LSI Industries Inc. (LYTS) Q1 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the LSI Industries Inc. First Quarter 2019 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. It is now my pleasure to introduce Interim CEO, Mr. Ron Brown. Please go ahead, sir.

Thank you, and good afternoon. As you are probably aware that with the announcement of Jim Clark becoming LSI's CEO effective November 1, I'm now officially the former Interim Chief Executive Officer of LSI. So this call will be one of my last actions as part of my duties as Interim CEO. Going forward, I will be serving LSI as a new member of the Board of Directors. I will certainly be interested in these calls, but I'm assuring Jim Clark that I will be in listen-only mode for those calls. We are happy to have both, Jim Clark and Bill O'Gara, our new Chairman of the Board, in the room with us today, and you will hear from both of them later during the call. Before that, I'm going to make a few opening comments and then turn the call over to Jim Galeese, our Chief Financial Officer, who will provide detail on the results for the first quarter. While the most exciting recent news for LSI was our October 17 announcement of the Board appointing Jim Clark as President and Chief Executive Officer effective November 1. Jim has great experience and an incredible track record. All of us at LSI are looking forward to Jim's leadership, and we are confident that Jim and the strong LSI team will be taking LSI to the next level. Bill O'Gara will be providing more color about the Board's selection process and make a proper introduction of Jim toward the end of the call. First, a few comments about the actions we are taking to position LSI for improved profitability and growth. As you can see from a number of our announcements, we have been extremely active. Early in quarter, we announced our new organization structure, which is aligned around our key markets and customers. With the competitive nature of our markets, we feel this new structure will provide us with an advantage by enabling us to better package our technology, products and services and bringing our customers innovative solutions. We have put in place and added a number of key people to help lead certain key vertical markets and strengthen our go-to-market channels. We have also taken several actions aimed at driving productivity in our integrated supply chain and reducing LSI's overall cost structure to improve our competitiveness. Earlier in the quarter, we announced the closure of our Hawthorne, California assembling and warehouse facility. This has now been completed. Last week, we announced the closure of our New Windsor, New York manufacturing facility. In order to make certain that we do this without disruption to our customers, this closure will be completed over several quarters, but should be completed by the end of June 2019. In addition, as a result of our more focused and streamlined organization structure, we have eliminated a number of salaried positions. When you add up the impact from all of these actions, we should realize annualized savings of over $6 million. I believe that you can see that we are taking action and making changes to improve the growth and profitability of LSI going forward. At this time, I'd like to turn the call over to Jim Galeese to provide more detail as to the results for the first quarter. Jim?

