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Operator: Greetings and welcome to the LSI Industries Fiscal Second Quarter 2023 Results Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jim Galeese, Chief Financial Officer. Thank you, Jim. You may begin.

Jim Galeese: Good morning, everyone and thank you for joining. We issued a press release before the market opened this morning, detailing our fiscal second 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 second quarter GAAP and non-GAAP results is contained in our press release and 10-Q. 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 second quarter results. At the conclusion of these prepared remarks, we will open the line for questions. With that, I will turn the call over to LSI President and Chief Executive Officer, Jim Clark.

Jim Clark: Thank you, Jim and good morning all. Thank you for joining us on today’s call. As you have likely seen from our press release, we had another strong quarter in our Q2 fiscal €˜23. In fact, this is our seventh consecutive quarter of double-digit organic growth. It’s quite an accomplishment given the ongoing headwinds of the general economy, ongoing supply chain challenges and disruptions in the construction market. My hats off to the entire team at LSI along with our agents and partners. Sales for the quarter were up more than 16% year-over-year, net income up over 107%. We had strong free cash flow performance and I am happy to say our net debt sits around $60 million, which is a 1.3x net leverage ratio. We are in a good spot going into the second half of the year and Jim Galeese will provide a deeper dive of the financials in a few minutes.

Our strategy around vertical markets continues to pay dividends and is reflected in our growth. While no market is recession-proof, we do believe that a good swath of our various vertical markets has provided us with some hedge against the current headwinds and have proven to be recession-resistant, creating growth opportunities that outpaced the performance of the general economy. Our refueling market continues to perform well. Although recovery in Mexico continues to lag our expectations, we have developed opportunities in other locations that are offsetting our delayed projects in Mexico. In the second quarter, we substantially completed approximately 200 site re-branding project in Puerto Rico for a major oil retailer. This represents our first major project in Puerto Rico and demonstrates the strength of our systems and processes, which allowed us to substantially complete this major project in a new market without a blip.

We will continue to look for those types of opportunities and expand accordingly. As many of you have seen, we issued a press release a few weeks back regarding a solar installation we completed for an oil retailer in Austin, Texas midyear last year. A few months of the system running and operating we were able to provide some interesting numbers in regards to energy savings and the payback period related to the initial investment. We see the Canopy at most petroleum retail locations as an untapped opportunity and this project is a good example of how we can turn this unused space into a real profit center for both us and our customers, let alone the environmental impact of the clean energy production. I want to caution everyone that this is simply a first step but it does go a long way into underlining the opportunities and possibilities of expanding products and services we can offer in our various vertical markets.

Our grocery store vertical continues to deliver above expectations. In this last quarter, we were awarded another major project by one of the nation’s largest retail grocery store chains to provide approximately 1,200 to 1,500 units of refrigerated and non-refrigerated display solutions, which we will substantially complete and deliver by the end of this fiscal year. We continue to provide various print and lighting solutions to a wide group of our grocery customers and we are experimenting with some other goods and services we can offer to this market. I hope to have some interesting news to share with you regarding these efforts next quarter. Our automotive market continues to show a number of growing opportunities and engagement of our team in a number of new projects.

This week, our automotive sales team will be attending the National Association of Automotive Dealers, NADA Trade Show and continuing to advance our position in this market. Despite several external factors affecting new and used car sales, this market continues to show good solid activity. Lastly, our sports court market has been moving along nicely with a number of larger wins recently. As we have spoken before, our company does have some seasonality built into our normal sales cycle. With our focus on outdoor lighting solutions, it means that a good section of our sales are exposed to the realities of winter, cold weather and construction activities has slowed during winter months. Q2 and Q3 normally represent our slower months. And although I do not expect us to outsmart winter, we have been very fortunate with a record-setting third quarter last year in a very robust Q2 this year.

