Greetings and welcome to LSI Industries' Fiscal Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. 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, and thank you for joining. We issued a press release before the market opened this morning, detailing our fiscal 2022 fourth quarter and full year results. In conjunction with this release, we also posted a conference call presentation in the Investor Relations portion of our corporate website. Information contained in this presentation will be referenced throughout today's conference call, including certain non-GAAP measures for improved transparency of our operating results. A complete reconciliation of GAAP and non-GAAP results is contained in our press release and 10-K. 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, as well as our most recent 10-K and 10-Q. Today's call will begin with remarks summarizing our fiscal fourth quarter and full year 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 President and Chief Executive Officer, Jim Clark.

Thank you, Jim, and good morning all. Thank you for joining us today. As you know, we're here discussing our fourth quarter and full year results. The short version of the story is we had a great year. Before we go into the specifics, let me take you back a short three years ago to 2019. As a management team, we sat down with a commitment to our shareholders in the market that we will be a $500 million company with double-digit EBITDA in 2025. Sales at that time were around $300 million, EBITDA was approximately 3%, and our company's momentum was a bit flat. We set out to design and execute a plan, which was to make our company a better company before we made it a bigger company. We engaged our workforce, strengthened our relationship with our customers and agents, and focused on specific vertical markets, where we believe we could add value and differentiate ourselves as a key partner. We were selective about the markets we chose, looking for vertical opportunities that matched our core competencies, had the right ingredients for sustainable growth, and would recognize the value and differentiation we aimed to achieve. A good example of that vertical market selection was grocery. Back in 2019, before the pandemic, we felt there was a real opportunity for remodel and new store development in the grocery space. The traditional grocers were being disrupted by customer experiences of new entrants like Whole Foods, Fresh Market, and Amazon. The big players in groceries wanted to change the look and feel of their stores, compete on a different level, and LSI was a perfect fit. We provided high-efficiency, energy-saving, low-maintenance outdoor lighting, coupled with graphics and signage on the buildings. Moving indoors, we offered high-quality, high-efficiency indoor lighting with modern, engaging graphics and signage to the interior of the store. We also provided project management and a full turnkey solution that took a lot of the burden off the store team and allowed them to focus on other activities. Looking deeper into the grocery vertical, we sought ways to grow and increase our value and identified JSI fixtures as a great complement to the solutions we were already providing. With the acquisition of JSI in May of 2021, we added refrigerated and standalone displays, creating continuity in the look and feel of the products, which is only possible when these solutions come from one company. This year, grocery became our number one vertical market, replacing convenience stores and refueling stations for the first time in the company's history. The best part is we have other vertical markets that we believe represent growth opportunities as strong as grocery, which will continue to propel us forward. Given all of this, today we celebrate our fourth consecutive quarter with sales over $100 million in each quarter and a total sales revenue of $455 million, with 7.7% adjusted EBITDA for the year and 8.3% adjusted EBITDA in the fourth quarter, all backed by a very robust pipeline as we enter the first quarter of 2023. Great pricing discipline, margin management, and sales execution will be the theme for 2023. Clearly, our goal of $500 million is well within reach. You can be assured we'll be planning our next target in the next quarter or two. As I said, we have good reason to celebrate. We have not merely talked about our plans but have put them into action and shown results. Going back to 2019, we also made the decision to reshore as much of our supply chain as possible. At that time, around 80% of our materials were coming from overseas. I'm happy to report that today, that number is around 30%, while we have shifted almost 70% of our sourcing to domestic and North American suppliers. Along with that move, we strategically increased our inventory levels. The challenges in the supply chain and transportation delays were interfering with our ability to deliver products on time. We increased our inventory by almost $20 million in the first half of the year. This impacted free cash flow a bit, but in doing so, we reduced inefficiencies in our manufacturing process and improved our overall profitability, effectiveness, and on-time delivery. This performance was noted by our agents, customers, and competitors. We took market share and created loyalty with these new customers by maintaining our commitments and reliability as a strong partner. Simply put, we did not have to start and stop our manufacturing processes due to limited parts availability. I expect that on a comparable basis, our inventory levels will remain elevated for some time as it just makes sense to maintain a higher level of inventory and reduce uncertainty in our processes. This does not mean we cannot adjust that level to some extent. You may have already noted we are bringing inventory levels down, resulting in improved cash flow, which was positive for the third and fourth quarter, and I expect that performance will be maintained. Additionally, our debt has improved to below $77 million, and our debt ratio is around 2.2%. This is a good cash flow business, and we will continue to reduce debt and explore other opportunities as our company continues to perform. In closing, I want to recognize and extend my gratitude to the almost 1,400 employees of LSI, along with our agents and partners. None of this would be possible without a great team of people and strong leaders. The dedication, participation, engagement, and leadership of our people are truly remarkable. The last few years have not been easy for any business or individual. The constant narrative that hard times are just around the corner can be exhausting, but it reminds me of the saying that hard times create strong people, and strong people create good times. We're not in control of the broader economy, but I can assure you we have strong people, and because of that, I'm confident we can continue to create good times. I'm pleased and excited about the momentum we've developed. I see robust order and quote activity leading into our new year, and I hope you will continue to observe LSI and the solid execution this team continues to provide. We have significant runway ahead of us. With that, I'll turn the call back over to Jim Galeese for a closer look at the numbers.

