EMI Industries, LLC (LYTS) Earnings Call Transcript & Summary

Greetings, and welcome to the LSI Industries acquisition of EMI Industries Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Jim Galeese, Chief Financial Officer. Thank you. You may begin.

Good morning, everyone, and thank you for joining today's call. We issued a press release after market close yesterday announcing LSI Industries' acquisition of EMI Industries. In addition to this release, a conference call presentation is currently available 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 operating results. Please note that our commentary and responses to questions on today's conference call may include forward-looking statements regarding our business outlook. Such statements involve risks and opportunities and actual results could differ materially. Please refer to our safe harbor statement, which appears in the transaction press release for more details. Today's call will begin with remarks highlighting the acquisition. At the conclusion of these remarks, we will open the line for questions. With that, I'll turn the call over to LSI President and Chief Executive Officer, Jim Clark.

Thank you, Jim. Good morning, all, and thank you for taking the time to join us on relatively short notice. After the market closed yesterday, we announced our acquisition of the privately held company, EMI Industries, for a cash price of $50 million. EMI is a Florida-based company and vertically integrated designer, manufacturer, distributor installers of store fixtures and food service equipment. EMI has been in business for more than 40 years as a trusted supplier of national convenience stores, grocery, a number of restaurant chains, and they offer a wide variety of custom and standardized solutions that help in the drive-in store customer traffic, elevate brand identity and enhanced shopping experiences. EMI is a market leader and provider of retail commercial display solutions throughout North America. They have dedicated a long -- they have decades of long relationships with deep base of established national customer accounts that range in size from several hundred store locations to national and international accounts with thousands of locations, positioning them to capitalize on sustained multiyear growth in demand for fresh on-the-go meal and beverage options. I'd like to mention that EMI is a sequel to the JSI acquisition, and it shares the same industrial logic that we've talked about over the last few years. With our acquisition of JSI store fixtures 3 years ago, LSI created a vertically integrated commercial lighting and display solutions business in North America. In 2021, the JSI acquisition fit in well into our vertical market strategy and significantly increased our total addressable markets, while driving meaningful revenue synergies across our combined product portfolio. Since acquiring JSI, we've realized significant commercial synergies, further demonstrating the industrial logic of the transaction. We've also delivered consistent growth in margin realization, free cash flow generation and profitability and has positioned us well to reinvest in our business, while maintaining a disciplined approach to balance sheet management. Our acquisition of EMI follows a similar template to that of JSI and one that checks all the boxes for us, while aligning closely with the priorities outlined within our Fast Forward plan. To that end, let me share some reasons why we believe this is the right fit and the right time for LSI. First, the acquisition expands our presence and capabilities in the growing vertical markets where we've established a presence. EMI's offerings complement the offerings we currently have within LSI and JSI with minimal overlap. Second, EMI brings a winning culture to LSI that closely mirrors our own. We've talked about it a number of times. Culture is a key fit for us. And EMI is a vertically integrated founder-led business recognized for its strong base of domestic manufacturing expertise, deep customer relations and niche higher-value products and services. EMI's value proposition combines product engineering, manufacturing, delivery installation and post-sale support, which contributes to higher customer satisfaction and retention. Third, EMI has low customer overlap with LSI. It creates potential significant multiyear commercial synergies for us. EMI is one of the largest privately held food equipment companies in North America with a diverse base of reoccurring long-term customers, including very well-known brand names like Publix, Starbucks, Wawa, QuikTrips, Chick-fil-A among others. While LSI and EMI do share some customers, a majority of customers do not overlap. This represents a significant cross-sell opportunity for us. We believe the business combinations also expand LSI's capability to attract new customers in these markets. And finally, EMI is expected to deliver adjusted earnings per share accretion to LSI upon closing of the transaction, excluding acquisition-related commercial cost synergies. On a post-synergy basis, we see a pathway to materially improving EMI's margin performance in future years, positioning us to realize double-digit EBITDA margin within the legacy MI business within the first 24 months following the close of the transaction. This acquisition of EMI builds on the ongoing success of the JSI transaction, while executing on the road map detailed in our 5-year Fast Forward strategic plan. It's one that seeks to deliver sustained commercial growth, operational excellence and disciplined capital allocation, consistent with our long-term focus. As outlined within the Fast Forward plan, we remain committed to adding scale and competencies within both our new and existing vertical markets, which EMI will help us to further advance. We view EMI as a highly complementary to our existing business with significant runway for margin and profitability improvement. Before I hand the call back to Jim Galeese for his remarks, I want to personally welcome the EMI team to LSI. Over the years, EMI has garnered a reputation for delivering the highest standards of customer service, quality and innovation to their customers. Their culture is a good fit for ours, positioning us to deliver long-term value creation for our shareholders during this next exciting chapter in our history. I want to take a moment to personally recognize Alan Harvill President and CEO of EMI; and Dave Mueller, the COO; and all the people at EMI who have built this company into an exceptional business it is today. We look forward to working closely with Alan and his team towards a successful integration and it's off to a great start so far. With that, let me turn the call back over to Jim Galeese for some specifics on the financial side.

