LSI Industries Inc (LYTS) 2023 Q1 法說會逐字稿

Ladies and gentlemen, greetings, and welcome to the LSI Industries Fiscal First Quarter 2021 Results Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, James Galeese, CFO. Please go ahead.

Good morning, everyone, and thank you for joining. We issued a press release before the market opened this morning, detailing our fiscal first quarter results. In conjunction with this release, we also posted a conference call presentation in the Investor Relations portion of our corporate website at www.lsicorp.com. Information contained in this presentation will be referenced throughout today's conference call. Included are certain non-GAAP measures for improved transparency of our operating results. A complete reconciliation of first quarter GAAP and non-GAAP results is contained in our press release and 10-Q. Please note that management's commentary and responses to questions on today's conference call may include forward-looking statements about our business outlook. Such statements involve risks and opportunities and actual results could differ materially. I refer you to our safe harbor statement, which appears in this morning's press release as well as our most recent 10-K and 10-Q. Today's call will begin with remarks summarizing our fiscal first quarter results. At the conclusion of these prepared remarks, we will open the line for questions. With that, I'll turn the call over to LSI President and Chief Executive Officer, James Clark.

Thank you, James. Good morning, all. Thank you for joining us today. As you've likely seen from our press release, we had a strong first quarter, and I'm very pleased with the efforts and the results of the company and our entire team. Sales were up almost 20% at $127 million compared to the same quarter last year. Net income doubled and adjusted EBITDA topped 1.5%, all on top of more than $10 million in free cash flow. Again, just a solid performance in a challenging market by a great team of folks across the company. Our Display Solutions segment sales were strong, but they were a bit constrained this quarter as we were impacted by both a supply chain issue, specifically one supplier who provides a graphics component and ongoing permitting issues that continue to occur across the country. Despite those challenges, orders for the first quarter were up 12% on the prior year. Our gross margin rate increased 450 basis points and operating income improved more than 70% as opposed to the same period a year ago. We're engaged in a number of test projects and we feel good about the opportunities in front of us. Our deployment and installations continue to move forward with a mix of new customers and ongoing projects that continue to line up very well with our vertical market focus and our current product offerings. Moving on to our lighting segment. We had an outstanding quarter with strong sales growth and margin improvement. Both our project business and stock inflow business enjoyed a strong order rate and orders increased by double digits compared to a year ago. Although we have a strong focus on outdoor lighting, we do and always have had a very robust indoor product line. The indoor line enjoyed a particularly strong quarter and gained some significant traction, strengthened by a number of new product introductions and our continued effort of introducing our solutions to new and existing customers. These results are a great reflection of our vertical market strategy, whereas we provide an ever-increasing basket of products and services to our customers. Earlier this month, both LSI and JSI jointly attended the National Association of Convenience Stores Conference, NAX in Las Vegas. The show was extremely well attended, rebounding from COVID. LSI was a true star at the show with the introduction of a number of new products, including one called the Readyma. The Readyma is a mounting adapter, which significantly cuts the installation time of under Canopy Lighting, while it also provides a quick service maintenance and upgrade path in the future. There was extremely strong demand for a solution like this, and we didn't see any competitive products in the market filling this gap. It's a great feeling when you see folks lined up 3 and 4 deep outside your conference show booth, just to see -- just to take a look and see at the product. We believe that there are many more opportunities to continue to differentiate ourselves in the lighting category. We continue to find ways to innovate and bring new features and functionality to all our solutions. We're laser-focused on finding ways to serve the markets we currently serve as well as exploring lateral expansion into other vertical markets that fit with our overall strategy. As we put the first quarter of the fiscal year behind us and look forward to 2023, we see many opportunities developing despite the uncertainty in the general economy. Although supply name issues and ongoing permitting issues remain some of our biggest challenges, in most cases, we found a way to work within the constraints and challenges. These issues create and this quarter's revenue numbers speak to that ability. We're well positioned for a strong second quarter. Our customer and agent relationships have never been stronger, and we look forward to continued improvement. With that, I'll turn the call back over to James Galeese for a deeper look at our financials.

