LSI Industries Inc.
Q2 2021 Earnings Call Transcript

Published: 21 Jan 2021

[Operator:]

Greetings, and welcome to LSI Industries Fiscal Second Quarter 2021 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. . As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jim Galeese, Chief Financial Officer. Thank you. You may begin.

[Jim Galeese:]

Good morning, everyone. We issued a press release before the market opened this morning, detailing our fiscal second 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 second quarter GAAP and non-GAAP results is contained in our press release and 10-Q.

[Jim Clark:]

Good morning, all, and Happy New Year. Thank you for joining today's call. In 2019, we sat down as a team to transform our company with the purpose of developing and refining our focus in creating a growth-oriented, competitive and defensible position in the marketplace. The underpinning of our strategy has been around the development of vertical markets where we can better serve and understand the needs of our customers with the goal of adding value to differentiate ourselves from our competitors and general market commoditization. This differentiation is achieved not only through our product offerings, but how we design and package those products along with the services we offer. In this aspect, LSI is unique in the way we work with our agents and partners and how we use lighting, graphics and our installation services to better serve our customers. I am happy to say that our results in this quarter in the midst of a pretty challenging environment could underline the progress we are making on this strategy. Sales are up sequentially quarter-over-quarter. Margins are up. Operating income is up. Net income is up and earnings per share up versus prior year. This progress cautiously emboldens us as a team to continue responsible investment in our strategy and acceleration of our plans. Over the last few quarters, I have talked about the investments we are making, including the release of new products, the increasing use of intelligence and controls in our devices and the investments of additional and commercial resources, along with the expansion of our vertical market focus. Now, in some cases, our vertical market focus is simply a matter of refreshing or adjusting our position in certain markets to accommodate for overall change. In others, it's an expansion in our existing markets with new services or products. And yet in others, it's an introduction of entirely new markets.

[Jim Galeese:]

Thank you, Jim. I will start by highlighting key financial statistics for the fiscal second quarter. Sales were $76 million, increasing 9% sequentially from Q1 and below prior year as projected. Net income was $2.2 million, compared to income of $1.7 million last year. Non-GAAP or adjusted net income increased 47% to $2.5 million versus $1.7 million in the same period last year. Earnings per diluted share were $0.08 versus $0.07 in Q2 of fiscal 2020 and non-GAAP earnings per diluted share were $0.09 versus $0.07 per share last year.

[Operator:]

Thank you. . Our first question comes from the line of Craig Irwin with ROTH Capital. Please proceed with your question.

[Andrew Scutt:]

Good morning. This is Andrew on for Craig. I just want to say congrats on the quarter. Great start to 2021. My first question is about margins. You guys have exhibited strong margins this quarter in both segments with a strong year-over-year increase. Can you guys just comment on the sustainability of margins at these levels and then just the dynamics in each segment?

[Jim Clark:]

Yes, Andrew. Good morning. Thank you. Tell Craig, we miss him. We’re – we’ve been very focused on our margin improvement quarter-over-quarter. We talk about it. We believe we still have room to work within margins. We are affecting it through a number of programs. It's not just cost-out initiatives. It's aligning ourselves with the right markets and the right mix. It's capitalizing on the strengths that we have. And it's working with customers that respect the products we are delivering and the solutions we are delivering as opposed to getting into the bid environments and things like that. And so I think it's a combination of all those efforts and I think that we still have room to run there. We may not see quite the ramp-up of improvement from where we are right now going forward that we have seen in the past, but we still think we can continue to turn that wheel.

[Andrew Scutt:]

Great. Thank you. That was very helpful. And one quick follow-up. Can you guys just provide some insights into what you are seeing in the March quarter, specifically with the seasonality? And then just also any commentary on quote rate levels? I know you guys said they were increasing in the past few quarters. I am just curios if this has continued - or past few months, I apologize.

[Jim Clark:]

Right. Quote activity has definitely picked up. We have also noticed kind of a lengthening between quote to conversion, meaning, I think that there is pent-up demand and there is some release relative to projects and people are getting the quotes and refreshing quotes. And we are waiting for those to convert to orders. But we did – we’ve* definitely seen a little expansion in that quote to conversion time. But the good news also is, we are seeing a very good uptake in the customers that do end up quoting with us, the number that actually convert to orders. So that's been very positive. Generally, as you saw in the release this morning, Q1 over - Q2 over Q1, we had sequential improvement. We expect that to remain in Q3. So we are looking for improvement in Q3 over Q2. How March ends up breaking out? I can't tell you right now. But based on our quote activity and based on the projects we see on the chalkboard, so to speak, we are very encouraged about robust March. We did not - because of our quote to order to shipment cycle, we didn't see a lot of impact from COVID in March of last year, minus our distribution business. Atlas did feel it a little bit quicker. But we believe that even though we didn't feel a lot of impact, we should do very well on a year-over-year comparative coming into Q3 and into March.

