Good day ladies and gentlemen, and welcome to the Second Quarter 2019 LSI Industries Incorporated Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this call may be recorded.

I would now like to turn the conference over to Jim Clark, President and Chief Executive Officer. You may begin. .

Operator, thank you. Good morning and thank you for taking the time to join us on today's call. As you know I'm new to the organization and as we move towards the end of January I’ll be marking my third month with LSI.

LSI has a rich 43 year history of innovation in the lighting and graphic segment, and I spent my early days focused on gaining a better understanding of the organization by visiting our facilities in Ohio, Kentucky, North Carolina, New York and Texas.

I have held a number of meetings with all our employees and have traveled to meet a number of our agents, customers and suppliers. Throughout this effort I’ve attained a better understanding of our strong business foundation and the commitment of our employees and partners to further grow and improve the business.

I have also been able to assess where we are in the transformation process of focusing on key market segments, and to consider additional changes required to drive our business performance to the next level. Many of these items and activities are simply focused on execution, while others may be more structural and strategic in nature.

Our second quarter results reflect the position of the business as we transition and change to become more focused on key market segments and applications where our products and solutions are most valued by our customers.

I want to mention that this transition is disruptive and its disruption is felt as an adverse impact on sales and margin as we realign [audio gap] in both business segments. We are not satisfied with our second quarter results, but I’m confident our changes will result in profitable growth as we move forward.

For Q2 of 2019 the Graphics Segments generated sales growth of 12% versus the prior year. We have been aggressive in developing solutions for the rapidly growing and changing digital market graphics segment, securing several large projects, including a national quick service restaurant and a test platform with a national petroleum company.

These solutions can be applied in many applications, ranging from hundreds to thousands of locations nationwide over a multiyear project lifecycle. These projects however are complex and competitive in nature and as we learn them, we initially generate lower margin which we will improve over time.

Another bright spot is LSI’s penetration into the Mexico market which contributed to our overall sales growth and represents a significant opportunity for us over the next several years.

Our Lighting sales declined 8% for the quarter, reflecting the continued softness and competitiveness in both our project and stock and flow markets, as well as the shift in emphasis to higher value-add opportunities.

On the plus side, our focused approach to vertical markets has led to the award of a two year contract to supply outdoor lighting requirements for a large national auto retailer. This contract represents over $5 million in sales annually for locations based throughout the country. Several key initiatives important to our transition remain on schedule.

The transfer of our New Windsor, New York production facility and closure is on schedule for completion by the end of June. Projected savings of approximately $4 million are also on track. We continue to invest in sales and marketing talent, possessing the competencies required to execute our new focused commercial model.

I’m happy to say that we have secured an interim Chief Marketing Officer, Scott Coleman, and he is in place as we continue our search for a permanent candidate.

The Chief Marketing Officer is a new position chartered to develop the plans required to navigate our evolving markets and I’m excited by the benefit this role and the discipline should bring us over the next several years.

Several sales resources have also been added in the second quarter to strengthen and expand our capabilities to our partners and to the entire organization as we increase our focus on customer visits over the next few quarters. I’m also happy to announce that we have recently hired a new SVP of Operations, Mike Beck.

He will be replacing our retiring VP of Operations, Tom Palmer. Mike will be a key driver to assured continued improvement in our strategic operations initiatives. Moving forward we will make decisions and investments that build the business to achieve profitable and sustainable growth.

I plan to outline changes in critical investments needed in the coming months. This effort and vision will build momentum, which in turn will generate sustained success. I am confident we can achieve our objectives and I look forward to providing future updates on our progress.

With that, I will turn it back over to Jim Galeese for a deeper look at our numbers. .

Thank you Jim and good afternoon everyone. As a reminder, today's discussion 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. 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.

Let me start with key financial statistics. Total second quarter sales were $89.5 million or 3% below prior year. Adjusted operating income was $1.5 million compared to $4.6 million in Q2 of fiscal ’18. Q2 adjusted EBITDA was $4.1 million or 4.6% of sales. Adjusted earnings per diluted share for Q2 were $0.3; Q2 of fiscal ’18 was $0.12.

Cash flow from operations was $5.4 million in Q2 and our debt level decreased $3.8 million versus Q2 last year, serving to increase our available line of credit. Our regular cash dividend of $0.5 was declared payable February 12.

Moving to reported GAAP results, Q2 GAAP net income was a loss of $15.8 million and reported earnings per share was a loss of $0.61. The GAAP results contain a pre-tax non-cash goodwill impairment charge of $20.2 million and restructuring charges of $1.6 million.

