Lsi Industries Inc Q4 FY2020 Earnings Call

Greetings. Welcome to the LSI Industries Fourth Quarter and Full-Year Fiscal 2020 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host and CFO, Jim Galeese. You may begin.

Good morning, everyone. We issued a press release before the market opened this morning, detailing our fiscal fourth 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.lsi-industries.com. Information contained in this presentation will be referenced throughout today's conference call. I would like to remind you 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 fourth 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, Jim Clark.

Thank you, Jim. Good morning, all, and thank you for taking the time to join today's call. In our last earnings call, we discussed our third quarter results from the initial impacts of COVID-19 on our business. As LSI was deemed an essential business from the start, we made the decision early on to remain operational throughout the current challenge. Creating a safe work environment and protection of our employees was mission number one, but we also worked hard at finding ways to not only remain operational but actively look for ways in which we could add value to our customers. Our U.S. manufacturing footprint and our previous work on diversifying our supply chain not only allowed us to continue to serve our customers with minimal interruption, but it also created an opportunity to pivot and provide some specific COVID-related support, including social distance graphics and other products and services. As you have likely seen from our recently released Q4 financials and the actions and efforts of the entire LSI team throughout the year, in particular through the current challenge of COVID-19, it has allowed us to exit from our fourth quarter and our year profitably with increased earnings, continued expansion of our gross margin, lower operating costs, strong cash flow generation, and I'm happy to say, the elimination of nearly $40 million in debt over the last 12 months. Note, LSI is currently debt-free. One year ago, we started fiscal 2020 on a mission to shift our business away from commoditized, low-value products to higher value solutions. We created growth in future opportunities in many of the vertical markets that we serve, including petroleum, parking, automotive, quick-service, retail, and grocery pharma. Our team, including many of our partners, had the courage and discipline to walk away from low-value business and focus on markets where we bring a much higher value to our customers and our Company and shareholders. This effort resulted in a 520 basis-point gross margin improvement in lighting for the fourth quarter and a 310-bp improvement overall for the year. Although sales declined in the fourth quarter as a result of COVID-19, our adjusted operating income in lighting was $2.9 million or 5% above prior year, and $2.2 million in graphics, up 64% versus prior year. Jim Galeese will provide further comment on our exceptional financial performance for the quarter in the year. Now, shifting my comments to fiscal year 2021. I'm encouraged by the pace and progress of our Company and the participation of our entire team. While COVID-19 and the related headwinds may slow down our progress, the efforts and professionalism from our employees in adapting to the new reality of our current environment has been outstanding. On the lighting side of the business, in Q4, we completed the build-out of our product development and marketing team, and we introduced seven new products, not including those introduced by Atlas, and more than 20 new products for the year in 2020. Under our current plan for 2021, we will introduce an additional 20 new products. These products and solutions reflect an alignment with our vertical markets and provide further differentiation from low-quality commoditized products. The integration of an entry-level controls platform across our entire product line, a continued improvement in energy usage, coupled with higher output and improved visual comfort will add to the differentiation in value we frequently talk about. Building on our plan of understanding our markets and separating ourselves from our commodity solutions, we will add three new vertical markets to our focus over the next year. When we complete these growth plans, along with our engineering, manufacturing, marketing, and sales team, I feel we'll compete on a different level and we earn the right to win in the markets we work in. On the graphics side of the business, we've experienced surprisingly minimal disruption to our ongoing and proposed future projects. Our customer commitments and plans have not changed significantly in the petroleum, grocery, pharma, and quick-serve retail environments. We've had to work around deployment and installation schedules occasionally as COVID hotspots emerged. But for the most part, it has been business as usual. In Q4, we completed the move of our graphics facility in our Canton-Akron location. This new location has had an immediate improvement on our productivity, and we look to leverage this even further as we move into 2021 and beyond. Although these are uncertain and unprecedented times, our outlook remains focused on the things we can control and the execution of a well-thought-out strategic plan. We've made adjustments to reflect the environment, but we still feel as though we are in charge of creating the opportunities and continuing to build and grow our company. For those of you who regularly follow our Company and our calls, I think the past quarter reflects our high say-do ratio in our commitment to execution. We spent the last 18 months transforming LSI into a better performing company, and I believe our best days still lie ahead of us. With that, I'll turn it back over to Jim Galeese for comments on our financials.

