Greetings, and welcome to LSI Industries' Fiscal First Quarter 2024 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, Chief Financial Officer. Thank you, Mr. Galeese, 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 '24 first quarter results. In addition to this release, we also posted a conference call presentation in the Investor Relations section 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-Q. Please note that management's commentary and responses to today's 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, and thank you for joining us today. As you have likely noted from our press release, we had solid results in our first quarter of fiscal year 2024. We continue to improve business operations in nearly every category and the commitment of our team and their ability to execute continues to be demonstrated each day. Adjusted net income for the quarter was up 23%. Adjusted EBITDA came in at 12.2%. We had an EPS of $0.29, which was up $0.04 from last year, and free cash flow was better than $9 million for the quarter, bringing our net debt to $25 million, while sales remained steady. As you may recall from my last call, I spoke about our Fast Forward plan at LSI. This plan outlines our business goals and objectives extending out to fiscal year 2028 and is regularly shared with our entire management team and company personnel. It is also posted on our website under our Investor Relations section. The plan has some ambitious goals in top line sales, margin performance, profitability, and the markets that we intend to serve. Anyone who has tried to develop a new skill or habit understands that the speed of progress can vary and that external factors always play a role. Along those lines, I wanted to remind everyone that our goal is to be an $800 million company with 12.5% adjusted EBITDA performance or better by 2028. The reason I mention this is that this quarter, we achieved 12.2% in adjusted EBITDA. This achievement helps demonstrate to the team at LSI that this level of performance is well within our reach. If we continue to focus and practice, we can sustain that level of performance and aim even higher in the future. However, much like our path to 10% EBITDA, there will be ups and downs in our journey to 12.5% or better. Some quarters will be better than others, but we will learn from each. I do not expect that we will regularly perform at this elevated 12%-plus level just yet, but I do know that we can get there, and I think this quarter shows it. Short-term, we know that Q2 and Q3 are typically seasonally affected, and lower utilization puts pressure on our margin. Last year, we had the best Q2 performance in the company's history. In fact, it was our single best quarter ever. As I mentioned in the past, we do not expect that every Q2 will be like that. I expect that we will have some settling and realignment this year. Our quote activity remains at a very high level, but our quote-to-conversion time has been extended and continues to be less predictable than it has been in the past. Permitting issues have stabilized, but they're still unpredictable. Supply from other trades, particularly electrical switchgear, remains unsteady and slows project time. Our Automotive vertical, which has had strong demand for the last few years, is a bit less predictable right now, which I'm sure is connected to the Big 3's labor negotiations. Our Grocery segment has a lot of potential and program interest but is also constrained right now due to a probable merger and divestitures and a seasonal pause that occurs as the holidays approach. While we have some challenges, we also have some exciting and meaningful opportunities ahead. We have a number of new products, new commercial efforts, focused marketing programs, and continued progress in our operational efforts. Last week, we were awarded the second phase of lighting in our ongoing involvement in the new EV power plant and battery manufacturing facility in Kentucky. This award was even larger than the first award, which speaks to underlying customer confidence in our product quality and our ability to deliver. In addition, we also noted last week that we have been awarded a large 7,000-site multiyear brand refresh program for a major oil retailer. This is all positive news and bodes well for continued opportunities ahead. From an operational perspective, just yesterday, I was at our new Bangor, Maine facility, which will be responsible for the production of our new zero ozone-depleting R-290 refrigerated solution. I'm happy to say that things are progressing well. We will begin production in this facility and delivery in Q3. Customer interest in this product is high. I also visited our Milo, Maine facility and saw the results of our ongoing changes to optimize production and reduce waste while improving margins and adding capacity. Two weeks ago, I was at our Burlington, North Carolina facility, which handles our stock and flow lighting business, Atlas Lighting. We're currently in the middle of what we call lighting season, which typically sees an increase in maintenance and repair of outdoor lighting as winter approaches. This is an area where Atlas tends to shine, and we are confident in this team's ability to deliver and are looking forward to the results this coming quarter. Lastly, we recently completed several changes to our print graphics division in Akron, Ohio, consolidating print operations into our Houston, Texas plant, which we expect will yield cost and operational efficiencies along with increased capability. Our ADAPT project management group and our digital menu board program management team remains in Akron. All in all, we expect a strong year in 2024, but we are aware of external factors that could affect timing and progress. The Automotive vertical, Grocery vertical, and our work in warehousing could all be affected over the next few quarters. However, we do not see these disruptions as structural risks and are confident that any impact would be limited to timing only. Our team is committed and innovative, and we expect to continue our journey to $800 million by 2028. Thank you all again for being part of the call. I'll now turn the call back to Jim Galeese for a deeper look at our financials.