The good will impairment is a result of aligning the lighting book carrying value to current fair market value. A complete reconciliation of Q2 GAAP and Non-GAAP measures is contained in our Press Release and 10-Q. Next, I'll briefly comment on the performance of our two reportable segments.

Starting with lighting, sales of $63.7 million were 8% below last year, with a decline reflecting the ongoing market competitiveness and softness in several verticals where we have a strong market position.

Lighting gross margin declined three margin points, reflecting lower volume mix and select price moves to me competitive levels in certain product lines. Very little of the October price increase was realized in Q2 as expected, as shipments include the backlog of pre-price increased projects.

The effect of the October price increase will be realized more in Q3, certainly offset the incremental Chinese tariff costs. Excluding tariff activity, overall material sourcing costs continue to be approximately flat with year-over-year increases in metals, offset by savings in other categories as well as other product cost reductions.

Sourcing costs are projected to continue to fluctuate in key categories, but the overall impact is expected to remain flat. Lighting adjusted operating earnings for the quarter were $2.9 million with EBITDA of $4.9 million or 7.7% of sales.

Shipping to Graphics; graphics sales growth of 12% was driven by the petroleum segment which increased 34% versus last year, specifically several new large projects with key national accounts, also the quick service restaurant segment, a sales for a large national brand project continues to accelerate. The graphics margin rate was lower in Q2.

Reflecting these projects have lower initial margins, which then improve over the project life cycle similar to the process on prior projects. The Mexico market expansion which provides proven solutions to existing customers, large U.S. oil companies is progressing very well. “An order activity for digital signage also continues at a strong pace”.

Graphics adjusted operating earnings for Q2 were $914,000 and adjusted EBITDA was $1.3 million or 5.1% of sales. Total LSI operating costs decreased one point as a percent of sales, reflecting our management of resources and investments as we continue to transition to focusing on key market verticals.

With that, I'll now return the call back to the moderate. .

Thank you. [Operator Instructions]. Our first question comes from Craig Irwin of ROTH Capital. Your line is now open. .

Good afternoon, thanks for taking my questions. So Mr. Clark, first question I wanted to ask you.

Now that you’ve had a couple of months at LSI to reassess and reevaluate, do you see the graphics business as core to the mission for LSI going forward and are there any other potential structural changes that could possibly be on the table over the next number of quarters..

Well Craig, thanks for joining the call. Just to set the perspectives straight, it’s been 62 days in seat, so there is a lot that I’m still absorbing and a lot that I’m learning. As I look at the graphic segment, obviously we’ve had some great successes where we’ve been able to pair those up, in particular petroleum market.

If you look at how our petroleum customers buy and how we supply solutions to them, you look at a classic pump station in Ireland out in front of a self-service minimart or petroleum station, we own so many elements on that through the combination of the graphics and lighting.

I think in that case you could clearly make an argument that graphics and lighting mark a very powerful and differentiated offering to the customers.

Now you know as you go further away from those core markets, I think that sometimes you get a bit more of a convenience by if you will, but I do think there's an opportunity and I think that we need to find a way to strengthen our vertical focus on those markets where those two elements, graphics and lighting come into play. .

Great, that's good to hear. So another question we are starting to get a little bit more often from the value oriented investors that are looking at potentially becoming shareholders in LSI these days, is the restructuring of your New York facility.

So I know this was really just announced a couple of months ago, but are we seeing any loss of revenue specifically related to the transition of those products over to other facilities? Are we seeing a replay of what played out when you exited the Kansas City fluorescence business or is the market weakness and the price pressure that’s showing up in lighting delivering all of the under performance in that business?.

Well, first of all to address this specifically, we are not experiencing any disruption at the New York facility. I would mention specifically that the work force there has truly differentiated themselves in their commitment to keeping the facility staff. We sat down with – as you guys may know that’s a union shop.

We sat down with the local group there in the IBW and they have really done an outstanding job of keeping our production up to both the standards of quality and in terms of total production. Well, I think we learned a lot.

The organization – it was before my time, but the organization learned a lot through the Kansas City exit and I think we put good plans in place to retain the people that were there and to make sure we had a smooth transition. As far as where all the softness comes from, you know its spread across multiple segments. It's not in particular any one.

You know I’m not going to put my finger on it and say it's specifically lighting. You know graphics picked up this quarter. You know you've been following LSI long enough.

There is some cyclicality to this and you know the organization has gone through a lot of disruption over the last year, so it's – you know in terms of a total miss it’s, you know I can't say that it's any one market. .