Thank you, Jim, and good morning everyone. To summarize key fiscal fourth quarter financial statistics, net income was $1.5 million, compared to net income of $900,000 last year. Earnings per diluted share were $0.06 versus $0.03 in the fourth quarter of fiscal 2019. EBITDA was $3.9 million versus $2.2 million in the prior year. As a result of the pandemic impact on construction activity, sales declined 22%. On a non-GAAP basis, adjusted net income was $1.7 million, compared to income of $100,000 in the same period prior year. Non-GAAP earnings per diluted share were $0.06 versus zero earnings per share in the fourth quarter last year. Adjusted EBITDA was $4.5 million, compared to $3.3 million prior year. A complete reconciliation of fourth quarter GAAP and non-GAAP results is contained in our press release and 10-K. The Company generated $11.5 million of free cash flow in Q4, eliminating all net debt and resulting in a cash balance of $3.5 million at the end of fiscal 2020. This compares to net debt of $39.5 million at the end of Q4 fiscal 2019. Full year free cash flow was $47.1 million. With the onset of COVID, the Company implemented multiple actions to reduce costs from both an ongoing and an interim basis, contributing to our fourth quarter results. This included adjusting headcount required to support the COVID-driven lower sales and reducing discretionary spending in all major categories of operating expense. We continued to invest in new products and other commercial initiatives. For the completed fiscal year 2020, adjusted net income was $3.2 million, compared to $1 million in fiscal 2019. Adjusted earnings per share were $0.12, versus $0.04 for the prior year. Adjusted EBITDA was $15 million for fiscal 2020, and sales finished at $306 million. Our regular cash dividend of $0.05 per share was declared payable at September 8th for shareholders of record on August 31st. Moving to our two reportable segments. Fourth quarter lighting adjusted operating income increased 5% to $2.9 million. The gross margin rate improved 520 basis points to 28.6% and operating expenses decreased 18%. The increased margin rate continues an improving trend of the last several quarters of reflecting lower manufacturing fixed costs, the transition to a higher quality sales mix, and recent actions to reduce operating costs. This also reflects the number of new and cost-reduced products launched in fiscal 2020. Sales declined to $41 million for the quarter, influenced by the pandemic. However, recent book-to-bill activity has exceeded 1.0, an indication that construction activity is gradually recovering. Shifting to the graphics segment. Graphics generated a solid quarter with adjusted operating income of $2.2 million versus $800,000 last year. Sales declined 6% as the pandemic delayed installation schedules. Operating expenses declined by $1.7 million, reflecting the organizational restructuring that occurred earlier in the fiscal year, as well as recent cost actions. The graphics gross margin rate was flat compared to last year, reflecting the current mix of programs. We exit fiscal 2020 with a strong graphics backlog and do not expect any changes to our large, multi-year customer program commitments. However, in the near term, we do anticipate project installation schedules may be extended due to pandemic-related disruptions. Lastly, our North Canton, Ohio relocation project was completed with the move seamless to our customer base. I'll now return the call back to the moderator.

And at this time, we will be conducting a question-and-answer session. Our first question is from Amit Dayal with H.C. Wainwright. Please proceed with your question.

Thank you. Good morning, everyone. I just want to first say congratulations on managing through this period with such positive results. In terms of the outlook for next year, it looks like there are some interesting growth drivers in place for you guys including new product launches. Could you give us a little color on what type of growth we should potentially anticipate in fiscal ‘21? 5% to 10%, is that reasonable, or do you think you could come in even higher?