Thank you, Jim. As Jim just shared, EMI is a strong strategic fit for LSI, accelerating our growth within complementary vertical markets where we continue to build market-leading positions. In recent years, EMI has delivered sustained organic growth in revenue, operating income, adjusted EBITDA and free cash flow. In the full year, calendar year 2023, EMI reported total revenue and adjusted EBITDA of approximately $87 million and $5.5 million, respectively. With closing, the transaction will be immediately accretive to LSI on an adjusted earnings per share basis. We funded the acquisition of EMI utilizing cash and availability under our existing $100 million credit facility. At closing, we anticipate that our pro forma net leverage ratio will be approximately 1.3x, well within our targeted range. We intend to significantly reduce net leverage within the business over the next 24 months, supported by anticipated growth and pro forma free cash flow from the combined entities. LSI's vertical market focus enabled us to develop a business system, built on execution and continuous improvement, constantly looking for new ways to get better and faster for our customers, helping us reduce time to market, shrink lead times and develop innovative solutions to customer requirements. Having successfully implemented this approach at LSI, we deployed the framework at JSI store fixtures, and will introduce the same to EMI to assist in realizing identified synergies. We're confident that, collectively, we can build on the current EMI EBITDA margin portfolio profile, attaining double-digit EBITDA margin over the next 24 months. On a reporting basis, EMI will become part of LSI display solutions segment, beginning with the fiscal fourth quarter, reflecting a partial quarter impact. With that, I'll turn the call back to the operator and open the line for questions.

[Operator Instructions] Our first question comes from the line of Aaron Spychalla with Craig Hallum.

Maybe first for me, it sounds like not a lot of product or customer overlap, but could you just maybe talk about the display solutions that you're producing, how it's complemented by what EMI has to offer? And then just how much more share of wallet are you able to get with this combined offering? You talked a little bit about TAM expansion from JSI. What might this add as you go into like a Starbucks now? How are you able to kind of offer a more complete solution there?

Yes. Aaron, thanks. Probably the biggest thing is that it's an expansion of -- if you think about all the products that JSI makes and we put them into a catalog, now the catalog is just twice as big, if you will. As an example, EMI does a lot more in metal shelving than we do within JSI. They have food-grade stainless steel countertops, which we don't currently offer, cup and beverage dispenser systems that we don't currently offer. So it's really just an expansion. And if you use your analogy or your question about Starbucks, where we were able to -- and these are just arbitrary numbers. They're not specific. If we were able to provide 20% of their needs before, we're now able to provide 40% of their needs, whether that's, like I said, additional countertop areas, dispensing areas, metal shelving, metal cabinetry. They do have millwork capabilities and they're very efficient at that. So there is some overlap there, but they have different designs and capabilities. So it's really just kind of an expansion of the products and services we're able to offer.