Thank you, James. LSI delivered a strong first quarter with all key metrics generating substantially improved performance. Sales growth of 19% represents our sixth consecutive quarter of double-digit growth. Growth was realized across multiple verticals as well as both our Lighting and Display Solutions product segments. Margin expansion continued in fiscal Q1, with gross margin improving 430 basis points versus Q1 last year and strong increases in adjusted operating income, net income and EBITDA margins as well. Adjusted EBITDA margin improved to 10.5% in Q1 with both segments realizing significant year-over-year improvement. We're encouraged that multiple factors are contributing to our continued margin improvement led by increased volume leverage, successfully aligning selling prices to ongoing inflation, service execution, meeting demanding customer requirements, project mix and solid cost management. Improved income performance produced earnings per share of $0.25 in the quarter, approximately double to $0.13 in the prior year quarter. Free cash flow generation increased substantially in the quarter, $10.1 million versus cash usage of $8.2 million fiscal Q1 last year. Working capital stabilization has enabled a higher conversion of earnings to free cash flow. Q1 represents the third consecutive quarter of positive free cash flow following several quarters of investing in additional inventory to mitigate supply chain challenges and support sales growth. We expect positive cash flow to continue moving forward. Improved cash flow reduced the ratio of net debt to trailing 12-month EBITDA to 1.7x. Shifting to segment performance, Lighting delivered an excellent quarter. Compared to last year, sales increased 32%, gross margin of 33% increased 290 basis points and operating income more than doubled. Strong sales growth was led by high levels of activity in multiple vertical markets, where our sales and marketing efforts continue to strengthen our position. These include refueling C-store, parking, automotive and warehousing. We're also making good progress in other attractive markets, including applications for the institutional and sports lighting markets. Following multiple price increases in fiscal 2022, selling price realization is enabling us to offset the impact of inflation and leverage the favorable impact of improved volume and service capabilities. Overall, we expect pricing to remain stable at current levels for the short term. Order activity for lighting in Q1 remained at a high level with orders 11% above the prior year quarter. We enter fiscal Q2 with a continued healthy backlog, 17% above the same period last year. Performance for the Display Solutions segment was also favorable. Sales increased 8%, gross margin improved 150 basis points and operating income increased 72%. The sales increase was led by continued strong demand in the grocery vertical and year-over-year growth in refueling C-store. Growth in these verticals was driven by increases in both refrigerated and non-refrigerated food display cases and print graphics solutions. In Q1, we completed initial installations for a global oil company branding change in Puerto Rico, and site install activity will continue throughout Q2. In addition, we have started digital menu board install activity for a QSR customer in Canada. These, combined with our ongoing programs in Mexico, reflect our continued regional expansion driven by our strong customer partnerships is coverage. The gross margin improvements for display solution was driven by improved pricing on all major programs and project mix. Customer proposal activity across our Display Solutions vertical markets remains at a high level. Orders for the quarter were 12% above Q1 of last year, and the backlog entering Q2 is 15% above last year. For LSI looking forward, we expect continued growth in fiscal Q2 compared to the prior year period and earnings and margin rates favorable to last year as well. We continue to be diligent, focusing on our target verticals, managing costs and capital allocation priorities, which include debt reduction and investments in sales growth initiatives. I'll now turn the call back to the moderator for the question-and-answer session...

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. If you would like to ask a question please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. Please press 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key on your telephone keypad.

Ladies and gentlemen, we will wait for a moment while the question queue assembles.

Our first question is from the line of Rick Fearon from Accretive Capital Partners.

Good morning, James and James and congratulations on another truly outstanding quarter. And James, in particular, if we're making such significant progress towards your stated goal a couple of years ago that LSI would generate $500 million in revenue, $50 million in EBITDA. And here we are with a run rate of exactly that quarterly revenue of $127 million quarterly EBITDA over $13 million. And now net debt standing at 1.7x EBITDA, and these are just very impressive results. and more confirmation that you deliver what you say. So yes, I just -- I know you're being very thoughtful about how LSI chooses to grow, both organically and via M&A. My question is now that it's been about 18 months since the JSI acquisition in May of 2021. Are there lessons at this extremely successful business combination have taught us that can be applied to future acquisitions? And I guess, as a corollary to that, what types of businesses or situations would LSI likely avoid in the future.