You can be assured we will be looking for every opportunity to keep that momentum going. Next week, we will be hosting our Annual National Sales Meeting in Cincinnati. For these meetings, we bring all our sales, marketing, product development and engineering resources together for a very full agenda. As we have done in the past, we will have a combination of workshops, sales training, product training for our sales and marketing folks. This is a big investment that has historically paid big dividends and we are excited to make this investment and move forward with this meeting. Immediately following our national sales meeting, we will be hosting our third annual partner and agent virtual sales and tech meeting. Sharing lessons learned from our national sales meeting, along with new product introductions and best practices learned over the last year.

Going into Q3, our quota activity across all sectors remains strong. We are still facing some significant headwinds, but we believe many more opportunities ahead of us and we are working to improve both our top line and our bottom line. With that, I will turn the call over to Jim Galeese for a deeper look at our financials.

Jim Galeese: Thank you, Jim. Positive momentum in our business continued throughout Q2, generating double-digit sales growth, expansion in our gross and operating margins, significantly improved earnings and earnings per share and strong cash flow. The period saw continued healthy demand levels across both reportable segments and operational execution continued at a high level. Sales increased 16% year-over-year for the quarter, with both reportable segments attaining double-digit growth, Lighting increasing 17% and Display Solutions 15%. We continue to leverage our position in market verticals where we have a strong position and advance our position in verticals identified with profitable growth potential. Reported operating and net income were double the prior year quarter with reported diluted earnings per share of $0.22 and adjusted earnings per share of $0.26.

This compares to $0.11 and $0.15 respectively last year. Adjusted EBITDA increased to $13 million, 54% above prior year and our adjusted EBITDA margin rate was 10.1%, our second consecutive quarter of margin exceeding 10%. The business continued to generate solid free cash flow. Second quarter cash flow of approximately $9 million increased cash flow for the first half of the fiscal year to $19 million. Our strong cash generation reduced net debt, $17 million in the first half of the fiscal year and over $25 million from the prior year period. This served to reduce the ratio of net debt to trailing 12-month adjusted EBITDA to 1.3x. Debt reduction remains a capital allocation priority and provides flexibility to pursue investments in both organic and inorganic growth initiatives.

Now, a few comments on segment performance. Momentum continued in the Lighting segment as sales increased 17% and adjusted operating income improved 45%. Demand remains broad-based. Our independent sales network provided significant year-over-year growth and our direct national account sales continued to expand, with orders received from several new customers in the quarter. We noted in the press release the substantial growth in sales for indoor application, reflecting the progress in providing a specific complete solution set for key vertical markets, serving to increase our average order size. Selling prices remained stable in the quarter and commodity costs continued to moderate. This, combined with volume growth, was responsible for the improved earnings and margin expansion for the quarter.

We reduced lighting inventory 7% sequentially in the second quarter, reflecting ongoing supply chain stabilization. Lighting DIO remains somewhat above historical levels and opportunities have been identified to further reduce inventory moving forward while ensuring product availability to meet projected customer demand. Project quotation levels in Q2 remained steady at a high level and we exit the quarter with backlog mid single-digits above last year. Moving to Display Solutions, sales increased 15% and adjusted operating income approximately doubled to $8 million. The gross margin rate increased 620 basis points driven by volume leverage, improved program pricing and favorable program mix. Jim mentioned the Puerto Rico branding program for a large oil company.

I want to point out our high level of fulfillment and service performance on this and other large, highly customized display projects across the refueling C-store, QSR and grocery verticals as permitting issues and customer installation schedule changes continue. Our teams pivot quickly collaborating with the customer to successfully meet the requested changes. This capability continues to be a differentiator for LSI in the market. Concept design and pilot work for prospective new programs remains very active in the Display segment with over 20 proposals for new and existing customers in progress. To summarize, it was a solid quarter for the business, highlighted by strong financial and operational performance. We continue to effectively manage expenses while investing in programs to identify and support both short and long-term profitable sales growth.

Looking forward, quote order activity is expected to remain healthy in Q3 with sales reflecting normal seasonality. I will now return the call back to the moderator for the question-and-answer session.

Operator: Thank you. Our first question is from George Gianarikas with Canaccord Genuity. Please proceed with your question.