Yes, Aaron, Jim G here. We highlight a couple of case study examples in the deck for the conference call for grocery and C-store. And like Jim said, what EMI brings, they have a very strong presence, interior, led by a wide range. Their range of millwork solutions is much broader than ours and customer -- around the customer requirements. And then they bring a different refrigeration element than what JSI offers a bit and then, of course, the whole countertop for both grocery and C-store. So it really expands. We keep talking about providing an end-to-end solution up from concept phase through installation and aftermarket service. This only builds upon that capability.

Great. Great. And then maybe second, can you just talk about some of the operational synergies, cost reductions that you are expecting to pursue as we look to kind of grow the EBITDA margin there in the coming years?

Yes. We -- I mean, we see a lot of things that we are very proficient at that we'll be able to offer to them and help them with. Probably on the top, they eat -- the ones that are really easy to understand are things like procurement and raw materials. Our combined volume purchases in our vendor base, with their vendor base is going to create opportunities. All the rest of them are pretty well known, right, manufacturing, SG&A, all of those things. We see a lot of opportunity. We see a lot of efficiency we can help each other with. But this is not something where we're looking to come in and make massive changes to the EMI organization. We respect what they've done. We respect how they operate their business. We want to make sure that the things are complement -- complementary, but we do believe there's a lot there. And then as I mentioned in my comments, the cross-selling opportunity, our cost of sales is dramatically reduced when we're in there providing more bang for the buck for the customer, one belly button, more solutions, but our cost of sales is lowered because we're in there just getting a greater share of wallet with the same investment.

Our next question comes from the line of Amit Dayal with H.C. Wainwright.

Congratulations, Jim and Jim, on another interesting acquisition. Just to begin with on the margin side, over time, do you think there are opportunities to sort of improve EMI's margin, EBITDA margins to the levels LSI has sort of recently been executing at?

We do. I mean -- and I don't want to get into all the details, but we definitely see an opportunity there and taking that and improving it significantly is part of our plan. We anticipate that it will be -- there will be an ongoing kind of linear process. But within 24 months, we expect significant improvement.

Understood. Also curious to see how their refrigeration business can support some of the innovation you have been working on, on the refrigeration side with your newer offering. Does this line of sort of business now help you push that offering in a stronger way to the market now?

It does. Currently, EMI does not offer an R-290 solution, and there's great interest, as you know, from the market and from a number of EMI's customers. So we're -- we'll be able to take that technology to development as well as the manufacturing capabilities that we've invested in recently with the new R-290 facility and really expand on that. There are some refrigerated products and refrigerated solutions that EMI offers that LSI -- JSI does not today, and we see some opportunities there. We also -- I'll give a shout out here to Duane, our Head of Engineering, up at JSI. I think that there's going to be a lot of areas he's going to be able to help EMI be more efficient in. Our lab capabilities, our engineering, our prototyping capabilities in JSI are a bit more advanced than EMIs. And I can just see the synergies and the opportunities and the momentum we're going to be able to build there. So we'll both benefit, but EMI will benefit through the access to the R-290 and through the access of some of the lab and testing and design capabilities that JSI has that EMI just doesn't have today.

Our next question comes from the line of George Gianarikas with Canaccord.

I'd like to understand a little bit about your Fast Forward strategy. I mean, you've articulated $143 million in revenue through M&. A, this gets you about 1/3 of there, I believe. What are you seeing in the marketplace? How long have you been in discussions with EMI? How should we think about next steps to getting to that inorganic growth number over the next few years?

