LSI Industries Inc.

Ladies and gentlemen, and welcome to the LSI Industries Second Quarter 2020 Results Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Should anyone require operator assistance, please press star zero on your telephone keypad. It is now my pleasure to introduce your host, Mr. Jim Galeese. 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.lsi-industries.com. Information contained in this presentation will be referenced throughout today's conference call. 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'll turn the call over to LSI CEO, Jim Clark.

Jim, thank you. Good morning, all. Let me start this morning with a few highlights of the last quarter. I'm encouraged by progress we've made in our second quarter. Although top-line sales and lighting lagged a bit behind last year, we had significant improvement in our margins, underlining our effort to move away from low-value, highly commoditized business into higher-value, differentiated opportunities. In our lighting segment, we enjoyed a better than 4% gross margin improvement and better than an 8% op income improvement when compared to last year's results. We are committed to improving this even further. As part of our customer first initiative, a majority of our executive management team spread out across the country in early January with the mission for each person to visit with two or three of our reps and agents. The goal was to create a personal contact with our partners in the field can get a firsthand view of the opportunities and challenges they experience daily. The meetings were generally scheduled for one to two hours, but the majority of them ended up going far beyond the scheduled time, with some lasting as long as six hours. We came back from these meetings energized by the input of our partners and the development of a more personal connection. The mission now is to sort through the feedback received, look for the opportunities, and I assure our agents and reps that we are truly partners in their business as much as they are in ours. On this trip, we visited with more than 20 reps. We still have a number of reps to go, and this is something we will do again soon. Expanding on the partner visits, we had approximately 24 of our top reps come in and visit with us in Blue Ash the middle of last month. We committed the entire leadership team to the meeting, having everyone from manufacturing Engineering, Quality, Order Entry, Sales, and Finance participate. Much like the field visits, we were listening to our partners, looking for input, sharing feedback, and planning for the future. I could not have been happier with this visit and the commitment these folks have to our company. Most of them have been LSI partners for decades, and they truly exemplify the word partner. Luckily, January is the longest month of the year. and we took full advantage of it by holding our national sales meeting in Cincinnati last weekend. We were able to get our entire sales team together, including Jeff Davis, our new commercial leader, for three days of intensive training, including new sales processes, product reviews, competitor updates and new product introductions. Along the lines of new products in the last quarter, I'm pleased to say we released six new products and over the next few quarters, we plan to release two times that number. On the graphic side of the business, I would like to note that the petroleum business has achieved nine consecutive quarters of growth, and we have worked to be engaged in a string of new projects. As we've discussed in prior calls, these new projects tend to be multi-year ventures, and we go through an efficiency and learning curve. That curve directly relates to our margin performance. The more experienced we become with a project, the more effective we become and margins improve. A good example of this margin improvement cycle is in our digital signage business. Over the last two quarters, we've been able to improve customer satisfaction and differentiate ourselves from our competitors, all while improving margins by better than 5%. Simply put, we're providing better service than our competitors, the customers recognize it, and they're willing to pay for it. Continuing on the graphics topic, last week LSI announced joined in on an inaugural celebration with Polaro, marking the opening of their first Mexico location. This was no small event. It included a seven-piece mariachi band and a full extended celebration on premise. This was a well-attended, full-scale event. Our logistics and implementation mechanisms allow us to provide the exact same high-quality brand image to our marketers in Mexico as in the United States. We like to say whether the project is in Kansas City or Mexico City, LSI is a sought after trusted partner in the petroleum branding and our customers can be assured of a consistent high quality experience. That's why so many of the world's largest petroleum companies are working with LSI. In general, the Mexico projects are ramping back up. However, we have heard from a number of our partners that there have been some expanded regulatory requirements added to the process which is adding time to approval and permitting. We do not anticipate or expect any loss of business, but project start dates have been extended to account for this longer approval processes. As I mentioned previously, we've invested in an expansion efficiency improvement plan in our Houston facility, which is the primary manufacturing location for our petroleum related graphics projects. Last summer, we added approximately 40,000 square feet and we've made considerable workflow improvements, all of which is being done under a heavy workload and without impacting production or customer satisfaction. I was down in Houston a few weeks ago with Jim Galeese and we're pleased with the progress these folks have made and the continuing operations in front of us. I expect that it will take us another quarter or two before we realize the full impact of these changes, but it's very exciting to see the improvements. As many of you may have noted, we entered into a definitive agreement last month to sell our 210,000 square foot graphics facility in North Canton and move into a smaller facility right down the road from our current location. With changes in print technology, improved workflow design, we simply didn't yet need the space we were in. The burden and cost of carrying that excess space just didn't make sense. This move will allow us to retain a highly skilled and valuable workforce in Canton while introducing a number of efficiencies in the layout and production flow of our North Canton operations. We'll be going through a build-out and moving the building over the next few months, but we anticipate a close on the sale of this building towards the end of this quarter, Q3. On a completely different note, I wanted to talk about events in China for a minute. As you know, we are principally an American-made and manufactured product. With that said, we do source some measure of components from the Far East. Each year, we have plans in place to account for known disruptions like the Chinese New Year and contingency plans to account for things like shipping strikes, tariffs, etc. I can't say that we had the coronavirus specifically in mind, but we do have plans in place to address issues just like this, which could cause possible supply chain disruptions. At this point, we've analyzed our exposure to critical parts distribution and disruption from China. and we feel comfortable that we should be able to weather any disruption for some time. Obviously, it's hard to predict what the long-term impact could look like, but being an American-made product, we should prove to be another benefit to our partners and customers and we hope that our ability to provide products to our customers will be minimally disruptive if at all. Regardless, we all hope for a speedy resolve to this issue. In closing, I want to reflect back over the last year. has gone through a lot of positive changes. We put a lot of time into our operations and sales plans to be ready for the second half and for the future. Margins continue to improve. Operating income is up, and debt, which was over $50 million this time last year, is down below $10 million today. Although we still have a ways to go, I know that we have plenty of opportunities remaining in front of us, both operationally and commercially, and I'm looking forward to a strong second half. With that, I'll turn it back over to Jim Galeese for a closer look at our financials.