Thank you, Ron, and good afternoon, everyone. I want to remind you that today's presentation includes 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. I'll be providing comments on our financial performance on a non-GAAP basis for comparability purposes, and then highlight the non-GAAP items, which reconcile to reported GAAP performance. Total fiscal first quarter sales were $85 million or 3% below prior year. Adjusted operating income was $3.5 million, an increase of 11% with the operating margin improving 50 basis points to 4.1%. Adjusted net income for the quarter was $2.2 million or 27% above prior year, adjusted earnings per diluted share for Q1 were $0.08, $0.01 above Q1 fiscal 2018. Q1 adjusted EBITDA was $6.2 million or 7.3% of sales, an increase of 70 basis points from Q1 prior year. Cash generation was positive in Q1, and our debt level decreased $5.7 million versus Q1 last year, serving to increase our line of credit availability and strengthen our overall financial position. Moving to reported GAAP results. The Q1 GAAP operating results reflect a $590,000 charge related to the closure and transfer of assembly operations of our Hawthorne, California facility. As a result, Q1 GAAP reported net income was $1.7 million and reported earnings per share were $0.07. Reported earnings per share for fiscal Q1 2018 were a loss of $0.61, which contained a pretax noncash goodwill impairment charge of $28 million. A complete reconciliation of Q1 GAAP and non-GAAP measures is contained in our press release and 10-Q. The company announced on October 29, the closure of the New Windsor, New York facility, which manufactures indoor lighting products. The company will record an estimated $2.4 million in restructuring cost over the next several quarters. The project will generate $4 million in annual savings. Adjusted gross margin for the first quarter was 25.7%, 140 basis points below prior year, driven by lower lighting volume, mix of large graphics projects and margins currently being realized on select new products and solutions. Operating expenses decreased 190 basis points year-over-year offsetting the lower margins. We expect margins to improve moving forward, driven by improved volumes, implementation of key product cost reductions and the impact of our integral supply chain infrastructure projects as they take effect. Next, I'll comment briefly on the performance of our two reportable segments. Starting with Lighting. Sales of $61.4 million were 10% below last year, with the decline reflecting the ongoing competitiveness and softness in commercial and industrial market applications. This was partially offset in markets where our products and solutions meet specific customer requirements. For example, sales in the renovation segment continued to be strong and generated solid margins for the quarter. Our product road map contains several new products to be launched over the next several quarters that support our renovation initiative. While the first quarter was soft, the outlook for automotive is favorable, as several large customers have specified our solutions and placed orders generating a sizable growth in backlog. Lighting operating earnings were $4.4 million or 12% below last year. Operating margins decreased 20 basis points to 7.2% with the unfavorable impact of volume and mix offset measurably by productivity improvements. The Lighting market is projected to remain mixed, with a number of variables influencing the outlook. As a result, Lighting growth will likely remain sluggish in the short term. Shifting to Graphics. The Graphics business, again, delivered a solid quarter, with both sales and earnings measurably above prior year. Sales increased 24% to $23.5 million, while operating income improved 62% to $2.4 million with operating margins improving 230 basis points to 10.1%. The sales increase was led by a strong performance in the petroleum C-store segment, which increased 65% over prior year. The growth was driven by multiple accounts, both domestic projects and new projects in Mexico. As mentioned last quarter, our key oil company customers are expanding in Mexico, and we have been selected as a key supplier for many of these expansion plans. QSR growth was driven by our supply agreement with a national chain for their reimaging program. Volumes are increasing rapidly, with solutions for 100 sites installed in Q1 and the schedule projecting over 300 sites in Q2. The project will cover over 3,000 sites when complete over the next 18 months. Quotation activity for our digital signage solution remains strong. And our intermediate term outlook for Graphics remains positive. Developments continue in the area of sourcing and procurement, including the ongoing volatility in key commodities and the initial impact of Chinese tariffs, which went into effect September 13. We did experience increases in key commodities in Q1, but were successful in offsetting the majority of these increases in steel, aluminum and plastics through cost reductions and other purchase categories, along with design savings. Our announced Lighting price increases, which were effective October 15, are necessary to offset the 10% tariff now in effect for many harmonized tariff schedule categories purchased from China. We will continue to proactively manage the ongoing developments in materials. I'll now turn the discussion back to Ron.

Thank you, Jim. We are doing a little shuffling of the chairs right now to get Bill O'Gara and Jim Clark close to the phone. I would like to introduce Bill Garrett and finally we'll introduce our new CEO, Jim Clark. As many of you know, Bill O'Gara was appointed Chairman of the board in August of this year. Bill has been a long-standing member of LSI's Board of Directors and also serves as Chair of its Audit Committee. Bill is well known and respected in the defense industry having served as President and CEO of the O'Gara Group for a number of years, and we're fortunate to have Bill as Chair of our Board. Bill?