Thank you, Jim. We finished fiscal 2022 with a strong fourth quarter. Net sales were a record $127 million, representing growth of 31% over the prior year and a 16% increase sequentially from Q3, with both reportable segments generating significant growth. Fiscal fourth quarter earnings also improved significantly, as non-GAAP earnings per diluted share were $0.21 compared to $0.12 per share last year. Adjusted EBITDA increased to $10.6 million, or 56% over last year. Margin expansion was a strong focus throughout fiscal 2022, and the business attained our highest levels in the fourth quarter, with our adjusted operating margin improving 160 basis points versus last year, and adjusted EBITDA increasing 130 basis points to 8.3% of sales. Incremental sales growth in targeted market verticals, selling price alignment with inflationary impacts, and disciplined cost management all contributed to margin expansion. For the fiscal year, the business executed at a high level, generating significant year-over-year sales and earnings growth throughout all four quarters despite a challenging operating environment. Sales increased 44% to a record $455 million. Adjusted net income improved to $18 million, which is 84% above the prior year, and adjusted earnings per diluted share increased to $0.64 versus $0.35 last year. Adjusted EBITDA increased to $35 million, or 66% above fiscal 2021. These results represent the highest EPS and adjusted EBITDA attainment in several years. In previous calls, we discussed the purposeful decision to invest in inventory, specifically in the first half of the fiscal year, to mitigate supply chain challenges and support sales growth. The improved supply chain allowed us to reduce inventory levels in Q4, contributing to a higher rate of earnings conversion to cash. As a result, free cash flow increased to $8 million in the fourth quarter. Improved cash flow served to reduce net long-term debt to $77 million in Q4, lowering the ratio of net debt to trailing twelve-month adjusted EBITDA to 2.2 times. A regular cash dividend of $0.05 per share was declared, payable September 7th for shareholders of record on August 30th. Shifting to segment performance, both segments achieved substantial increases in sales and operating income for the quarter, improving both sequentially from Q3 and over the prior year. Sales for the lighting segment increased 29% year-over-year in Q4, continuing strong growth in key vertical markets. Lighting generated a gross margin rate of 31% in the quarter, 210 basis points above the prior year, reflecting additional volume leverage and successfully aligning selling prices with inflation. For the fiscal year, lighting sales increased 24%, with balanced growth realized in multiple market verticals and through both project and distributor stock channels. Growth was driven by new products, expanded selling efforts, effective marketing programs for both our channel partners and end users, and product availability enabled by our investment in incremental inventory. Lighting enters fiscal 2023 with continued momentum, a favorable quotation and order activity, a last three-month book-to-bill ratio over 1, and a backlog approximately 30% above the prior year. Fourth quarter sales for our Display Solution segment increased 35% versus last year, led by the grocery and quick-service restaurant verticals. Growth in grocery was propelled not only by continued strong demand for JSI display cases across national chains, but our printed graphics also had a solid quarter with several key accounts. This supports the solution-selling approach we're utilizing in the grocery vertical. We continue to successfully execute the major QSR digital menu board program initiated in fiscal 2021 and have begun supporting the additional awards received for our performance. Activity for both will run through fiscal 2023 and beyond. For the full fiscal year, Display Solution sales increased 75%, including the impact of the JSI acquisition, which occurred in the fourth quarter of fiscal 2021. All Display Solution vertical markets realized increased sales, except refueling, which was down slightly due to ongoing site construction delays. However, proposal activity remains high, and we recently received a rebranding program from a major oil company providing a turnkey solution, including both product and installation services for locations in Puerto Rico. We anticipate this program will generate more than $10 million in new revenue in the first half of fiscal 2023. Fiscal 2022 operating income for Display Solutions increased to $18.1 million, or 8.2% of sales. The fundamentals for the market verticals in this segment remain positive, and our outlook is favorable as we enter fiscal 2023. I will now turn the call back to the moderator.