Good morning. James Clark here. Thank you for the comments, and thank you for participating in today's call. Yes. I mean JSI was a great fit for us. As you know, we stated a few years ago that we were going to be very vertically market oriented, and we looked within those markets to either expand the depth of what we can offer those markets or do a lateral expansion, if you will, a horizontal expansion of the vertical markets we're in. In this particular case, we saw grocery had a number of reasons. We believe that grocery would grow. This goes all the way back to early 2019 was mostly because of a disruption in the market we saw with Whole Foods and Fresh Market kind of disrupting some of the traditional grocers and a real call or need for a number of the products and services we had. Using that as a kind of a thesis, we looked at companies that could help us in the depth of some of the verticals we're in, and JSI was a natural fit. Not only did we see something that had a lot of momentum behind it, but we saw a cultural company with JSI. And it has since proven out, it just fit with the culture that our company had. It didn't require a lot of restructuring in terms of what it looked like to have a good high say ratio and those type of things. So JSI fit very well. I think we'll continue to look for businesses like that. Growth is very important to us. We want to continue to grow. We want to grow both organically and through M&A. But M&A, keeping that funnel filled and looking for companies that fit a profile like JSI did, are going to be continually important to us. In terms of companies, we would likely avoid, I mean, I think that things that take us off of our mission, things that are far left field from where we are, or don't have the potential for the growth or the investment in the segments we're in. Those would be things that we would definitely stay away from.

That's helpful. And do you feel that you and the team have identified significant organic drivers within the business today? Or is it -- are you envisioning most of the future growth coming from M&A? And I know that the synergies between LSI and JSI have opened up additional avenues especially within grocery channels and C-stores. But are there other verticals that you believe represent exciting opportunities at this point?

Yes. I mean great question, and thanks for it. I mean, we talked about early on, going back again and just having a high saved ratio, just saying what we're going to do and executing against it. We talked very candidly about the fact that we would have a portion that would be M&A and a portion that would be organic. And about 18 months ago, we transacted on JSI which was obviously the M&A part. But over the last 5 quarters, we've had double-digit organic growth. And so the balance is there, and we continue to kind of pursue keeping that in balance. When you look at a company like JSI, we saw the opportunity to continue to serve some of the vertical markets we're in, but we also saw an opportunity to share some of the relationships, the trust, the prior years of service, each of us had with the customer bases that we had. So JSI in grocery and LSI and grocery, both had a very good presence in there. It just strengthens us that much more. Convenience store is a market that we think we can bring JSI to in a big way. And those type of programs take years to develop. We talked about this upfront when we did the JSI acquisition. We have a number of test sites and test programs going on right now, and we hope to convert those. We have -- we think we have a very compelling story behind it. It fits in line with what a number of our C-store customers say what the future of service is going to look like in those environments, in those stores. And so we do have a good product line in both JSI and LSI to kind of serve those markets. So it's about balance. And our goal is to continue to have that balance both through M&A and through organic growth, but growth in general is important to us. We think scale matters in this business, and we want to continue to make sure we stay relevant from that standpoint.

Sure. And I'm sure with Terry Wealth sort of thoughts side by side with yours. You guys have been able to approach new verticals that maybe he wasn't really focused on with JSI that putting the 2 great minds together come up with solutions for the C stores, for example, that excite your customers.

Yes. So I'll just say it's a -- Terry is certainly a very visible leader in JSI. But his brother Mark is also highly involved and there's a whole team of folks there. I mean I could think of 10 right off the top of my mind, and I could think of another 20 below that. But it goes to underlying exactly what LSI is about is it's not one person. It's a team of folks. And I'm sure if Terry was on this call, he'd say the same thing. So we're very happy. It's just strong leadership with a good team behind us.

