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. [Operator Instructions] 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 top 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 a big constrained this quarter as we were impacted by both 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 continue to move forward with the mix of new customers and ongoing projects that continue to line up 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 very robust indoor product-line.

The indoor line enjoyed a particularly strong quarter and gained some significant traction, strengthened by a number of 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, whereas 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, NACCS, in Las Vegas. The show was extremely well-attended rebounding from COVID.

LSI was a true start at the show with the introduction of a number of new products, including one called the ready mount. The ready mount is a mounting adaptor which 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 see -- just to take a look and see at 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 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. And 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, $10.1 million versus cash usage of $8.2 million 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 free-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 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-store, 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 2002, selling price realization is enabling us to offset the impact of inflation and leverage 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 of 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 and year-over-year growth and are fueling C-store.

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. And site install activity will continue throughout Q2.

In addition we have started digital menu board install activity for our QSR customer in Canada. These combined with our ongoing programs in Mexico reflect our continued regional expansion, driven by our strong customer partnerships. The gross margin improvements for display solution was 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 and the backlog entering Q2 is 15% above last year.

For LSI looking-forward, we expect continued growth in fiscal Q2 compared to the prior year period and earnings and margin rates favorable to last year as well. We continue to be diligent, focusing on our target verticals, managing cost 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. [Operator Instructions] 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 and 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 and these are just very impressive results and more confirmation that you deliver what you say so.

I just -- I know you're being very thoughtful about how LSI chooses to grow both organically and via M&A.

My question is, now that it's been about 18 months since the JSI acquisition in May of ’21, are there lessons that this extremely successful business combination have products that can be applied to future acquisitions and I guess 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. Yeah. I mean, 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 those markets or do a lateral expansion if you will or horizontal expansion of the vertical markets we're in.

In this particular case we saw grocery had a number of reasons we believe that grocery would grow, this goes all the way back to early 2019.

It was mostly because of the disruption in the market we saw with Whole Foods and Fresh Market kind of disrupting some of the traditional grocers and a real call or need for a number of the products and services we had.

Using that as a kind of 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 that had a lot of momentum behind it, but we saw a [indiscernible] cold finish company with JSI proven out.

It does fit with the culture that our company had, it didn't require a lot of restructuring in terms of what it looked like to have a good high, say, do ratio and those type 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, we want to grow both organically and through M&A. But M&A keeping that funnel filled and looking for companies that fit our profile like JSI did are going to be continually important to us. In terms of companies we would likely avoid.

I mean, I think that 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 the growth or the investment in the segments wherein. Those would be things that we would definitely stay away from..

Thanks, that's helpful. And do you feel that you and the team have identified significant organic drivers within the business today or is it -- are you envisioning most of the future growth coming from M&A and, 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. I mean we talked about early on going back again and just having a high say do ratio, just saying what we're going to do and executing against it. We talked very candidly about the fact that we would have a portion that would be M&A and a portion that would be organic.

And about 18 months ago we transacted on JSI, which was obviously the M&A part, but over the last five quarters we've had double-digit organic growth. And so the balance is there and we continue to kind of 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're in, but we also saw an opportunity to share some of the relationships, the trust the prior years of service each of us had with the customer base that we had.

So JSI in grocery and LSI in grocery, both had a very good presence in there, it just strengthens us that much more. Convenience store is a market that we think we can bring JSI to in a big way and you know those type of programs take years to develop.

We talked about this upfront when we did the JSI acquisition and we have a number of tests sites and test programs going on right now and we hope to convert those, we have -- we think we have a very compelling story behind it, it fits in-line with a number of our C-store stay with the future of service is going to look like in those environments, in those stores and so we do have a good product-line in both JSI and LSI to kind of serve those markets.

So it's about balance and our goal is to continue to have that balance both through M&A and through organic growth, but growth in general is important to us. We think scale matters in this business and we want to continue to make sure we stay relevant from that standpoint..

