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. [Operator Instructions]. 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..

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.

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 second quarter results. At the conclusion of these prepared remarks, we will open the line for questions.

With that, I will turn the call over to LSI President and Chief Executive Officer, 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.

In several of our established markets, we enjoy strong preference and brand awareness based on decades of experience and an understanding of the market needs and opportunities.

We work closely with our niche agents, our general agents and distribution partners to understand not only the customers’ articulated need or request, but also the opportunity to see and develop solutions to address the unmet needs.

We’re able to introduce forward-looking thinking and improvements on design and specifications of the projects, which increases our value as a partner.

We add value throughout the use of different graphics materials, sensors, controls, optics, light cut-off and we improve the ease of installation and performance of our products in such areas as uniformity and durability, all resulting in less maintenance, longer operating life and lower overall cost of ownership.

These principals span across our solution sets, whether it's in lighting or graphics. The commercial effort we are investing in is oriented around qualifying our customers’ goals, highlighting our strengths and focusing on those projects where we can create competitive advantages.

Last year, in our automotive vertical, we designed a custom-built large indoor fixture in partnership with one of the world's largest Japanese automakers. The goal was to have a fixture that would probably highlight their product in showrooms across the country with the right color, temperature, intensity and uniformity.

The project was not simply bid out, but instead it was an engineered solution that leveraged our unique capabilities, including design and manufacturing, along with a network of partners across the country to assure proper application and installation.

In this case, LSI worked with the customer as a partner and not simply as a manufacturer or supplier. Last quarter, I mentioned a contactless payment project with one of the world's largest oil retailers. In this case, we helped design and deploy a payment option allowing customers to pay at a pump using a mobile application.

LSI worked with the customer and a team of their partners to print the QR code and an embedded near-field chip into a series of graphics and then we managed the deployment and the installation in just over 11,500 locations. These locations included anywhere from two to 16-plus pumps at each site.

The project was in the works for over a year, but the deployment was scheduled to be completed from start to finish in just over three-and-a-half months. I am happy to say that we are more than 70% through this deployment and things are moving along well.

In fact, just this week, we were awarded another 1,100 locations in addition to the 11,500 locations on the initial project spec. Last month, we issued a press release announcing our partnership as the official lighting partner of the USA Pickleball.

Pickleball is one of the largest growing sports in the United States and is part of the sports court industry, which includes tennis, paddle, basketball and others. As the official lighting partner of the USA Pickleball Ball Association, we will have much improved visibility in one of the fastest-growing sports in the U.S.

This partnership goes to underline our strength and offering in the sports court market. For decades, LSI has provided solutions to this market. And with a refreshed product offering in this space and more to come in the future, we see a real growth opportunity ahead of us.

This week, we issued a press release announcing that we were awarded a $20 million contract to provide indoor digital menu board systems to one of the world's largest fast food retailers.

This is a follow-on order to the $100 million order announced last year and goes to further illustrate our ability to expand our share of wallet and our overall offering* in a key vertical market we compete in. These projects all go to underline the strength of our strategy and the opportunities in front of us.

Next week, we will be hosting our agent and partner meeting as well as LSI's national sales meeting. These meetings will occur virtually. And as of today, we have over 500 agency and partners registered and planning to attend.

We will be sharing a roadmap of our plans for the future years, including the introduction of 25-plus new products in the upcoming quarters and the expansion of our existing vertical markets. We are all glad to have the calendar year 2020 behind us. Employee and partner safety remains at the top of our list as we start calendar 2020 – year 2021.

I am proud of how the team at LSI has found a way to not just survive in the current environment, but also to thrive. With that, I will turn the call back over to Jim Galeese for a closer look at our financials..

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.

Adjusted EBITDA was $5.1 million, or 6.7% of sales, 130 basis points above prior year. The company generated $5.3 million of free cash flow in the quarter, increasing our cash balance to $13.6 million as we exit fiscal Q2. The company maintains an existing credit facility of $75 million and continues to have no long-term debt.

We continue to effectively manage working capital in the face of constantly changing market conditions due to COVID, with non-cash working capital decreasing both sequentially and to prior year.

This also reflects our capability of managing the new product introduction process, launching new products while concurrently phasing out existing lines minimizing duplicate inventory and obsolescence exposure.

New product activity was very active in Q2 with five new products introduced and we will continue to accelerate throughout the second half of the fiscal year. This includes a key expansion of our outdoor portfolio and the next generation of several indoor product groups.

A regular cash dividend of $0.05 per share was declared payable February 9 for shareholders of record on February 1. Now I will briefly comment on segment operating performance.

As mentioned, sales increased 9% sequentially from Q1 with the graphics segment increasing 27% while the lighting segment, more impacted by the resurgence of COVID, was flat to the prior quarter.

The graphics increase was driven by the petroleum and grocery verticals, including the petroleum 11,000 site contactless payment project and project activity for several large grocery firms. Development work on potential new programs remains very active.

In lighting, project quotation activity remains favorable, realizing quote and inquiry levels above prior year throughout the quarter, including improved activity in several of our key verticals, including automotive.

But we also observed the quote to order conversion period lengthening indicating the industry challenge in managing project planning and scheduling. The business gross margin rate improved 160 basis points versus prior year with multiple factors contributing.

Price mix was favorable, reflecting the ongoing focus on higher value applications and solutions. Productivity continues to be a major contributor as we align our manufacturing costs to market requirements.

Design savings are a sizable part of productivity as we identify ways to engineer cost out of our product while improving features and ease of contractor use. Both segments generated improved gross margins compared to prior year with graphics improving 280 basis points and lighting 140 basis points.

The lighting gross margin rate again finished above 30%. Q2 operating expenses declined 7% versus prior year, reflecting our strong focus on priority which includes investment in key commercial initiatives, notably sales resources and targeted marketing programs, balanced with ongoing identification of cost savings and leverage.

Looking forward to the second half of the fiscal year, we are encouraged with improving trends and market activity and the impact our commercial initiatives can generate but we also recognize that market conditions may remain inconsistent in the near term.

Therefore we will continue to balance our diligent focus on execution with investing in initiatives to generate growth. I will now return the call back to the moderator..

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

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?.

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..

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..

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..

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

Thank you, Andrew..

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

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?.

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..

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?.

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..

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?.

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..

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?.

I am sorry. You cut out slightly in the beginning part. I missed.

Jim, did you get that?.

Well, in terms of the sales force, yes..

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..

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?.

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..

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

Thank you..

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

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?.

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..

Go ahead..

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..

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?.

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..

The same with lumen output..

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..

Got it. Thanks guys. I appreciate it..

Jed, thank you..

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

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..

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..