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. Our first question comes from the line of Amit Dayal with H.C. Wainwright. Please proceed with your question.

Thank you. Good morning, everyone. Appreciate you taking my questions. Most of my questions are based on the outlook. For next year, relative to the $500 million revenue target for 2025, it looks like you're almost there. Would it be too aggressive to assume that you could hit that number in fiscal 2023?

Well, Amit, first of all, thanks for joining, and good to hear you. We're always trying to ensure we deliver on what we say. There are still a lot of challenges environmentally. I feel very positive about the first quarter and where we can be for the year. I don’t want to commit that we'll hit the $500 million, but I will say that based on the momentum we've generated over the last few years, we're certainly on our way to it.

Understood. And then operating leverage has improved significantly; your adjusted operating income grew by, I think, over 150%, while revenues grew by 44%. Are these the levels of adjusted EBITDA margins we can expect in a more steady fashion for at least fiscal 2023?

Yes, hi, Amit. This is Jim Galeese here. Yes, we've worked hard; if you go back a couple of years, we identified that we needed to work on our margin expansion. What we've accomplished over the last several years in this area, we’re proud of. It's no accident, and it involved multiple levers, both commercial initiatives and operational initiatives. We're going to continue to work both of those levers, and we do see that we can maintain and continue to enhance both our operating and EBITDA margins moving forward.

Understood. Your book-to-bill ratio entering the fourth quarter was 1.1. Is it stronger entering the first quarter of 2023?

I'm sorry, Amit.

The book-to-bill ratio was at 1.1. And yes, coming into Q1, it’s remaining at that level. We monitor it daily, obviously, and we're right at that level.

And in terms of the backlog mix, could you provide a bit more granularity on the percentages of different revenue sources?

Our two reportable segments are Display Solutions and Lighting. If you go back a couple of years, we were at 70/30; today, we're at 50/50. And it remains that way. We have a couple of large projects we tend to work on, and most of it is smaller infill products. But from a mix standpoint, it's currently 50/50 between Lights and Display Solutions.

Thank you, Jim. It's really good to see such strong execution in this type of environment. So, congratulations on that. I'll take my other questions offline. Thank you.

Thank you, Amit.

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

Hey, guys. Thanks for taking my questions. I appreciate it. Just to start, I'm curious as to what led to the decision to reduce inventory? Are you seeing signs in the marketplace that suggest a supply chain loosening, indicating that you felt comfortable bringing down inventories to continue gaining share in the marketplace? Thanks.

Yes, George, thank you for joining. You hit the nail on the head; we're noticing that some supply issues are becoming more reliable. We knew that about $20 million is where we wanted to be. I don't think we ever got excessively heavy. Looking at year-over-year comparisons, you're going to see us carrying heavier inventory for a while due to the supply chain and transportation variability. However, we have certainly seen improvements, and we want to capitalize on that by reducing some inventory positions. This has nothing to do with weaker sales or volume but rather the stabilization of certain supply items.

Is there still an opportunity to maintain even higher inventory levels? How do you balance that against buybacks, considering technology obsolescence that you'd have to deal with?

Yes. When managing our inventory, we consider availability; we want to avoid situations where we can't ship product. Over the past couple of years, that has been a significant competitive advantage—ensuring availability for key components that were at high risk. The second aspect we consider is technology and obsolescence. We do not want to become burdened with products that are moving toward obsolescence. However, we've re-engineered our products over the last three years to mitigate this. The third factor is the improving reliability of our supply chain; we transitioned from offshore sourcing to North American suppliers, which has proven beneficial. All three of these elements allow us some flexibility in adjusting inventory levels.

George, Jim Galeese here. In recent years, we've launched a record number of new products and managed the phase-in and phase-out process effectively despite ongoing supply chain challenges. So, we're confident in our ability to manage inventory moving forward.

Your business is showing great results compared to some of the broader economic weaknesses reported. How do you reconcile what you read about the broader economy versus the strength you're seeing in your business? Are you hearing any anecdotes from customers about issues, or is it full steam ahead?

