Ladies and gentlemen, greetings and welcome to the LSI Industries Fiscal First Quarter 2023 Results Conference Call. At this time, all participants are in a listen-only mode. A brief 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, CFO. Please go ahead.

Good morning, everyone, and thank you for joining. We issued a press release before the market opened this morning, detailing our fiscal first 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 first quarter 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 first 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 President and Chief Executive Officer, Jim Clark.

Thank you, Jim. Good morning all. Thank you for joining us today. As you've likely seen from our press release, we had a strong first quarter and I'm very pleased with the efforts and the results of the company and our entire team. Sales were up almost 20% at $127 million compared to the same quarter last year. Net income doubled, and adjusted EBITDA topped 10.5%, all on top of more than $10 million in free cash flow. Again, just a solid performance in a challenging market by a great team of folks across the company. Our Display Solutions segment sales were strong, but they were constrained this quarter as we were impacted by a supply-chain issue, specifically, one supplier who provides the graphics component, and ongoing permitting issues that continue to occur across the country. Despite those challenges, orders for the first quarter were up 12% on the prior year. Our gross margin rate increased 450 basis points and operating income improved more than 70% as opposed to the same period a year ago. We're engaged in a number of test projects, and we feel good about the opportunities in front of us. Our deployment in installations continues to move forward with a mix of new customers and ongoing projects that align very well with our vertical market focus and our current product offerings. Moving onto our Lighting segment, we had an outstanding quarter with strong sales growth and margin improvement. Both our project business and stock-in-flow business enjoyed a strong order rate, and orders increased by double digits compared to a year ago. Although we have a strong focus on outdoor lighting, we do and always have had a robust indoor product line. The indoor line enjoyed a particularly strong quarter and gained significant traction, strengthened by new product introductions and our continued effort of introducing our solutions to new and existing customers. These results are a great reflection of our vertical market strategy, where we provide an ever-increasing basket of products and services to our customers. Earlier this month, both LSI and JSI jointly attended the National Association of Convenience Store Conference in Las Vegas. The show was extremely well-attended, rebounding from COVID. LSI was a true standout at the show with the introduction of several new products, including one called the ready mount. The ready mount is a mounting adaptor that significantly cuts the installation time of under-canopy lighting, while it also provides a quick-service maintenance and upgrade path in the future. There was extremely strong demand for a solution like this, and we didn't see any competitive products in the market filling this gap. It's a great feeling when you see folks lined up three and four deep outside your conference show booth, just to take a look and see the product. We believe that there are many more opportunities to continue to differentiate ourselves in the lighting category. We continue to find ways to innovate and bring new features and functionality to all our solutions. We're laser-focused on finding ways to serve the markets we currently serve, as well as exploring lateral expansion into other vertical markets that fit with our overall strategy. As we put the first quarter of the fiscal year behind us and look forward to 2023, we see many opportunities developing, despite the uncertainty in the general economy. Although supply issues and ongoing permitting issues remain some of our biggest challenges, in most cases, we've found a way to work within the constraints and challenges these issues create. This quarter's revenue numbers speak to that ability. We're well positioned for a strong second quarter; our customer and agent relationships have never been stronger, and we look forward to continued improvement. With that, I'll turn the call back over to Jim Galeese for a deeper look at our financials.