But you both seem to be very similar leaders in finding that cultural fit as part of the magic, I know. And so I guess, relating back to that inorganic growth that might require some additional capital investment. Can you share some thoughts about equity issuances or utilizing stock versus currency for acquisitions?

Yes. I mean I think this comes down to sources and uses, right? What are our options in terms of forward opportunities and how can we invest in them and what do we have in our (indiscernible), so to speak, to execute against go-forward plans. There comes a big burden with being a public company, obviously. We want to make sure we serve our shareholders and the people that are confident and invest in us. And at the same time, we want to make sure we're executing against growth that continues to retain those investors, and it keeps the story interesting. So my personal preference is always around debt. I think we've talked about it in other calls. We certainly use that here with JSI and you see the cash -- our free cash flow this quarter and our ability to pay down debt and our leverage ratio being at 1.7 below 1.8 right now. We want to continue to move that stuff down. And we do want to make sure that we're responsible with the way we do that. It fits into our strategy in terms of making sure that we're ready to act with opportunities in front of us. And I think equity is a piece of that, but it's not -- it's certainly not our first go-to but it is something that's on the table for us to use.

That makes sense. And I mean, it's just -- it's another arrow in the quiver, if you will, when it's a fairly priced instrument that kind of gives you some optionality, which kind of gets to my last question, which I know you know what's common and I've asked this on conference calls before, but it really I just -- I look at a stock price that we consider grossly undervalued with trailing 12-month revenue of $476 million on EBITDA now on a run rate above 10%, $41 million of trailing EBITDA, both of which have been growing quarter after quarter and net debt now down to $69 million and declining. It seems almost unfathomable that the enterprise value of this business is only around $300 million and not twice that. So this is a story that the public market is still learning about. I think in the microcap space, it's incredibly inefficient. There's just no research coverage and anyone who invests in small microcaps these days coming from the wealth management business is doing it through ETFs, which are blind to incredibly compelling stories like this. And so I guess with the recent Board authorization, the $15 million share buyback, what are your current thoughts about activating a 10b5-1 stock repurchase program? Or I know priority has been reducing debt. Is there sort of an order of events still that you're looking at for that?

Well, it's always about total shareholder return, right? And we want to make sure we do what's best for our shareholders and maintain that continuity of the relationship and be there for -- be making smart decisions. As an example, we've remained completely committed to our dividend program. We -- it's part of our capital allocation model. I've spoken before that debt is something that we're willing to use, but we want to be very responsible with it and bring it down to very manageable levels. And as you saw earlier this year, earlier this calendar year, we did authorize a program. The Board authorized a program to do a stock buyback. And I agree with you, I think that having the opportunity to invest in companies that can grow, you have a big landscape out there. And certainly, when we look across that landscape, we look and say, well, what's LSI doing? They're pretty impressive. So would we put our money back in 5, the answer is yes. It just I will just say this that it is constantly in our thought. We review it quarterly. We don't do things just for the effect. So the fact that we put that program in place certainly says that we're seriously considering it. And the best I can say at this point is we're aware of it and we're committed to doing what creates the best shareholder return. And if that happens to be it, you can be assured we will execute against it.

That's extremely helpful, James. And I know as you look at LSI, for example, as the opportunity among the landscape of opportunities, here's a business that trades at what many of us think is worth twice what it's trading at. It's also another bite at the JSI Apple, which was a fantastic acquisition, full price, fair price, but the synergies were sort of immeasurable and the opportunities it's creating seem very exciting and then bringing on the great cultural fit and the team that you mentioned assembled over JSI has sort of off-balance sheet value that is hard to quantify but makes the future pretty exciting. So I like that way of thinking of are there opportunities within our own business to own more of it. And thank you, again, for encouraging your Board to authorize the stock repurchase program. And yes, thanks for the hard work this quarter and going forward.

Thanks, Rick.

Our next question comes from the line of Amit Dayal from H.C. Wainwright.

Good morning guys and congrats on the quarter, by the way. Just margin improvements, James, could you comment on whether these are here to stay. Any commentary on stickiness of these improvements and how we should be thinking about modeling for these going forward?

