LSI Industries Inc. (NASDAQ:LYTS) Q3 2024 Earnings Call Transcript

LSI Industries Inc. (NASDAQ:LYTS) Q3 2024 Earnings Call Transcript April 25, 2024

LSI Industries Inc. beats earnings expectations. Reported EPS is $0.21, expectations were $0.18. LYTS isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings. Welcome to the LSI Industries Fiscal 2024 Third Quarter Results Conference Call. [Operator Instructions]. I will now turn the conference over to your host, Jim Galeese, Chief Financial Officer. You may begin.

James Galeese: Welcome, everyone, and thank you for joining. We issued a press release before the market opened this morning detailing our fiscal '24 third quarter results. In addition to this release, we also posted a conference call presentation in the Investor Relations section of our corporate website. 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. Our complete reconciliation of 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, for more details. Today's call will begin with remarks summarizing our fiscal third quarter results. At the conclusion of these prepared remarks, we will open the line for question. With that, I'll turn the call over to LSI President and Chief Executive Officer, Jim Clark.

James Clark: Thank you, Jim, and good morning, all. Thank you for joining us on today's call. It's truly hard to believe, but we're closing out our third quarter of fiscal year 2024 and well into our fourth quarter as we speak today. We are just over two months away from the end of our fiscal year 2024, and we've just begun developing our operating plans for 2025. Things have been busy, and the LSI team continues to execute well. Working through the second half of the year, we are still facing some ongoing headwinds related to the current pause in our grocery vertical. Despite these challenges, total sales for the third quarter were down only 8%, while adjusted net income was up 14% on a year-over-year basis. These results demonstrate and underline the resiliency of the management team to operate the company with a continued focus on execution and earnings while being fully prepared to capitalize on developing opportunities.

As you all are well aware, LSI has developed and published our strategic plan to grow the company and its earnings $800 million in sales and 12.5% in EBITDA in 2028. This plan, which is known as our Fast Forward Plan, provides insight for our investors, employees, and customers alike to understand our goals in the path we intend to take to reach that $800 million milestone. Late last week, LSI announced the acquisition of EMI Industries. EMI is based out at Tampa, Florida, and they have a long-established history as a fixture display and food equipment manufacturer in the grocery, convenience store, and restaurant industries. EMI has been in business for more than 40 years and they serve a well-established customer base ranging in size from regional brands with several hundred site locations, the national and international brands operating thousands of sites.

This acquisition fits well into our Fast Forward Plan, and we see a number of opportunities from additional goods and services that we can offer to our customers. A key component of our strategy is identifying and developing a solution set for higher value verticals where our customers recognize the value of our products and services. This approach has served us well over the last several years, and we've advanced our position in multiple verticals. The acquisition of EMI further expands and accelerates this strategy. I mentioned in previous calls, published information regarding the significant multiyear planned investment by C-stores, QSR, and grocery industry participants as a target in store sales growth as a means to increase profitability.

An improved image and brand enhances the consumer shopping experience. The acquisition of EMI positions LSI to exploit further growth opportunities in this multiyear investment cycle. As we've discussed before, company culture and commercial synergies are always important element to LSI when looking at any type of transaction. Our work with EMI over the last few months has shown a highly experienced management team that plans to stay onboard with EMI and LSI well into the future. In terms of commercial synergies, we see a customer basis about a third, a third, and a third. In other words, while one-third of the combined company customers are new to EMI, about one-third of the combined customers are new to LSI and JSI, and about one-third of the customers are shared.

As a result, we've identified substantial cross-selling opportunities across our expanded customer base. In fact, in regards to common customers, we had one customer, a large quick-serve chicken restaurant chain, reach out to us already, letting us know they do business with both LSI and EMI, and they look forward to working with us as a combined entity. In his own words, he thought this was a great combination. Aside from these commercial opportunities, we see a number of operational and integration opportunities. It will help EMI lower costs, improve production capabilities and product quality, while improving customer service and profits. We see combined technology capabilities and benefits we can offer our customers. We won't get all of these opportunities overnight, but working with the team at EMI, we are confident of our ability to work together, share capabilities, and learn from each other.

EMI and JSI today provide adjacent products to our combined customer base, And in fact, they make a perfect combination, whereas EMI and LSI help JSI in metal fabrication and design and JSI will help EMI in refrigeration and cold fixture business. EMI and JSI both work in the millwork and refrigeration space, and we believe the capabilities and purchasing power will complement each other. Over the next few quarters, we'll explore these opportunities, including having JSI work with EMI in the introduction of an R290 solution, allowing EMI to offer an environmentally friendly refrigerated solution for those customers who value this offering. In the full calendar year 2023, EMI reported total revenues of $87 million and EBITDA performance of $5.5 million.