Thank you, Jim. LSI delivered a strong first quarter with all key metrics generating substantially improved performance. Sales growth of 19% represents our sixth consecutive quarter of double-digit growth. Growth was realized across multiple verticals, as well as both our Lighting and Display Solutions product segments. Margin expansion continued in fiscal Q1, with gross margin improving 430 basis points versus Q1 last year. There were strong increases in adjusted operating income, net income, and EBITDA margins as well. Adjusted EBITDA margin improved to 10.5% in Q1, with both segments realizing significant year-over-year improvement. We're encouraged that multiple factors are contributing to our continued margin improvement, led by increased volume leverage, successfully aligning selling prices to ongoing inflation, service execution meeting demand and customer requirements, project mix, and solid cost management. Improved income performance produced earnings per share of $0.25 in the quarter, approximately double the $0.13 in the prior-year quarter. Free cash flow generation increased substantially in the quarter, reaching $10.1 million versus cash usage of $8.2 million in fiscal Q1 last year. Working capital stabilization has enabled a higher conversion of earnings to free cash flow. Q1 represents the third consecutive quarter of positive cash flow following several quarters of investing in additional inventory to mitigate supply-chain challenges and support sales growth. We expect positive cash flow to continue moving forward. Improved cash flow reduced the ratio of net debt to trailing 12-month EBITDA to 1.7 times. Shifting to segment performance, Lighting delivered an excellent quarter. Compared to last year, sales increased 32%, gross margin of 33% increased by 290 basis points, and operating income more than doubled. Strong sales growth was led by high levels of activity in multiple vertical markets where our sales and marketing efforts continue to strengthen our position. These include refueling C-stores, parking, automotive, and warehousing. We're also making good progress in other attractive markets, including applications for the institutional and sports lighting markets. Following multiple price increases in fiscal 2022, selling price realization is enabling us to offset the impact of inflation while leveraging the favorable impact of improved volume and service capabilities. Overall, we expect pricing to remain stable at current levels for the short term. Order activity for Lighting in Q1 remained at a high level, with orders 11% above the prior year quarter. We enter fiscal Q2 with a continued healthy backlog, 17% above the same period last year. Performance for the Display Solutions segment was also favorable. Sales increased 8%, gross margin improved 450 basis points, and operating income increased 72%. The sales increase was led by continued strong demand in the grocery vertical, with year-over-year growth fueling C-stores. Growth in these verticals was driven by increases in both refrigerated and non-refrigerated food display cases and print graphic solutions. In Q1, we completed initial installations for a global oil company branding change in Puerto Rico, with site install activity continuing throughout Q2. Additionally, we've started digital menu board install activity for our QSR customer in Canada. These initiatives reflect our ongoing regional expansion, driven by our strong customer partnerships. The gross margin improvements for Display Solutions were driven by improved pricing on all major programs and project mix. Customer proposal activity across our Display Solutions vertical markets remains at a high level. Orders for the quarter were 12% above Q1 of last year, with the backlog entering Q2 15% above last year. For LSI looking forward, we expect continued growth in fiscal Q2 compared to the prior year period, with earnings and margin rates favorable to last year as well. We continue to be diligent, focusing on our target verticals, managing costs, and capital allocation priorities, which include debt reduction and investments in sales growth initiatives. I'll now turn the call back to the moderator for the question-and-answer session.

Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. Our first question is from the line of Rick Fearon from Accretive Capital Partners. Please go ahead.

Good morning, Jim and Jim, and congratulations on another truly outstanding quarter. And Jim in particular, for making such significant progress towards your stated goal a couple of years ago that LSI would generate $500 million in revenue, $50 million in EBITDA. Here we are with a run rate of exactly that—quarterly revenue of $127 million, quarterly EBITDA over $13 million, and now net debt standing at 1.7 times EBITDA. These are very impressive results and more confirmation that you deliver what you say you will. I know you're being very thoughtful about how LSI chooses to grow both organically and through M&A. My question is, now that it's been about 18 months since the JSI acquisition in May of 2021, are there lessons from this extremely successful business combination that can be applied to future acquisitions? And as a corollary to that, what types of businesses or situations would LSI likely avoid in the future?

Well, good morning, Rick, Jim Clark here. Thank you for the comments and thank you for participating in today's call. JSI was a great fit for us. As you know, we stated a few years ago that we were going to be very vertically market-oriented, and we looked within those markets to either expand the depth of what we can offer in those markets or do a lateral or horizontal expansion of the vertical markets we're in. In this particular case, we saw grocery has a number of reasons we believe that grocery would grow. This goes all the way back to early 2019, primarily due to market disruptions we saw with Whole Foods and Fresh Market disrupting some of the traditional grocers, which created a real call or need for several of the products and services we had. Using that as a thesis, we looked at companies that could help us in the depth of some of the verticals we're in, and JSI was a natural fit. Not only did we see something with a lot of momentum behind it, but we saw a strong cold finish company with JSI that proved to fit with our culture, which didn’t require much restructuring in terms of what it looked like to have a good high say/do ratio and those types of things. So, JSI fit very well. I think we'll continue to look for businesses like that. Growth is very important to us; we want to continue to grow both organically and through M&A. But keeping that funnel filled and looking for companies that fit our profile, like JSI did, will continue to be important to us. In terms of companies we would likely avoid, I think things that take us off of our mission, things that are far left field from where we are, or don't have the potential for growth or investment in the segments we operate in are definitely things that we would want to stay away from.