Yes, George, thanks for the call and thanks for the question. Listen, I mentioned it on probably every quarterly call we've been on. We're very active out there trying to create opportunities, not just the ones that are brought to us, but organically trying to create opportunities in the M&A space. We have had dozens of meetings over the last few years. We always look -- there's a financial -- the beginning of anything that we're looking at starts with a fit to our plan, right? That's why we have that Fast Forward plan and it helps us stay disciplined. It also helps us reinforce our engagement with people we're talking to. Number 2 thing we look for is cultural fit. We -- what we don't want to do is get involved in the business that just is so -- it's on such a different trajectory or angle than us that we don't feel like we can get the synergies we want. So that's a funny-shaped little door that we have to fit through. And then, lastly, it has to have the momentum. I'm going to just call it that cultural momentum in the company that can keep the same pace and speed as LSI. So it makes for a funny-shaped little door. Not everybody fits through it, although we may talk to a lot of different people. Not everybody fits through it. So we are looking at a lot of stuff, but not everything fits that door and that leads to the progress that we're having right now, which is we're very happy to have closed this. We were in talks with them for quite some time. We were in talks with other people in this market space for quite some time. We're very happy with the outcome that we have around EMI. And we do have other things in the hopper. And as you'll note, our leverage ratio, even with this, is still 1.3, so very manageable. We look to make a significant impact in terms of debt reduction within the next couple of quarters and certainly by the end of 24 months. So this fits in well for us and it still allows us a lot of room to kind of look for other opportunities.

George, I'd like to use the term earn to invest and invest to earn. In the last few years, since the JSI acquisition, we continue to improve our earnings, which spawned cash flow, which allowed us to reduce debt significantly, positioning us to take the next step in inorganic growth. And as Jim said, consistent with our Fast Forward strategy, we cast a wide net and we're open to both vertical and horizontal, adjacent-type M&A activity. And with our financing availability, we're in a good position to continue to consider the right type of acquisitions as we move forward.

Great. And maybe last question. When do you expect to close the transaction? I'm not sure if you guys said that in your press release. I didn't see it.

Yes, it was a simultaneous sign and close. So we are closed -- we have closed the transaction.

Okay. So we should expect revenue, obviously, starting in the second quarter of this year.

It will be fourth quarter, right. It will be reflected in our fourth quarter. Will be a stub period, obviously, as we're into the quarter. But yes, you should expect to see some revenue being included with the EMI.

Congratulations.

Thanks, George.

Our next question comes from the line of Rick Fearon with Accretive Capital Partners.

Wow, what a nice acquisition and yes, congrats. It looks like a perfect fit and the price is great. I know that opportunities like this don't grow on trees and just you were answering George [indiscernible] to the acquisition process. Would love to hear a little bit more about that, maybe rough number of prospects you look at, the review process that you and your team take during this, if you're making proposals that are being rejected and then kind of going back to other opportunities. And I know the gestation period can take some time and so given all that and everything that you probably have going on the hopper, it would be great to understand that process.

Yes. Well, Rick, thank you for the question and it's good to hear you on the call. I don't want to dive too deeply in that because I do think that there is some competitive intelligence in there and that type of thing. But I will say this. We are buyers, not shoppers. We look for the opportunities and make sure that they fit for us. They're a legitimate fit and we try to ascertain and do that quickly so that we're good partners to anybody, whether it's a selling business or whether it's a investment banking group that brings an opportunity to us for whatever it is. When we become aware, there's 2 ways that we create these opportunities. We're very active organically, meaning we're going out and creating -- we know the markets we want to be in, and that's one of the huge benefits of having the Fast Forward plan, right? It's easy for us to articulate. It's a wide net, but it's focused in the sense that it's got to fit within this strategic plan that we have. So that helps us be disciplined in who we look at. We engage -- half of all the activity we do is self-generated. It's us picking up the phone and talking to business owners or talking to -- whether it's a small privately held company or whether it's a company held by private equity or it's part of a bigger corporation, we actively engage and organically try to develop our own opportunities. The other half comes to us through different processes and different vehicles that are out and available in the market. But here is the important thing. When we do become engaged, we're very quick to articulate what we see as the opportunity, where we would be in that process and how likely it is that they would fit within LSI and we could close on that deal. So we're very disciplined buyers. And the reason why we do that is we want our reputation to be stellar with these folks. If it's not a company that we think is going to be a good fit, we're going to let them know why very quickly. If it's something we're very interested in pursuing, then we let them know that also very quickly. But as you know, you've been following us for quite some time, we're disciplined in about valuation and that type of thing. And we're not caught up in marketing in a singular event or anything like that. So we're always looking for the right fit and then -- and we always try to articulate to anybody that's engaged or involved in it our probability of getting across the finish line.