Okay, and then on the gross margin side, it’s been well telegraphed that the largest OEMs out there have had a mandate internally, don't lose any large jobs, surprising variances have been handed out literally within an hour or two maximum at the biggest OEMs in the market. So I understand a little bit of pricing pressure here.

Can you comment about any potential strategies you have in play that you think will help preserve margins or maybe remediate margins over the next couple of quarters.

Are we looking for behavioral change more than anything from the large competitors before those margins can rebound?.

Well, I think you hit the nail on the head. I mean it's very hard to plan around activities you know such as don't lose any project at any price. You know we certainly don't operate like that. You know we want to remain profitable, so you know we certainly do have a point where we’ll say encore [ph].

I think our biggest defense to those activities is to be present in front of the customers. We enjoy our best success when we stay vertically focused. LSI has you know a 43 year history. They have a great success story.

They make a unique product and deliver it in a unique way and as you brought up earlier Craig, just the graphics piece of it is what separates us. So the message to our organization has been you know customer first and look for those, you know and let's play in the areas where we are truly differentiated in those vertical markets.

So right now, at least in the short time I've been here, that's been the message to our troops and the message to our customers.

I mentioned it, I’ll just follow it up with just this one last thought as, I mention it just a few minutes ago, but I've spent a significant amount of time traveling to our facilities, meeting our customers, spending time with the sales force, and in fact you know having a number of customers visit us here at LSI, but also getting out on the road and visiting customers out in California, Nevada, Texas and in fact next week I'll be in St.

Louis, Kansas City and Minneapolis. I think there's a lot of customers that really value the experience that LSI brings. They are willing to look beyond just the acquisition cost and understand the total cost of ownership, you know the expertise we bring to the verticals and the performance that the products ultimately bring and the company delivers.

I think that that's where we're going to continue to different ourselves and that's the field we're going to consider, that's the field we're going to compete on. .

That's good to hear. So a couple of financial questions, probably for Mr. Galeese. $700,000 lower expense for us you made this quarter than what I've been modeling.

Can you maybe comment about where things are going right for you on the SG&A side? Has there been any change in budgeting philosophy at the company you know or is this the result of the restructuring that’s happened over the last couple of years. .

Thanks Craig, Jim Galeese here. It is a combination. You mention you know a couple. Certainly with our current tightening of margins for EBIT you know we are keenly aware of our SG&A spend and make very conscious decisions around certainly our discretionary spend. But certainly our realignment of our resources has contributed to that in the SG&A area.

We look to drive productivity in all areas of our business and SG&A is one of those, focusing on verticals and getting our resources focused there is one, so we can either eliminate or redeploy other resources where we're not seeing that level of productivity. So we stay very close to that Craig and you know I will continue to do so.

But we also, you know we just say not hesitant. You heard Jim mention select key investments, because you know we're betting on the front end of the business, that’s where we're going to be successful. So we are going to make some surgical investments in the front end of our business. .

Thank you, and last question if I may. Free cash flows, operating cash flow is north of $5 million. Obviously you're keeping a very tight focus on the balance sheet here.

Do you think LSI could generate cash in the current quarter? What do you think about cash generation as the calendar year progresses?.

To your point, that's a very important statistic you know to the business. We do stay very close to that. You know Craig that our fiscal Q3 as always and calendar year Q1 is historically one of the softer quarters for the industry. You know not just ourselves, but with the winter months and you know so forth.

Our models we project to be able to hover around relative to the cash outlook over the next couple of quarters. We review our capital allocation model every quarter, a deal with the board and you know right now we're comfortable with that model. .

Great! Well, thank you for taking my questions and I guess I should say, good job on executing on things that you can control. .

Thank you, Craig. .

Thank you. And I would now like to turn the call back over to Mr. Clark for any closing remarks. .

Well, I'd like to say thank you again for taking the time to spend a few minutes with LSI and learn about our business. As I mentioned in some of the questions and in my opening statement, you know we are really leading this from the front end of the business.

I think that re-energizing our commitment to our customers and understanding the fields that we can compete on is critically important to our go forward success. We do not want to get sucked into projects where it gets down to just solely a pricing decision, and we are making a purposeful effort to stay away from those projects.

It not only keeps us focused on where we add value, but it also frees up the time for us to continue to pursue those high value projects. It’s still been a relatively short amount of time for me here in-seat.

I think that you know as we come into the next quarter, in the next call I’ll have a lot more information to share and I appreciate everyone's attention and participation and confidence in LSI and I look forward to sharing more on our next call. Thank you. .

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today's program. You may all disconnect.

Everyone, have a great day!.