Thanks, that's helpful. Do you feel that you and the team have identified significant organic drivers within the business today, or are you envisioning most of the future growth coming from M&A? I know that the synergies between LSI and JSI have opened up additional avenues, especially within grocery channels and C-stores. But are there other verticals that you believe represent exciting opportunities at this point?

Yeah. I mean, a great question, and thanks for it. We talked early on about having a high say/do ratio, just saying what we're going to do and executing against it. We talked candidly about the fact that we would have a portion that would be M&A and a portion that would be organic. About 18 months ago, we executed on JSI, which was the M&A part, but over the last five quarters, we've had double-digit organic growth. So the balance is there, and we continue to pursue keeping that in balance. When you look at a company like JSI, we saw the opportunity to continue to serve some of the vertical markets we are in, but we also saw a chance to share some of the relationships and the trust that the years of service we each had with our customer base. So both JSI and LSI had a strong presence in grocery, which strengthens us even more. Convenience store is a market where we think we can bring JSI to in a big way. Those types of programs take years to develop, and we have several test sites and test programs going on right now. We hope to convert those. We believe we have a very compelling story behind it that fits in line with some of our C-store strategy and the future of service in those environments. Our goal is to continue to maintain that balance through M&A and organic growth; growth overall is important to us. We believe scale matters in our business, and we want to continue to ensure we remain relevant from that standpoint.

Sure, with Terry's sort of thoughts alongside yours, you guys have been able to approach new verticals that maybe he wasn't really focused on with JSI that are bringing together great minds to come up with solutions for the C-stores, for example, that excite your customers.

Yes, it's a team effort. Terry is certainly a very visible leader in JSI, but his brother Mark is also highly involved, and there’s a whole team of folks there. I could think of ten right off the top of my mind and another twenty below that, but it underscores exactly what LSI is about. It’s not one person; it’s a team of folks, and I'm sure if Terry was on this call, he'd say the same thing. We're very happy; it's just strong leadership with a good team behind us.

Both seem to be very similar leaders, and finding that cultural fit is part of the magic, I know. Regarding inorganic growth, you might require additional capital investment. Can you share some thoughts about equity issuances or utilizing stock versus currency for acquisitions?

Yeah. I think this comes down to sources and uses—what are our options in terms of future opportunities and how can we invest in those? There comes a significant burden with being a public company; we want to serve our shareholders well and make sure we execute growth while retaining those investors and keeping our story interesting. My personal preference always leans towards debt. We've talked about it in other calls. We certainly used debt with JSI, and you saw our free-cash flow this quarter and our ability to pay down debt, with our leverage ratio at 1.7 times—below 1.8 times right now. We want to continue to move that down responsibly while ensuring our strategy is ready for new opportunities. Equity is an option, but it's not our first choice, though it remains on the table for us.

That makes sense. It's just another arrow in the quiver, if you will, for fairly-priced instruments that provide optionality. This leads to my last question. I know you've heard this before, but I look at the stock price and consider it grossly undervalued, with a trailing twelve-month revenue of $476 million and an EBITDA run-rate above 10%, $41 million of trailing EBITDA—both of which have been growing quarterly, with net debt now down to $69 million and declining. It seems almost unfair that the enterprise value of this business is only around $300 million and not twice that. This story might be something the public market is still learning about. The microcap space is incredibly inefficient; there’s minimal research coverage, and anyone investing in small microcaps nowadays usually does so through ETFs, which overlook compelling stories like this. With the recent Board authorization of a $50 million share buyback, what are your thoughts on activating a 10b5-1 stock repurchase program? I know priorities have been reducing debt, but is there an order of events you're considering?