Thank you, Jim. For the quarter, LSI generated increased earnings, margin rate expansion, strong cash flow, and working capital efficiency. An increased gross margin rate contributed significantly to our improved earnings and margin expansion, with the rate improving for both the Lighting and Display Solutions segments. Several factors contributed to the 260 basis point improvement, led by improved program pricing and moderating material input and operating costs. We exhibited strong commercial and operational execution in the quarter. Our supply chain capabilities continue to effectively support our business. Strong cash flow of over $9 million served to reduce net debt to $25 million and lowered our TTM ratio of adjusted EBITDA to net debt to 0.5x. This provides the balance sheet flexibility to support our capital allocation priorities, including debt reduction, investment in organic growth initiatives, inorganic growth opportunities, and return of capital. As for segment performance, Lighting Q1 sales met strong prior year levels as our vertical markets continue to generate favorable activity. The adjusted gross margin rate for Lighting increased to 34.9%. It was a strong quarter for outdoor project activity, led by high-value area lighting and parking garage applications. Operating expenses increased somewhat versus the prior year due to planned investments in commercial growth initiatives. Looking forward, we expect Lighting activity to remain steady in the near term, with Q2 sales at or several points above prior year levels. As for Display Solutions, adjusted operating income increased significantly despite modestly lower sales. Operating income rose by 19% with a substantial increase in the gross margin rate. Sales growth was realized across multiple customers in the refueling C-store and QSR verticals. Sales in Grocery slowed in the quarter due to the pending merger of the nation's top two grocery chains causing timing disruptions on certain programs. The improved gross margin rate reflects our ongoing focus on program pricing and high-value mix. An eventful quarter for new activity was highlighted by the program award from one of the nation's largest oil companies to deliver a brand refresh for 7,000 domestic locations across seven brand banners, all to be completed in 4.5 years. Our proven solutions and trusted long-term relationships with this customer positioned LSI as the partner of choice. We were also awarded programs by several oil companies for brand conversions in six Central American countries and Jamaica. While the overall outlook for our Display Solutions business is strong, the near-term will be impacted by grocery industry events. We will continue to focus on commercial and operational execution, margin management, and cash. I'll now turn the call back to the moderator for the question-and-answer session.

Thank you. We will now be conducting a question-and-answer session. The first question comes from Aaron Spychalla with Craig-Hallum Capital Group. Please go ahead.

Yes. Good morning, Jim and Jim. Thanks for all the color and for taking the questions. First for me, you talked about the refueling opportunity—can you just share a little bit more about the cadence of the rollout there? Is that pretty even or how might that look? And then you referenced several new significant programs secured during the quarter. Any other details to share there based on size, end-market timing, etc.?

Good morning, Aaron. And thanks for the call—thanks for the question and for participating in the call. Yes, the refueling opportunity really goes to underline something we've been discussing for some time, which is that we are trusted with the branding and identity of these locations. If we go back five years ago, we mentioned a 7- to 10-year refresh cycle. But now we're seeing that cycle compress to a trending 3% to 5%. This customer's 7,000 locations just completed a refresh program not long ago. This one is scheduled to be 4.5 years in length and will be under their direction. They're being very purposeful about the timing, taking sites that were just completed, which will be on the tail end of this timeframe. The second project we mentioned was the second phase of the EV power plant. We received this order early last week, and we're very passionate about this, as it underscores our ability to serve large projects here domestically. We can react swiftly if a customer needs to change their plans since we are not relying on foreign sources; we are able to be a real local partner on these projects.

Great. Thanks for the color on that. And then, just second, the execution on the margins has been really impressive. Can you just kind of talk about some of the initiatives you mentioned regarding making the business more flexible based on this kind of demand timing, so any details there? And you touched on it at the beginning, but how might margins kind of progress this year as we think about the type FY '28 goals as well?

Yes. I mean, I think the thing on margins is that we've been consistent in underlining that we see opportunities to incrementally improve margins quarter after quarter. It's really about efficiency, which starts with the initial order process and managing customer expectations. It continues into our supply chain and manufacturing, extending all the way to shipping partners. Each lever provides opportunities to pull, and we're looking to get into a rhythm where we are consistently executing those. And even as we've noted, there are still some lumpiness in the supply chain globally. That creates inefficiencies which we can mitigate by having multiple suppliers and possibly additional inventory. When things stabilize, we can improve our margins even further. We're prepared to face headwinds and will benefit once they turn into tailwinds.

Understood. Thanks for taking the questions. I'll turn it over.

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

Thank you. Good morning, everyone, and thank you for taking my question. Jim, on the Display side, revenues were lower year-over-year, but margins improved significantly. So, going forward, ex-grocery, is that helping margins potentially remain elevated while revenues for the Display segment may slow down a bit?

No, I wouldn't characterize it that way. I think the margin improvement is due to team initiatives; we would rather have those sales integrated. If we had those numbers in our reports, we'd see even greater improvement. Our fixed costs are what causes the most drag; utilization is key. The more we can utilize resources, the better we will be. What you're witnessing is truly a team effort executing to the best of our ability.

Understood. Thank you for that.