George Gianarikas: Hey, good morning, everyone. Thanks for taking my questions, and congratulations on continued excellent execution. So €“ maybe if I could start off with a question about just strategy. You’ve now brought down your debt to it seems like reasonable levels. You’re generating cash, business is going well. So if you just kind of think about the next 12, 24, 36 months, how do you think about the positioning of the company and how you plan to use your balance sheet as to potentially reposition and accelerate growth? Thank you.

Jim Clark: Hey, George, thanks for joining, and thanks for the question and the complements relative to the performance over the last quarter. Our strategy has not fundamentally changed. We are very committed to our vertical market strategy across the organization. We are looking for businesses that we think are assisting as recession-proof, but recession-resistant did show growth opportunity and have long legs, meaning 3, 5, 10 years out that we believe there is something structural to those businesses that will continue to create growth opportunities for us. So we remain very committed to that in terms of paying down the debt and strengthening our balance sheet and reposition ourselves, there is two ways we’re going to grow, right?

The last seven quarters, we’ve grown through organic growth. But we’ve always said that acquisitions and being able to add to our portfolio of solutions to our customers, particularly aligned with the verticals that we’re in, it’s going to be important for our kind of out of market above-market growth. So we’re going to keep continuing to execute against that. I think as we pay down debt, it just continues to open up the opportunities for us to look to add something else to the portfolio. And we try to keep a very active pipeline. And then it’s just a matter of the opportunity coinciding with us being in the right position and the market is aligning relative to a growth opportunity, and we will be ready to execute.

George Gianarikas: Thanks. And I wasn’t necessarily the best student when it came to matrix algebra and advanced mathematics, but it doesn’t take a rocket science you’re well above what you’ve outlined for 2025 guidance in terms of $500 million in revenue and $50 million in EBITDA. So I am curious if you can kind of help us understand what your business is capable of, when you look out a few years, what sort of margin structure, what sort of revenue structure should we look to €“ to understand the company?

Jim Clark: I think there is €“ well, let me start with this. First of all, we are looking to revisit that in this quarter and kind of update what our goals are and what our targets are. We hope to share that wildly by the end of the year, if not sooner, by the end of the fiscal year, if not sooner. We definitely see growth opportunity, both top line and bottom line. We do see what we believe is still a lot of runway left for us. This concentration on the vertical markets just allows us to get a greater share of wallet, and we’ve always talked about that, that the cost of sales and the cost of confidence in the customer are very high prices we pay any company pays to get in and create a relationship with the customer. We need to make sure we’re executing on the basic commitments we make to the customers, which we do very well.

Our say/do ratio still remains very high in our ability to deliver our products and then the services that go along with them. We’ve been executing and firing on all cylinders on that for quite some time, and we remain committed to making sure we can continue to do that. But if we look at what the cost is relative to interfacing and dealing with the customer, it is that initial order, the ongoing orders, the confidence that customer has. And we believe we’re in an environment where if we can continue to execute like that, maintain the confidence and trust of our customers, we can add additional offerings, whether they are products or services or a combination of both into that. So when we look at what our growth opportunities, I know a few years back, we caught a few people off guard with going into refrigeration with the JSI acquisition.

But you can see how well that paired up. We do have synergies. We don’t expound on the €“ to great length, but we’re both in there, JSI, LSI were in there as one team, as one company, and we benefit from selling across the product €“ across our product and solution lines to those customers. As we look forward, we want to make sure we leverage on that some more, both in the growth, we look at it as a three-legged stool growth in our commercial market by picking the right verticals to be in, growth through our organic activities, meaning we become that much better at managing margin and managing profitability. And we think we have a long runway to go with that. We’re not out of ideas, we’re not out of opportunities in that regard. And then lastly, what can we add from an inorganic or acquisition?

It’s those three kind of things that we’re focused on, and we plan to, like I said, revamp our targets. I’d also say that there were some pretty lofty goals when we sat down and we penned them out. We actually sat down in December of 2018. We brought it kind of to the market in Q3 of 2019. And there was a lot of skepticism. So we need to make sure that we’re pushing ourselves in a healthy way, but that we’re also able to deliver. So those are the things we’re working on now, and we think we have a lot of runway past the $500 million and double-digit EBITDA.