[Andrew Scutt:]

Great. Well, thank you for taking my questions and once again congratulations on the strong results.

[Jim Clark:]

Thank you, Andrew.

[Operator:]

. Our next question comes from the line of Sameer Joshi with H.C. Wainwright. Please proceed with your question.

[Sameer Joshi:]

Yes. Thanks. Thanks for taking my questions and congratulations on a nice quarter. My first question is, as we understand COVID could be a headwind for next few quarters. So is the cadence of the revenues still on upward trajectory for the next two quarters, especially given your seasonal performance last year?

[Jim Clark:]

Well, we always have some seasonality. And I think that it - we are seeing some activities that may be out of season, so to speak, where things are, orders or projects that have been delayed. They are coming in the third quarter, where typically they would have come in, in the second quarter or may be deferred to the fourth quarter. So that's very encouraging for us the way we are looking at the third quarter. And then the fourth quarter, if we get back into the seasonality plus mixing it with the pent-up demand, we could see a very strong fourth quarter. And there is certainly some early indicators, particularly around the quote activity that that's very possible that could happen.

[Sameer Joshi:]

And is this from the* - like what segment is this from? The Lighting segment where you expect these times to shrink? Or is it from petroleum graphics, that kind of thing?

[Jim Clark:]

It's cheaply* from the lighting side of things. Petroleum definitely does the graphics side, particularly in the petroleum side does have a reset in the month of January and February typically. And that's all planned in. That's all baked into our plans. But we think that as we talk about that quote to order cycle, we believe there is two things that are going to affect that. They are both oriented around lighting. And so we are hoping to see a better third quarter than we would see from a seasonality standpoint. And then the second is on our graphics from digital, Burger King specifically. They have really ramped up the speed to meet with some project timing that they want to make sure that they get in. So on the digital side, we definitely see some opportunity there in the third quarter.

[Sameer Joshi:]

So just stepping back on a larger macro scale level, do you expect benefits coming over the next six to 12 months around higher infrastructure spending, capital expenditures by companies?

[Jim Clark:]

Well, we’ve definitely been attention to a lot of the discussion, particularly from the incoming administration about investments in infrastructure. From a lighting standpoint, we play very solidly in that and could be a benefactor of that. I think that some of that is, we are starting to see some of that in terms of the quotes that are coming in and the project activity that is being looked at. But it's still a little early to tell how that's going to all shakeout right now. I think on whole, it’s important to just remember that we do have stops and starts that we are still dealing with. We have supply chain challenges, where COVID is affecting them or things like that. So we remain very bullish, but there is a lot of pieces to this whole puzzle.

[Sameer Joshi:]

Understood. You have spoken about 10% increase in sales force. Do you have sense of timeline? Is it beginning or is it already done? Can you give us some color on that?

[Jim Clark:]

I am sorry. You cut out slightly in the beginning part. I missed. Jim, did you get that?

[Sameer Joshi:]

Well, in terms of the sales force, yes.

[Jim Clark:]

Sales force increase. Okay. I am sorry. And the question was, have we started that yet? Where we are at it? It completely cut out on my side. Yes. So we talked about it over the last few quarters. We are certainly making investment in our commercial activities. That is, from a marketing standpoint, you saw our announcement about our partnership with Pickleball and it goes right along in lines when we are talking about our vertical market development. From a true commercial standpoint, talking sales resources on the street, right now we are targeting a 10% improvement and we are probably 80% through that in terms of actually getting folks on board. There is some ramp-up time to that. You bring on a new resource. We have got to get them trained up and get them knowledge specific to our company. We have also added some resources that may not qualify directly under the commercial side, but on our services business, which we referenced quite a bit with this rollout of the contactless payment, also with other, the digital menu board systems that we are rolling out. Our services side of the business has experience a pretty good growth and we are investing some resources there too. And there again, we are kind of 80%, 90% of our planned investment. But we are continuing to, you know we watch this real-time live and as long as the opportunities are there, we will continue to make those investments and expand those resources. We don't have any constraint or cap relative to what we are willing to invest in if we can show the return.

[Sameer Joshi:]

Understood. And just one clarification on the cost side. When you mentioned that you are continuing to cost out off take, engineer cost out, are you also doing any cost controls at the operating level that should and of course you are spending on sales but are there any other efficiencies that you are able to derive?