Thank you, Ron, and good afternoon, everyone. On behalf of the entire Board of Directors, we cannot be more pleased with Jim Clark joining us as LSI's President and Chief Executive Officer. Hopefully, you all saw our October 17 announcement, which provide you detail about Jim's background and his experience. If you may recall, our CEO search process began a little over six months ago. At that time, the board was not satisfied with LSI's strategy for driving growth and profitability in an industry viewed as experiencing fundamental change from the disruption of digital and connected technologies in the markets we serve. In order to significantly increase shareholder value, we felt we needed a transformative change in vision and strategic direction. Consequently, the board made the decision to conduct a thorough and global search for a new CEO. As such, we hired a well-respected national executive search firm to assist us. We were advised that a thorough CEO search could take anywhere from three months to a year. We wanted to make certain we didn't rush the process. So we decided to bring in two experienced executives, Ron Brown and Crawford Lipsey as Interim CEO and Interim COO, respectively. We had time to conduct a thorough search, and we're extremely pleased with how this process has worked out. We are confident that Jim is the right CEO to move LSI forward with the development of a sound strategy that addresses the challenges associated with an industry undergoing dramatic change. His solid track record of driving transformative and profitable growth by providing customers with innovative solutions and services was the reason he was the unanimous choice of our board. As you have heard, LSI has taken a number of actions recently to improve our profitability and growth. We're looking forward to Jim's leadership and taking LSI to the next level. Jim, would you like to make a few comments?

Thank you, Bill. Good afternoon to all and thank you for taking the time to participate in today's call. Today marks my fourth day with LSI, and I have had a chance to meet all the employees at our Blue Ash facility, and I've spoken via audio conference to the remaining employees working remotely or at other facilities. Tomorrow, I will travel with Jeff Croskey, our commercial sales officer, to our Columbus and North Canton facilities, and over the next two weeks, I will travel to the remaining LSI locations. I'm choosing to take my first days at LSI to meet the people that make up the company. Although, we saw a wide variety of products and solutions. I think that the people ultimately people buy from people, and therefore, it's no surprise that I believe our biggest opportunity are the folks who work for LSI, including our customers, suppliers, reps, and shareholders. The work that the board, Ron Brown, Crawford Lipsey, the senior management team, and many others who have done over the last few months has left us with a great platform for growth. Over the next few months, I plan to work with a wide selection of our customers, and work with the senior management team in refining our go-forward strategy. I'm excited to be part of LSI, and organization that has 42-year history of innovation and growth. I like the unique nature of LSI, the heart of the employees, the family and solutions that it brings to market. There is much work to be done, but I believe there is a strong opportunity to further accelerate the growth of the organization by leveraging the strengths of LSI in a way that differentiates us from our current competitors. I'm confident that as a group, we'll be successful in creating and highlighting that differentiation and it will consistently be the first choice in our category. I want to thank you, again, for your confidence in our company and spending time with us today. And with that, I'll turn it back over to Ron.

Thank you, Jim. It's great to have you on board. And operator, at this time, we would like to open up the call for questions.

[Operator Instructions] And our first question comes from the line of Craig Irwin with Roth Capital Partners. Your line is now open.

Hi, good afternoon and thanks for taking my questions. And welcome aboard, I should say. First thing I want to ask about is Atlas. There was no mention of Atlas in the prepared comments you shared with us just now. Can you maybe give us a little color about the relative contribution of Atlas? Are we seeing success in the cross-channel synergies that we'd all hoped will materialize over the next couple of years? Do you see much in the way of changes coming for Atlas given their different approach to manufacturing versus traditional LSI? And is this an opportunity for learning across the rest of the organization?

Yes. Hi, Craig, Jim here. I will respond first on the comment. Atlas - business for Atlas remains solid. As you know, the stock and flow market itself is very large and demand is robust, and in fact, we're entering into one of the higher seasonality periods for stock and flow product. Atlas has been successful in expanding its distribution range a bit, which is one of the key synergy targets of the acquisition cases, and we look to further accelerate that as we go through fiscal 2019. There are product pricing - there has been some pricing moves in Atlas, particularly around second price point products as we compete with China imports, which you are very familiar with, but one thing about Atlas, they are very quick, they are prompt by talent and their ability to respond and change has been a rather impressive element of that business. In fact, one where we look to incorporate some of their characteristics into the broader LSI program. We are looking at from a global supply chain infrastructure perspective. The model you mentioned where we purchase kits and do some final assembly in Burlington. We will continue to do that, but we will also continue to look at the sourcing complete where it makes sense going forward, Craig.