And Amit, Jim Galeese here. It really starts with our value proposition itself. It's a key part of our vertical market strategy. The level of innovation and the things we've done in the last few years, such as the REDiMount, the Archer, and the Forward Throw, that value is recognized by the customers. This recognition allows us to get appropriate pricing, all of which positions us well for margin generation. With the appropriate volume, yes, we believe we can absolutely sustain and grow our margin expansion.

Understood. Just comments around the grocery, impacted by ongoing M&A activity and maybe some seasonality. Do you anticipate this to continue impacting performance from that vertical for the next one or two quarters? Or is that something that may be closing sooner and potentially resuming normal activity with those customers?

Yes. We don't have a crystal ball on this, and I don't think there's a playbook. There hasn't been a merger of this scale in decades. We have customers involved doing their best to communicate timing and strategize, but it’s a dynamic situation. While there are timing-related issues, I anticipate large opportunities will emerge from this once the situation stabilizes. We have credible information, but it's a fluid situation as many factors are changing.

Okay, thank you. That was helpful. Lastly, any cost increases associated with the new production facilities coming online? Maybe you mentioned the ozone solution, the new ozone solution facility. How should we think about the costs from those activities in future quarters?

The short answer is very minimal impact from a cost standpoint. This transition from man-made to a natural refrigerant is positive, with no negative ozone impacts. We already had a facility supporting our primary refrigeration and were able to reengineer our line for improved efficiency and capacity. The short answer to your question is cost impact should be minimal, but we expect significant benefits and improvements in margins.

Understood. That's all I have, guys. Thank you so much.

Thank you. Next question comes from the line of George Gianarikas with Canaccord Genuity. Please go ahead.

Hi. Thank you for taking my questions. I'd like to understand a little bit about some of the volatility you're describing in end markets. You mentioned Grocery and that seems fairly idiosyncratic related to the mergers. You also mentioned Auto. You have a pretty diversified business. Could you please describe what you're seeing broadly across the various end markets you participate in?

Yes, good morning George, and thanks for the question. In general, Lighting had a strong quarter, resisting many market trends. We continue to execute well, and our product line is well-received. Display Solutions are often project-oriented, and even a brief pause in them can lead to disruptions. The things that cause results to change or swing aren't due to any single customer, as no one customer accounts for more than 10%. We’re feeling some project timing disturbances related to order trades as well. This doesn’t pose a long-term threat but can impact timing in a short term. Grocery is an exception right now, but we expect it to correct itself. Similarly, automotive has its own unique challenges right now.

I appreciate the transparency. You've been talking about this for a while. So to the extent that timing issues relate to macroeconomics, M&A, permitting, and supply chain issues, is it accurate to say that they constitute separate issues?

Absolutely. There's a mix of factors impacting us right now. Some of the timing disruptions could yield significant opportunities. In general, most of our business remains stable, and our quote activity stays high—which keeps us optimistic. We're prepared for when it turns back in our favor.

Thank you. With your debt reduction and strong free cash flow, how do you view M&A opportunities? Are you seeing any shifts in the M&A market that might be beneficial for potential acquisitions?

We are committed to growing both organically and through M&A. We are in a strong position from a debt standpoint, and the willingness to have genuine conversations is much better now. The activity level has markedly improved. While it never moves as quickly as we want, we remain excited about the prospects. The vertical strategy allows us to consider a wide range of opportunities. We will be disciplined; it has to work for us and the other company.

Good morning, Jim and Jim, and congratulations on another very solid quarter. Particularly those program wins, your new capabilities seem to enhance the company's growth prospects, so I'm quite interested in your M&A strategy. Are you considering any changes in engagement strategy with investment bankers to capitalize on potential acquisitions?

Our ears are always open to partnership opportunities. The current environment presents unique headwinds, and financial partners are crucial to navigate these challenges. Our personnel are trained and hands-on, so should an opportunity present itself, we have the capacity to move swiftly. The environment today has fostered grounded conversations, making collaboration with other companies more feasible. The scope of our vertical strategy allows us to consider a variety of acquisition targets beyond just lighting or display solution companies.

Regarding the R-290 capabilities, do you see yourselves penetrating the C-Store vertical with these developments?

Yes, absolutely. The inquiry rate surrounding R-290 is quite high. While there are complexities, challenges also exist in the infrastructure needed to support this transition. However, I believe the value proposal is fully understood, and we’re poised to deliver, assuming we can align all supporting elements.

The merger in the grocery vertical seems disruptive at the moment. Would you characterize it as a precursor to significant refresh programs?

I would wholeheartedly agree. There will be a considerable disposition of around 400 to 600 locations needing a brand refresh. The merger will create immediate opportunities for programs that have been sidelined. We anticipate robust quote activity on the back end of this situation. I think we had a pretty complete conversation here. Our Q1 results were strong, and our future outlook seems optimistic despite the timing disruptions. We are on our path to our 2028 goal, and I appreciate everyone's interest. With that, we'll say goodbye.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.