Yes. I mean I think that our mission is to make them sticky. We've done it in a very responsible way. We're creating the value for our customers that equate to the margins that we're producing right now. They're comfortable with the pricing. We look for -- there's 2 ways that we're looking to affect that. One is productivity and our ability to kind of convert what comes in, in an efficient manner, and we continue to make -- make forward progress on that. And I think that we still have a lot of runway left relative to that. The second is our -- the products we're delivering and the partners that we are. And I think that over the last couple of years, we've certainly been able to demonstrate again, it's a team of people, but we've certainly been able to demonstrate that value. And so between the 2 of them, I think that I do believe that we can keep the margins where they are, and I do believe that we still have some runway ahead of us.

Okay. I know the fourth calendar quarter is maybe seasonal, given sort of the period in which these guys are that the grocery segment, etc, operate retail channels operate. How should we think about the next quarter given the stronger-than-expected results for the fiscal first quarter?

Yes. So Q1 was a strong quarter. We're very happy with it. We're coming into Q2, as we said, even on our last call, we don't have 6 months visibility or anything, but we do have 30-plus sometimes 60 days of visibility. And I'll tell you, we don't anticipate any slowdown right now. Orders remain strong. inquiries remain strong. Our quote activity remains strong and our backlog remains strong. So frankly, permitting is probably the most frustrating thing we're dealing with right now, and I truly don't understand it. I don't understand how permitting issues and those type of things continue to persist, but they do, which causes general slowdown in construction, which causes some of the lumpiness relative to our forward visibility. We still balance some supply chain issues. I think that you noted in my comments just a few minutes ago. Our digital program would have been even that much stronger. I'm very happy with where it was, but it would have been even that much stronger hadn't been for one singular component that is just jammed up in the supply chain. But with all those things into consideration, we do have some seasonality in our business, cold winter, cold weather does kind of affect some of the outdoor activity holidays, starting with Thanksgiving through Christmas effect some of our vertical markets, those types of things. With all of those things factored in, though, I still expect us to have a pretty fairly strong Q2.

Understood. Projections or the consensus estimates are calling for 4% to 5% annual growth, you are delivering 19%, 20% year-over-year growth. How should we think about the rest of the year, given sort of the execution is coming in so strong?

Yes. I mean it's a great question. I think, as I was saying, we've got -- I narrow it down to supply chain and permitting is the top 2, but our list of -- we have 20 things that we're dealing with still today that we didn't deal with 4 years ago. So that our ability to continue to grow is something that's cheap -- it's critically important to us, but the comps are getting harder. They get more difficult. I mean we're talking about $100 million, $125 million quarters where we hadn't -- historically, we had never broken $100 million quarter ever. So I feel confident about our ability to continue to grow. Our internal goal is certainly double digit, but you could -- we do have to factor in these quarter-over-quarter on a comparable basis, we'll certainly keep raising the bar. That's for sure. And one thing on the permitting issues, I know some people don't always understand that. So just take a second to mention that on large commercial projects and things like that, there's often electrical or building permits, things like that, that are usually handled at the state and city level. And those folks through either staffing or whatever it is, or still working through a massive backlog that just causes some consternation every once in a while, and it just seems to be all across the country. But Overall, our vertical markets that we're in remain strong, and we remain optimistic about continuing the growth path we're on.

That's for now. I'll take my other questions offline. Appreciate it.

Amit, thank you for the questions, and thank you for calling in...

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the conference to Mr. James Clark, President and CEO, for closing comments.

Yes. I would just -- I think we covered a lot of ground here today. I would just say that on behalf of the team, we're very happy with the results of the first quarter. We remain very optimistic about the second quarter. We're very focused on growth. Everybody in the company understands that it's a unique opportunity right now. We've got a lot of momentum behind the company and what we can do to continue to grow and achieve these results all under the guidance of making sure we're very good to our shareholders and create that return is chiefly important to us. So with that, I just want to say thank you for calling in. It's a little early, but happy holidays to everyone online, and we'll look forward to our next call. Take care.

Thank you. The conference of LSI Industries has now concluded. Thank you for your participation. You may now disconnect your lines.