EMI will be immediately accretive to LSI on an adjusted earnings per share basis. LSI has been working with EMI over the last few months as we underwent our full due diligence of the company. Our purchase price of $50 million was fully funded from our existing revolver, leaving our net debt at approximately 1.3 times. We will add about 300 employees to LSI and five additional manufacturing locations located in Florida, Georgia, New Jersey, Rhode Island, and Dallas, Texas. This acquisition helps make a meaningful step towards our $800 million goal and provides an expanded set of products, services, and solution in our targeted vertical markets. We have more work to do. Organic growth is an important piece of our plan, and we continue our efforts in securing new customers and experimenting with new vertical markets.

New product development and new product introductions remain on a healthy pace at LSI. Our outreach with our agents and partners remains a high priority, and in fact, next month, we will have our agent meeting here in Cincinnati, is currently slated to be one of our largest detention agent meetings ever. We have a lot of work to do and a lot of opportunities in front of us. We remain committed to reaching our $800 million goal. We're excited about what the future offers. With that, I'll turn the call back over to Jim Galeese for a closer look at our financials. Jim?

James Galeese: Thank you, Jim. In fiscal Q3. we continued our strong focus on execution and quality of earnings. For the quarter, LSI generated increased net income and earnings per share, margin rate expansion, and strong cash flow, all while continuing to invest in the business, with increased capital expenditures and other growth initiatives. Our adjusted gross margin rate improved 160 basis points versus last year, contributing to our improved net income and margin expansion. Adjusted EBITDA margin increased 80 basis points to 10.4%, while adjusted earnings per share increased $0.02 to $0.21 a share. Multiple factors drove the improvement with favorable mix, stable pricing, moderating material input costs, and factory productivity, all contributed.

Results were achieved in a divergent market environment with vertical performance ranging from robust activity levels to the continued pause in grocery. In refueling C-store, for example, our recent large program wins for display solutions generated significant growth in the third quarter, as site release activity for these programs were initiated. Our site work ranged from product only to being the single-source provider of comprehensive products and services. Many of these sites specify our unique forward throw technology and Archer perimeter lighting system. This differentiation creates increased revenue per site and strengthens our importance to customers. The adoption rate continues to increase as customers recognize the value these systems provide.

The refueling C-store outlook for the fiscal fourth quarter and entering fiscal '25 is strong, with high levels of site release activity for multiple programs expected to continue. Conversely, refueling C-store growth was offset by continued disruption in the grocery demand levels caused by the slow progress in the proposed merger of two large industry participants. We maintain ongoing contact with our grocery customers and plans for interior refresh programs remain, but with schedules deferred, pending more clarity on the merger. The underlying fundamentals of the grocery vertical remains solid and support multi-year investment in store refresh programs. For lighting, market performance has varied across verticals as well as project size. Overall, lighting project quote activity for fiscal Q3 was above prior year levels.

However, we're also experiencing the quote to order conversion period continuing to lengthen, particularly for larger projects. Small project activity remained stable across multiple verticals, and we expect this trend to continue in the fourth quarter. Despite the lengthening quote to order conversion period, the Q3 book-to-bill ratio was above one. Lighting adjusted operating income increased 11% for the quarter on 3% lower sales. The lighting gross margin rate was 280 basis points above the prior year period, reflecting in part the healthy level of small project activity, as well as stable pricing, moderating material input costs, and factory products. Next, a few comments on cash and capital allocation. Free cash flow was $11 million in the quarter with our TTM cash flow over $43 million.

Solid cash flow generation reduce net debt to $9 million and lowered our ratio of adjusted EBITDA to net debt 0.2 times as of March 31. We have been successful the last several years with our earn to invest model, generating increased earnings and cash flow, significantly reducing debt, and positioning the business to execute on both organic and inorganic growth initiatives, as identified in our Fast Forward Strategic Plan. Last week, we announced the acquisition of EMI Industries as part of that inorganic growth plan. We expect the combined cash flows of two entities to significantly reduce outstanding debt over the next two years, supporting the cycle of investment to achieve our 2028 target. On a reporting basis, EMI will become part of LSI's display solutions segment, beginning with a partial impact beginning in fiscal Q4.

As part of our capital allocation and total return to shareholders, the company declared a regular cash dividend of $0.05 per share payable on May 14 to shareholders of record of May 6. In summary, our third quarter performance reflects the diversity and durability of our business model. The last two quarters demonstrates LSI can achieve solid results while overcoming of that driven interruptions to key markets. The addition of EMI will further strengthen our diversity of markets and customers and durability of performance. I'll now turn the call back to the moderator for the question-and-answer session.

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