Well, it's always about total shareholder return, and we want to ensure that we make the best decisions for our shareholders while maintaining that relationship. As an example, we remain completely committed to our dividend program; it’s a part of our capital allocation model. I've mentioned that debt is something we're willing to use, but we want to be very responsible with it and bring it down to manageable levels. Earlier this year, we authorized a stock buyback program. I agree with you; investing in companies with growth potential is significant. When we look across the landscape, we can see that LSI is indeed impressive. So, would we reinvest our money? Yes. I’ll say this—it’s constantly on our mind; we review it quarterly. We don’t act for the effect, so having the buyback program authorized signals that we are considering it seriously. Simply put, we’re committed to doing what creates the best shareholder return, and if buyback opportunities arise, you can be assured we will execute against them.

That's extremely helpful, Jim. Thank you. As you look at LSI in the context of opportunities, here is a business that many believe is worth twice what it's currently trading at. This also presents another chance to look into the JSI acquisition, which was fantastic at a fair price, but the synergies seem immeasurable. The future looks exciting with the great cultural fit and team at JSI, which adds off-balance sheet value that is hard to quantify. Thank you for encouraging your Board to authorize a stock repurchase program, and thank you again for the hard work this quarter and moving forward.

Thanks, Rick.

Thank you. Our next question comes from the line of Amit Dayal from H.C. Wainwright. Please go ahead.

Thank you. Good morning, guys. Congrats on the quarter, by the way. Just on margin improvements, Jim, could you comment on whether these improvements are here to stay? Any commentary on the stickiness of these improvements and how we should be thinking about modeling for these going forward?

Yeah. Our mission is to make them sticky; we've done it responsibly, creating value for our customers that aligns with the margins we're producing right now. They're comfortable with the pricing. We're focusing on two areas: productivity and our ability to convert efficiently. We continue to make forward progress, and I believe we still have a lot of runway left relative to that. The second focus is on the products we're delivering and the partners that we are. Over the last couple of years, we've demonstrated that value. I do believe we can maintain margins where they are and still have some runway ahead.

Okay, thank you. I know the fourth calendar quarter could be seasonal, considering some periods where these operations work in regional channels. How should we think about the next quarter, given the stronger-than-expected results for the fiscal first quarter?

Q1 was strong, and we're happy with it. Entering Q2, we don't have a six-month visibility, but we do see strong orders, inquiries, and quote activity. Our backlog remains strong. The most frustrating thing to deal with is permitting issues, which persist and can cause general slowdowns in construction. We still balance some supply chain challenges, but our digital program could have been even stronger. With all things considered, and factoring in seasonal impacts, I still expect us to have a fairly strong Q2.

Understood. Thank you. Projections or the consensus estimates are calling for 4% to 5% annual growth, while you are delivering 19% to 20% year-over-year growth. How should we think about the rest of the year, given the strong execution?

It’s a great question. The top two factors for us right now are supply chain and permitting; we’re dealing with over 20 issues today that we didn’t have four years ago. Our ability to continue to grow is critical. The comps are becoming more difficult—quarters are now around $100 million to $125 million, where we historically haven't broken the $100 million mark before. I feel confident we can keep growing; our internal goal is certainly double-digit. Still, these quarter-over-quarter comps are becoming harder to manage. I know some may not understand permitting issues, but on large commercial projects, getting approvals at the state and local levels is now delayed due to staffing backlogs. Overall, our vertical markets remain strong, and we're optimistic about continuing our growth path.

Thank you, Jim. That's all I have for now; I'll take my other questions offline. Appreciate it.

Amit, thank you for the questions and thank you for calling in.

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the conference back to Mr. Jim Clark, President and CEO, for closing comments.

I think we covered a lot today. On behalf of the team, we're happy with the first-quarter results and remain optimistic about the second quarter. We're focused on growth; everyone understands the unique opportunity right now, and we have a lot of momentum behind us. We aim to continue achieving results and providing good returns to our shareholders. Thank you for joining us. It's a little early, but happy holidays to everyone online, and we look forward to our next call. Take care.

Thank you. The conference of LSI Industries has now concluded. Thank you for your participation. You may now disconnect your lines.