Yes, Amit, thank you for joining the call today and for your question and comments. I need to be completely honest. Things are still very uncertain, making it hard for us to predict our growth rate for the year. We've explored multiple scenarios and are ready to adapt based on market reactions. Many factors are influencing this situation, including construction and the ongoing impact of the coronavirus. This situation particularly disrupts our lighting and graphics business, affecting our ability to perform installations. While we haven't canceled any projects, some have been delayed due to flare-ups and challenges in completing installations. As of now, a month into our new fiscal year, I can't provide specific predictions. I want to be straightforward. However, we are prepared to pivot quickly based on how growth and sales develop. As I mentioned earlier, we are pursuing several new verticals, and these factors will ultimately shape our performance, whether that results in flat, up, or down outcomes. We will have more clarity as the year progresses.

Yes. So, one question, Jim, I have, the new verticals, I don’t know if you mentioned those. You said three verticals. Could you give us color on what those verticals are and what kind of resources will you sort of be applying to make initial inroads in those areas?

Yes. So, as I’ve spoken over the last year and a half or so, we wanted to make sure we got things right and we built that better company before we built a bigger company. Despite the coronavirus and the environment in general, we're ready to make investments. And I've spoken pretty openly in the last couple of calls about acquisitions and M&A activity that we remain committed to. But, we're also making investments in sales and a couple other areas. And so, we're ready to make those investments to drive that growth. I don't want to talk specifically about the verticals that we're going in. Because to be completely frank, what we're doing is we are in the process of validating. We put together a list, it's much greater than three. But, we're in the process right now of validating the momentum we can create in those markets and how those markets fit in the current environment right now. So, that's certainly something that's all in the mix. But, I don't really want to say what those verticals are at this point, but they will pivot, or they'll build on top of the successes we've had in the verticals, if we do very well. And now, petro, auto, quick-serve retailer, grocery pharma being one that has been particularly strong lately, that type of thing.

Got it. And then, just one last one for me. These lower operating costs in this quarter, are these going to remain in place for the next few quarters? How should we sort of look to see where this is going to come out in the next fiscal year, on a quarterly basis?

Yes. I think, structurally, we could maintain where we are, and there might even be some additional opportunities. But as I just said a minute ago, we are going to be very deliberate in making some investments right now, kind of that thinking while everybody's going north, let's go south, or let me flip that around. While everybody's going south, let's go north. So, we can continue to maintain those structural costs and that type of thing. We're going to be looking for ways of making some investments right now. So, you might see some flux in that.

Okay. Got it, got it. Yes. That's all I have, guys. I'll take my other questions offline. Thank you so much.

Alright, Amit. Thank you. Thank you for taking the time to be on the call.

And our next question is from Craig Irwin with ROTH Capital. Please proceed with your question.

Good morning. This is Andrew filling in for Craig. I want to acknowledge the progress made in managing the balance sheet this quarter, particularly in terms of deleveraging. My first question is about the graphics segment. It seems that there may be potential for margin expansion in the upcoming year, especially as you advance with these early-stage programs, assuming the conditions improve and you can follow through on some projects. Could you provide any insights on the margin outlook for this segment?

Andrew, thank you for joining the call. I believe you're correct in noting the opportunity. It's clear that there is a level of uncertainty in the environment, as many calls in recent months have highlighted. However, in a normal context, we certainly identify potential. In the initial phases of our projects, we undergo a learning process and efficiency development as we advance. Many of our current projects have reached a maturity stage, and we are starting to see improved margins, which we expect to continue. Of course, this is balanced by the introduction of new projects, creating a continuous cycle. Nevertheless, we definitely see opportunities ahead, especially with the efficiencies we've achieved during the Canton-Akron transition and other initiatives we've been pursuing.

Great. Thank you. And second question here, might not be able to provide too many comments, but congrats on book-to-bill back over 1. Have you guys been able to execute on some progress in Q1 that may have been pushed out in Q4, is it still pretty uncertain out there and things are just going day-to-day now?