Great. My second question is strategic around the facility closures. So the biggest mistake of the old management team at LSI in the last few years was the shut of the Kansas City facility that was making all the fluorescent fixtures. The expectation was that it would just basically force the customers to convert to LED, and they chose not to and the business went away. Can you maybe share some of your experiences in Rexel and your prior firms that you have been at? In this type of transition, what do you see different about the changes to the upstate New York facility and materiality of the Hawthorne facility to operations? And how you plan to sort of a leaner footprint to benefit the company?

Craig, before Jim answers that question - Jim Clark, what I would like to say is with respect to the New Windsor closure, I mean, one of the lessons we've learnt is how important it is to do these closures or transitions that are not disruptive to the customers and that - we did have some disruption with the - with that closure, the Kansas City, the closure work, we are closing this over a long period of time or close to nine months period. To make certain, we do it right, we have a well-thought-out plan to continue to provide the product that was produced there to transition some of that product or quite a bit of that to our Blue Ash and our Erlanger facility and other product that is extremely - that is so pretty much based on price. We are putting in place sourcing alternatives with respect to that product line so that the from a customer standpoint, they will not see any impact as a result of this closure. That's the intent. Jim?

Yes, Craig. I don't know. This is Jim Clark. I don't know what else I can add to that answer, except to say that, it's Day 4 for me. So it would be reckless for me to kind of comment on how we got there or what the decisions were made to get there, but I will say that the communications that I've had with the employees, communications I've had with the board and senior management team is much more offense-focused and defense-focused. So it certainly would be our goal to make sure that we are taking care of our customers. We are not repeating mistakes of the past. Any product line, it's got some vitality to it. If it is being produced profitably, we are going to make sure we hold onto those. And as Ron said, I have had a chance to look at the transition plan. It's an extended transition plan; it gives us time to react. If we misplanned on something, it gives us time to react. And goal number one is our employees and our customers. So with that in mind, I do not expect to repeat the prior closures.

That's really good to hear. My last question is really about the current environment. How you feel about the December quarter relative to the September quarter? Are we still looking at a contracting environment of margins still little bit under pressure or the pricing actions likely to drive sequential margin expansion and maybe we can get back to a flat or possibly up in the next quarter or two?

Yes. Hi, Craig, Jim, again. Very good question. I'll break that into two components. First let's talk the Lighting area. What we're seeing is consistent with other documented information and feedback, meaning the market is sluggish; it's competitive, which we recognize. Also the quarter reflects a bit of our shift in priority setting around the general C&I segment focusing on the applications where we can differentiate ourselves, while deemphasizing areas where pricing is the primary decision-making factor. And certainly, our sales organization structure change has been adapted to strengthen this, and of course, it's also driving all of our forward investment plans. So as we look at fiscal Q2 as outlined in the press release, I think we're looking at a somewhat flattish quarter, if you will. There are strong activities in some areas, while remaining soft in others. Let me shift and comment on Graphics. We have some terrific momentum going here frankly, we are ahead of the-we are ahead of curve. Dave Moeglin and team is doing a super job there being led by our initiatives in QSR from our SOAR digital technology and in our - on our conventional technology to continue very strong growth in the petroleum sector, including our Mexico initiative is just going extremely well. What we're going to see there is continued strong double-digit growth, Craig, in the quarter. Margins will probably be around the range as we saw in Q1 only because of the continued mix of what we're seeing, but we are leveraging that volume to cover our SG&A, and therefore, expect actually the operating margins to be strong as now little stronger in Q2 for Graphics.

[Operator Instructions]

Operator, if there are no further questions, I would like to take this opportunity to thank all of those on the call for your interest in LSI. We would also like to thank all of our talented people of LSI who are committed to serving our customers better than anyone else in the industry. It has been an incredible honor for me to serve during the past six months as Interim CEO. And I look forward to now serving LSI as a member of the Board of Directors. LSI has an exciting future, it's the breadth of technology products and services that it has - it has those that no one else in the industry has in terms of product services and technology. Have incredibly talented and dedicated employees. And now we have the right CEO for LSI going forward. The combination of all this will make LSI a company we can all be proud of for years to come. Thank you for your attention. Have a good day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a wonderful day.