George Gianarikas: Great. So you’re still a growth company is the message, and we will hear more about that plan soon?

Jim Clark: Yes. We’re still a growth company, and we don’t see that extinguishing any €“ we’ve got runway.

George Gianarikas: Got it. And maybe just lastly, there was €“ there is been some M&A in the supermarket channel or the proposed M&A, I should say. And that was the potential for disruption, but it sounds like it’s turned into something that’s the opposite. Is that an accurate characterization of the activity you’re seeing in the marketplace in that particular channel?

Jim Clark: But we don’t have a crystal ball, but I’d agree with what you were saying is we’ve always looked at it as an opportunity. We certainly had our planning sessions, and we looked at it if it didn’t turn the way that we anticipated it turning, but we’ve always seen this as an opportunity. It underlines what we’ve talked about for some time, which is this space is going to continue to get competitive and little things are going to matter. And that’s what we’re very good at delivering. And we’re good at delivering that differentiation. We’re good at helping promote the brand of our customers and helping promote the differentiation of our customers, and we think there is a lot of runway left specific to grocery.

George Gianarikas: Great. Thanks, guys. I will get back in queue.

Jim Clark: Alright. George, thank you.

Operator: Thank you. Our next question is from Aaron Spychalla with Craig-Hallum. Please proceed with your question.

Aaron Spychalla: Yes. Good morning, Jim and Jim, it’s Aaron Spychalla. Thanks for taking the questions. First for me, good to see your commentary on the second half outlook, can you just talk a little bit more maybe about the increased visibility you’re getting? In the past, you’ve talked about some of the multi-site projects and refresh cycles kind of compressing. Just trying to balance that outlook with some of the puts and takes with seasonality as we kind of look to 3Q?

Jim Clark: Yes. Well, seasonality is always something that we’ve talked about quite a bit. We have our focus in a lot of our product is outdoor and they are affected in ways that we just don’t €“ we can’t forecast or see. So any time we get into Q2 and Q3, we anticipate, expect some seasonality. Obviously, we backed that trend last year with a very, very strong Q3. And we’re backing it a bit this year with a very strong Q2. The unforeseeable events that happened in the Q, I don’t think that they structurally affect our momentum or our growth. But if you have a large snowstorm that affects construction activity for a week or 2 sometimes as they remove snow and things like that. It slows down project and it slows down some of the timing.

So Q2 and Q3 have always been a little bit of €“ had a little bit more variability to them, if you will. And then like I said, you just kind of underline in general, the fact that a big part of our business is outdoor. We do a very robust indoor obviously. But when outdoor weather is affected and that type of thing, we can anticipate some slowing. But again, like I said, last year was an exceptional Q3 and Q2 this year has been €“ it was obviously very strong as you guys have read. On the large project activity, these kind of things €“ our large projects tend to work over many month periods, sometimes years. And so the up or down that occurs within any given month of February or March or in August or September. We don’t really see that much.

They are kind of live events, if you will, but they don’t really affect the length or commitment of the projects. And many of the projects we’ve been engaged in are these larger projects. And specifically to one of the comments you made, what we see is if we went back 10 years ago, we saw a refresh cycle that was much closer to, we will say, an average of 7 years. If we go back 5 years ago, we saw a refresh cycle that was starting to come under 7 years and bouncing between 5 to 7 years. And now as we look at things today, we’re seeing a refresh cycle that’s solidly in the 5 in fact, trending lower all the way down to 3 years. And I think it speaks a lot to the fast pace of €“ we always say the TikTok generation, which is to just keep the image looking fresh and new and attracting customers that create an environment where the customers we’re dealing with are showing to their customers that they are keeping pace, they are continuing to invest in their properties and their offerings, and it’s just to kind of capture that attention of the consumer, which is just those emotions and the buying habits and those type of things are just moving a lot faster.

So we obviously see it as a very positive trend for our business.