Sure, I'm Sure with Terry's -- Terry [indiscernible] sort of thoughts side-by-side with your, you guys have been able to approach new verticals that maybe he wasn't really focused on with JSI that -- putting the two great minds together come up with solutions for the C-stores, for example, that excite your customers..

Yes, so. I'll just say -- it's a -- 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 mean, I could think of 10 right-off the top of my mind and I can think of another 20 below that, but it goes to underline exactly what LSI is about is.

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. So we're very happy, it’s just strong leadership with a good team behind us..

But both seem to be very similar leaders and finding that cultural fit is part of the magic, I know. And so, I guess relating back to that inorganic growth, that might require some additional capital investment.

Can you share some thoughts about equity issuances or utilizing stock versus currency for acquisitions?.

Yeah. I mean I think this comes down to sources and uses, right? What are our options in terms of forward opportunities and how can we invest in and what do we have in our conference so to speak to execute against go-forward plans.

There comes a big burden with being a public company, obviously, we want to make sure we share -- serve our shareholders and the people that are confident and invest in us and at the same time we want to make sure we're executing against growth that continues to retain those investors and it keeps the story interesting.

So my personal preference is always around desk. I think we've talked about it in other calls. We certainly use debt here with JSI and you see the cash -- our free-cash flow this quarter and our ability to pay down debt and our leverage ratio being at 1.7 times, below 1.8 times right now.

We want to continue to move that stuff down, we do want to make sure that we're responsible with the way we do that it fits into our strategy in terms of making sure that we're ready to act with opportunities in front of us.

And I think equity is a piece of that but it's not -- it's certainly not our first do to, but it is something that's on the table for us to use..

That makes sense.

I mean it's just -- it's another arrow on the quiver if you will when it's a fairly priced instrument that kind of gives you some optionality, which kind of gets to my last question which, I know you know what's common and I've asked this on conference calls before, but it really -- I just -- I look at stock price that we consider grossly undervalued with trailing 12 month revenue of $476 million on EBITDA now on a run-rate above 10%, $41 million of trailing EBITDA.

Both of which have been growing quarter-after-quarter and 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. So this is a story that the public market is still learning about.

I think in the microcap space it's incredibly inefficient, there's just no research coverage and anyone who invest in small micro caps these days coming from the wealth management business is doing it through ETFs, which are blind to incredibly compelling stories like this.

And so, I guess with the recent Board authorization of $50 million share buyback what are your current thoughts about activating a 10b5-1 stock repurchase program or -- I know priority has been reducing debt, is there sort of an order of events still that you're looking at for that?.

Well. It's always about total shareholder return, right? And we want to make sure we do what's best for our shareholders and maintain that continuity of the relationship and be there for -- be making smart decisions. As an example, we remain completely committed to our dividend program, it’s part of our capital allocation model.

I've spoken before that debt is something that we're willing to use but we want to be very responsible with it and bring it down to very manageable levels. And as you saw earlier this year -- earlier this calendar year we did authorized a program, the Board authorized a program to do a stock buyback.

And I agree with you, I think that having the opportunity to invest in companies that can grow, you have a big landscape out there. And certainly when we look across our landscape we look and say, well what's LSI doing, they're pretty impressive. So would we put our money back [indiscernible] the answer is yes.

It just -- I will just say this that it is constantly in our thought, we review it quarterly, we don't do things just for the effect so the fact that we put that program in-place certainly says that we seriously considering it.

And best I can say at this point is, we're aware of it and we're committed to doing what creates the best shareholder return and if that happens to be you can be assured we will execute against it..

That's extremely helpful, Jim. Thank you. And I know -- as you as you look at LSI for example as the opportunity among the landscape of opportunities, here is business that trades at what many of us think is worth twice what it's trading at.

It's also another bite at the JSI apple, which was a fantastic acquisition, full-price, fair price, but the synergies were sort of immeasurable and the opportunities it is creating seem very exciting and then bringing on the great cultural fit and the team that you mentioned assembled over at JSI has sort of off-balance sheet value that is hard to quantify, but makes the future pretty exciting.