Your thorough process is why your acquisitions are so successful. So I know the big drivers for this transaction are the impressive customer base, and that becomes part of that LSI and then the recurring revenue from shared and new customers, cross-selling opportunities. And so the -- to another question you answered already, but with respect to synergies and operational side of things, it looks like you get a manufacturing presence in Georgia as well, which I'm guessing helps in the Southeast. And then there's some overlap in taxes. And I'm assuming that, that could lead to some synergies as well. But are there any additional comments with respect to helping EMI manufacture up in the Northeast, for example, or other things where it sounds like Duane can really be a help to them?

Yes. We do like the footprint that EMI brings, right, if you think about where we are as LSI, LSI, JSI. And again, I want to make sure everybody recognizes, this is not another JSI. This is a JSI second chapter if you will. It fits within that market space, but it really expands the solutions that JSI can offer and vice versa, expands the solutions that EMI can offer. So now you look at Bangor Maine, Milo, Bangor. We do have a sales presence in Massachusetts. There's a sales office in Massachusetts. Now we have another manufacturing facility in Rhode Island. And then New Jersey is going to be a nice presence to be just geographically. We get Georgia, which is very nice. We get Florida, which has always been a strong market for us from an LSI perspective, but now we get a real base of operation there. We have our largest facility -- or one of our largest facilities in Houston. Now we get a presence in Dallas, Texas. So we're looking at all of that geographically. We like the footprint that it offers. And then as you know, from a management team perspective, we're going to be going in there looking for complementary synergies and things that we can help each other with. So it's an exciting prospect. I mean, I'm dragged down with the summer cold right now. But aside from that, I'm very excited about this. I mean I hope it's coming through that we see this as a great opportunity, and we see a lot of opportunities within it. Never mind, the customer base is just so complementary. I mean it's customers that we get to touch now from 2, 3 different spots and some that we didn't even have access to, so really good fit.

That's awesome, Jim. So I just wanted to make a quick comment, the presentation on your website is fantastic. So yes, thanks for providing that sort of granularity and transparency. But congrats again, and yes, good luck.

Yes. Thank you. Thank you.

There are no further questions in the queue. I'd like to hand it back to Jim Clark for closing remarks.

Well, as I said, I think we covered them in the questions-answer period, but I want to leave everybody with this. We're very excited about this opportunity. We see a good cultural fit. The management team that's staying on board, we're excited to work with Alan and Dave and the whole team at EMI. We worked with a small group of folks at EMI. This is a privately held company. So it was -- this is not something they had gone through before. They had not -- this wasn't private equity owned or anything like that. So just based on the exposure we've had to this limited set of people we worked on this deal with and through the project, we're excited about the energy, the culture and the capabilities and it just -- it feels good. I will say that we had folks from JSI engaged in this, and they're all excited about it. So we've got a lot of momentum out of this. It's -- we have a plan that is 24 months long to recognize that full level of change and opportunity and improvement. But they've got a good business that has momentum and it will continue to pay dividends for them and for us, together. So we're excited about it, and we're already executing on the plans for the integration. So I just want to say thank you again. I know this was a short notice for a lot of people. We think it's important to communicate with our investors and with the outside world. So I thank you for taking the time to get on the call this morning. Thank you.

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.