[Jim Clark:]

Yes. I mean I think that, number one, from a cost control standpoint, I think we have a very good team of people here that recognize what investment and return looks like. We don't have systems that are inflexible. We are always looking for opportunities and we will always kinds of invest ahead of the curve if it puts anything at risk or it creates an opportunity or anything like that. We do believe that there are still some opportunities and this comes back to the margin thing, but we do believe we still have turns on the wheel here that we can continue to implement. It's just a matter of doing it that doesn't disrupt any commitments that we have to our customers or things like that. But the answer is yes, we do believe we still have some opportunity.

[Sameer Joshi:]

Got it. Thanks for the color. And thanks for taking my question.

[Jim Clark:]

Thank you.

[Operator:]

Our next question comes from the line of Jed Dorsheimer with Canaccord Genuity. Please proceed with your question.

[Jed Dorsheimer:]

Hi. Thanks. I joined a little bit late. So I apologize in advance if you have already addressed this. But I was wondering if you think through some of the changes, sort of large-scale, so you are seeing further pressure on sort of that petroleum market segment, which are strong and some of the auto in terms of -- or maybe you are not. So I guess first question, are you seeing pressure kind of equally spread across end markets for lighting between quick stop and service station and automotive?

[Jim Clark:]

Well, so in terms of the petroleum retailers, we have seen a continued investment from those folks. They are not easily disrupted. Their plans are usually well thought out. They put out ahead of them in terms of years. And we didn't have much of a disruption in terms of their commitment during this whole COVID side of things. Frankly, the challenges were just electrical permits, the construction permits, inspections, things like that from a timing perspective. And when we anticipate it to continue to be relatively strong. I think that some of the oil retailers have been talking about their activities and the things that they have been doing to control their cost and investment cycles and things like that and they remain fairly committed. On the automotive, I will just make a point to say, on the last day of the year, we had a very large commitment from a customer. And then on the first day of our calendar year, we had another. So we look at it from the outside like many would probably say, the buying cycles have changed. People are buying more online. There is less going on in the showroom. But we are also seeing some of the larger automotive customers taking advantage of the downtime in the showrooms and in the lots and making investments right now, maybe preparatory type of things, being ready when COVID kind of gets under control, if you will. So we are seeing pretty steady activity, would be the answer, Jed.

[Jed Dorsheimer:]

Go ahead.

[Jim Galeese:]

Yes. I was just trying to add to that, back to the petro side. As you know, those are generally very large, multiyear programs. And so they go through various phases of the cycle. But it's important to note, we watch the potential development work on few potential future programs very closely. And that development work pipeline right now remains very strong. So these are the programs that would start affecting us maybe in later calendar year this year and on through the next couple of years. So we have both the current programs that we monitor our activity on the future development programs very closely.

[Jed Dorsheimer:]

Got you. So it's a little counterintuitive, but it seems like there is a lot of headline risk, but the actual activity in the market seems much stronger on the auto side. COVID, the feedback we are getting is, COVID is actually a positive for auto sales because nobody is taking public transportation anymore and most retailers have seen an increase. So that kind of makes sense. One last question for you just on lighting and maybe for commercial. Have you seen a change over the past couple years in terms of the influence of spectral tuning or the ability to tune on-prem with the light? Or it's still love mostly static?

[Jim Clark:]

I think there is a lot of conversation about it. The whole concept of selectable color temperatures and things like that is definitely taking hold. It allows our customers, our installers and such, it allows us to reduce inventory and SKU proliferation.

[Jim Galeese:]

The same with lumen output.

[Jim Clark:]

It's same with lumen output. But spectral is kind of, it's complicated because it starts with the LEDs and it is impacted by the lensing that you are putting on it. And that may not be something that we kind of get any time soon, but it is certainly something that's talked about. But I don't expect to see it rolling out into the field anytime soon. It's just the cost for that flexibility is too high right now.

[Jed Dorsheimer:]

Got it. Thanks guys. I appreciate it.

[Jim Clark:]

Jed, thank you.

[Operator:]

There are no further questions in the queue. I would like to hand the call back to Mr. Clark for closing remarks.

[Jim Clark:]

I just want to say thank you again for everybody that tuned in. We are happy with the quarter the way it has developed. I think we are coming into the new calendar year with a certain degree of momentum and we are looking forward to trying to keep up that momentum and capitalize on it. I just want to say thank you again for calling in and we look forward to talking to you soon. Take care.

[Operator:]

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.