So I like that way of thinking of are there opportunities within our own business to own more of it and thank you again for encouraging your Board to authorized a stock repurchase program. And yes, thanks for the hard work this quarter and going-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 margin improvements, Jim could you comment on whether these are here to stay? Any commentary on stickiness of these improvements and how we should be thinking about modeling for these going-forward?.

Yeah. I mean I think that -- our mission is to make them sticky, we've done it in a very responsible way, we're creating the value for our customers that equate to the margins that we're producing right now.

They're comfortable with the pricing, we look for -- there's two-ways that we're looking to effect that, one is productivity and our ability to kind of convert when it comes in an efficient manner and we continue to make room -- make forward progress on that. And I think that we still have a lot of runway left relative to that.

The second is, the products we're delivering and the partners that we are. And I think that over the last couple years we've certainly been able to demonstrate, again, it's a team of people, but we've certainly been able to demonstrate that value.

And so between the two of them I think that -- I do believe that we can keep the margins where they are and I do believe that we still have some runway ahead of us..

Okay, thank you. I know fourth calendar quarter is maybe seasonal and given some of the period in which these guys -- but the grocery segment, et-cetera, operate regional channels.

How should we think about the next quarter given the stronger than expected results for the fiscal first-quarter?.

Yeah. So, Q1 was a strong quarter, we're very happy with it, we're coming into Q2 as we said even on our last call, we don't have six months visibility or anything, but we do have 30 plus sometimes 60 days of visibility. And I will tell you we don't anticipate any slowdown right now.

Orders remained strong, inquiries remained strong, our quote activity remains strong and our backlog remains strong. So frankly permitting is probably the most frustrating thing we're dealing with right now and I truly don't understand it.

I don't understand how permitting issues and those type of things continue to persist but they do which causes a general slowdown in-construction which causes some of that lumpiness relative to our forward visibility. We still balance some supply-chain issues.

I think that you noted in my comments just a few minutes ago, our digital program would have been even that much stronger and I’m very happy with where it was, but it would have been even that much stronger hadn't been for one singular component that is just jammed up in the supply-chain.

But with all those things into consideration, we do have some seasonality in our business. Cold winter -- cold weather does kind of affect some of the outdoor activity holidays starting with Thanksgiving through Christmas in fact some of our vertical markets, those type of things.

With all of those things factored in now, I still expect us to have a pretty fairly strong Q2..

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

Yeah. I mean it's a great question. I think as I was saying, we've got -- I narrow it down to supply-chain and permitting is the top two, but our list -- we have 20 things that we're dealing with still today that we didn't deal with four years ago. So that our ability to continue to grow is something that's cheap, it's critically important to us.

But the comps are getting harder, they get more difficult. I mean we're talking about $100 million to $125 million quarters where we hadn't -- where historically we have never broken $$100 million quarter ever. So I feel confident about our ability to continue to grow.

Our internal goal is certainly double-digit, but you could -- we do have to factor-in these quarter-over quarters on a comparable basis, we're certainly keep raising the bar that's for sure. And one thing on the permitting issues, I know some people don't always understand that, so just take a second to mention that.

On large commercial projects and things like that there's often electrical or building permits things like that that are usually handled at the state and city-level and those folks through either staffing or whatever it is are still working through a massive backlog that just causes some consternation every once in a while and it just seems to be all across the country.

But overall, our vertical markets that we're in remains strong and we remain optimistic about continuing the growth path we're on..

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 to Mr. Jim Clark, President and CEO for closing comments..

Yeah. I would just -- I think we covered a lot of ground here today. I would just say that on behalf of the team, we're very happy with the results of the first-quarter. We remain very optimistic about the second quarter. We're very focused on growth.

Everybody in the company understands that it's unique opportunity right now, we've got a lot of momentum behind the company and what we can do to continue to grow in achieve these results, all under the guidance of making sure we're very good to our shareholders and create that return is cheaply important to us.

So with that I just want to say thank you for calling in. It's a little early, but happy holidays to everyone online and we'll 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..