No. We've absolutely picked up some projects in Q1 that were pushed from Q4. But, I'll be candid. We have some in Q1 that are pushing to Q2. So, it's kind of one hand gives and one takes away. So, the good news, and I'll underline is that we haven't seen any significant disruption or cancellations. Particularly, as I mentioned in my comments and Jim underlined on the graphics front and this is not just isolated to our petroleum, but quick-serve retail, our digital menu systems in our print, those have been very, very active, quite active. And we haven't seen any fallout.

Our next question is from Rick Fearon with Accretive Capital Partners. Please proceed with your question.

Good morning, everyone. Congratulations on a strong quarter despite the challenges. I wanted to delve a bit deeper into the improvement in gross margins, especially in lighting, and how it ties into graphics, which seems to be influenced by the ramp-up of projects. Do you have specific gross margin targets for each segment, or is it mainly determined by the types of projects you're currently undertaking?

Good morning, Rick, and thank you for being on the call. We do have targets, but I’m hesitant to share them broadly. We are always aiming for continuous improvement, and I believe there’s still potential for us to grow. In early stage projects, especially in lighting, we are willing to work with the margins and seek improvements through operational efficiencies and other value-added services. This can include additional product or service offerings. These factors usually contribute to our margin enhancement. I believe we can make incremental progress on all fronts, even with our established customers.

That's great to hear. I mean, what you've done thus far is incredibly impressive. And again, though you inherited a stock and flow business that probably would not have been your first choice, it will be particularly interesting to hear about the new verticals that you and the teams identified for future growth opportunities that no doubt will factor into the margin improvement. But, what you've done with existing businesses is really impressive. On the operating expense side, it’s equally impressive. And just kind of on the SG&A front, last quarter you outlined some improvements that are already showing through in this quarter's results. And just is it other low-hanging fruit for SG&A reductions, or are we kind of at a good state at this point?

I believe there are ongoing opportunities for our team. However, we're currently making a deliberate choice to begin investing, which might result in some fluctuations. While we could continue to see gradual improvements, we also want to make these investments. I've mentioned our expansion into new areas, which involves expenses as we engage in these markets and gather necessary support materials. Simply put, I want to invest, which may create some pressure. We still recognize opportunities, and if things go well, the opportunities could balance out the investments. It's important to allow our company and team the freedom to focus on larger dollar opportunities instead of just minor ones. I definitely see potential for further SG&A reductions, but I want to prioritize making investments as well. We will see how these factors balance out.

Yes, I completely understand. Some of those investments will likely be considered operating expenses instead of capitalized expenses, which means there will be a delay with those investments. Once they are completed and we reach a stable state, we need to consider whether the existing business has a reasonable EBITDA margin target in mind before moving into the new verticals, or if achieving that margin will depend on diversifying into higher margin verticals.

So, one of the things we talk about often is that trade-off of that lower-quality business for the higher-quality business. Anything that we develop right now from a vertical standpoint, although it may have some initial cost associated with it to get us off the ground, our pursuit would definitely be in line with maintaining that growth on the margin and ultimately EBITDA margin. So, I think that our initial list and our initial approaches have been very mindful of that. So, my expectation is that we'll continue to make incremental improvements on that. I want to thank everyone for joining the call and dedicating some time to us. I want to recognize the hard work of the entire Company, the employees and the team, as well as the confidence our investors have in LSI. Considering the uncertainties and challenges we faced in the latter part of Q3 and Q4, and comparing them to our results and targets, although we didn't reach where we wanted to be, we are proud of the progress we've made and the outcomes we've achieved. As Rick mentioned earlier, I wish we could share this information more broadly beyond this call, and we'll do our best to ensure that happens. I am genuinely pleased with the progress we’ve made and believe we have many opportunities ahead of us in 2021 and beyond. Despite the challenges, we are committed to growing the Company and are excited about the prospects we've outlined on our preliminary slate and the advances we've made so far. I look forward to speaking with each of you soon and thank you again for taking the time to be on the call. Stay safe, and I look forward to our next conversation. Take care.

This concludes today's conference. And you may disconnect your lines at this time. Thank you for your participation.