We are not immune to challenges in the broader economy. We're all consumers, facing inflation in various costs. However, when looking at our business, many of the decisions we made early on are giving us momentum. We're not seeing a slowdown in quote activity or demand, which is reflected in the numbers we've published for Q4 as well as Q3 and Q2 before that. While the narrative about hard times exists, we aren't feeling that impact, although we are prepared for future challenges.

What margin targets can we expect alongside the $500 million sales target? Should we assume similar leverage as shown over the past year?

As Jim Galeese mentioned earlier, we still have levers to pull. As we grow, we become more efficient due to improved utilization. In addition, there are still inefficiencies present due to supply chain challenges. However, as the supply chain stabilizes, we will naturally benefit from improved margins.

You announced buybacks, which is great. Can you provide any guidance on the timing of that buyback? Is it open-ended, and do you expect to finish it by a certain timeline?

Yes, the buyback is definitely open-ended. We look at it continuously and decided that, given the levels at which our stock was trading, it did not make financial sense to prioritize. Our capital models are well-defined, with debt reduction and investment being top priorities. Investment has to yield a higher return than other options we may consider. Buybacks remain in the top tiers of our focus, but we won’t take action unless it makes financial sense. As the stock price increases, it naturally makes less sense to buy back shares, but if the stock price declines, we will certainly act.

Thanks for taking the time, and congratulations on a great quarter and executing in a tough environment.

Yes, George, I can't thank you enough for taking the time. I know it was a challenge, so I appreciate your extra effort.

Our next question comes from the line of Rick Fearon - Accretive Capital Partners. Please proceed with your question.

Good morning, Jim and Jim, and congratulations on another terrific quarter. Thank you.

Thank you, Rick.

My first question is round the forecasting of LSI's growth today. Jim, you started off by comparing the state of affairs three years ago; it's apparent today that the company's transformed into a much more diversified business with more orders and a larger number of customers constituting that revenue base. I wondered about your thoughts on forecasting stability and predictability compared to three years ago.

It's a great question, Rick. From a company's standpoint, we have become more stable, with better visibility. Our forecasting is improved, and commitments from our customers and agents are stronger. However, the broader economic environment still adds to uncertainty, and we're not immune to its effects. While our quote activity is strong and continues to be stable, I prefer not to make bold forecasts beyond six to eight weeks. Generally, I am optimistic.

The greater focus on the grocery vertical likely provides reduced cyclicality in sales versus petroleum. Are there additional verticals you are targeting for growth? Can you speak to this now, or is it better to hold that for a later announcement?

I'd prefer to hold off on specifics concerning expanded verticals. We want to stay focused on the verticals we've identified for growth. We saw disruption in grocery before the pandemic, and the pandemic only accelerated opportunities there. The petroleum refueling stations are not any weaker, but they face delays in permitting and local approvals. It is just a matter of infrastructure recovery. We are successfully capturing market share in grocery, automotive, and warehouse sectors. While we are experimenting with new verticals, we are cautious and maintain priority on those providing sustainable growth.

I understand, and it's exciting to hear about opportunities in additional international markets. My last question is regarding your margins, which continue to impress. Have you identified niche-oriented add-on sales that could be bundled to enhance gross margins on these projects?

It's all about capturing that broader share of wallet. We prioritize solving multiple customer problems on-site, which allows flexibility in handling delays elsewhere. We continually contribute to a list of vertical markets and products for potential add-on sales. JSI is an example of a successful acquisition that has added value to our portfolio. We will continue to explore similar opportunities but prioritize those with long-term potential.

I’d like to encourage management to keep in mind the current valuation of the company while making capital allocation decisions. Given the current market dynamics, it seems like there is an extraordinary opportunity to engage in stock buybacks.

Thank you for your comment, Rick. This does not go unheard by the management team or the Board. We want to be optimistic and will execute if stock repurchase options rise to the best opportunity.

Thanks for the time and congratulations once again on a fantastic quarter.

Thank you.

This concludes our question-and-answer session. I'd like to hand the call back to management for closing remarks.

I just want to say that this marks the end of our fiscal year. Happy New Year—we're into a new year here. Our first quarter is starting off solid, and I'm very encouraged by it. I want to take a moment to thank the entire team for their outstanding efforts, constantly solving problems from different angles. I also want to express gratitude to all team members. Our nearly 1,400 employees make the company strong. Thank you for your interest, and we'll look forward to the next call.

Ladies and gentlemen, this concludes today’s teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.