Aaron Spychalla: Great. Thanks. Thanks for the color there. And then maybe just can you talk about some of the new products that you have launched over the last couple of years? I know you have refreshed completely some verticals and you kind of called out indoor this quarter. Can you just kind of talk about how that’s helped and maybe some of the areas that you are kind of focused on going forward?

Jim Clark: If I go back 4 years ago, I remember us getting on a call and saying we were going to have almost 20 new products launched in the year. And since that time, we have kept that pace plus and those products are not necessarily €“ they are not game-changing technology products as much as they are tweaking existing product lines. Don’t get me wrong. We do have the game changers, by the way. But the core of it is taking our core products and just incrementally making them better to serve our customers better, particularly as we continue to orient ourselves around vertical markets. We have a lot that serve a variety of markets, and that will never go away that these products can be applied to a number of markets. But the learnings we walk away from in our vertical markets, we try to incorporate into our products, whether it’s easier to install or more controls aspects or variations in lighting, forward throw things like that, we continue to at least introduce a minimum of 20 new products each year, and we are on pace to exceed that this year.

And in terms of game changers, I will talk about one because it is normally balanced. We introduced a REDiMount. And I think we talked about it last quarter, but the REDiMount is really geared towards being very easy for the installer to install, which makes it where an installer might have a 2-hour install per a fixture, the REDiMount cuts that install time down significantly. And that makes it easier for the installation teams and installers to use our products. It lowers the cost to our customers by reducing the install time. And it has some embedded opportunities in a longer term, quicker refresh cycle, the ability to maintain and service these products through a simple turn and click. If you haven’t looked at the REDiMount, I would encourage you to go up to our website, and just look at it.

It’s another way that we are kind of innovating. And that innovation isn’t just in the technical aspects of our products, but in how people use them and how they install them and that type of thing.

Aaron Spychalla: Right. That’s good color. Thank you. And then maybe if I could just sneak one more in. Saw the Grocery award and continue to expand wallet share there. Can you just kind of elaborate a little more on some of the cross-selling opportunities that we have been looking at from JSI? Maybe an update on where those stand and anything else on timeline or kind of contribution potentially?

Jim Clark: Yes, absolutely. And before I hit on that, let me add one other thing. We are just talking about new products. I also want to add because I tend to talk about the lighting aspect of it quite a bit. But in the print materials and in our canopy designs and things like that, we use a variety of different inks and printing materials, some of them are metallic, some of them different composite materials, things like that. And that’s an ongoing partnership with our suppliers. It’s our understanding of those materials that help us articulate to our customers. What are you looking for, are you anticipating that you are going to update this in 3 years to 5 years because this ink and this combination will give you good color capture, and we will hold that color and everything for 3 years to 5 years, but we wouldn’t want to push it past 6 years.

So, those discussions go on all the time. And they affect the decisions that customers make both short-term and long-term because if we are putting in something that we know has a kind of a useful life of 6 years, then that decision has to be made with the understanding that they intend to update it in less than 6 years. If they say, hey, listen, we may want to stay with this image, this look for a longer period of time, then it changes the selection we make on the materials and the conversations we have with our customers and how we apply them. So, those also are in that new product. And the last thing I will say is specifically the JSI. We are in the refrigerated space. We are constantly looking at the refrigerants we use and the impact. They have both operating impact and cost as well as environmental impact and ozone depleting refrigerants versus natural refrigerants and things like that.

So, those are all things that are going on simultaneously. Now to flip to your question about how we look at €“ we call it boundary was selling in here, which is that any time one of our sales folk is in talking to a customer, that we are making sure that regardless of what the entry point is, once we are in and established with that customer that we are talking about the full product portfolio, and that’s whether you are at JSI or LSI or lighting or graphics or whether you are with our services group, that conversation happens all the time. It’s hard to articulate exactly that so and so brought us into this opportunity or lighting brought us into that. But I will just underline that it’s constantly €“ it’s a constant occurrence and it’s a discipline and a process that we are underlining with our folks all the time.

You can be assured, it will be one of the things we are covering at our upcoming sales meeting next month. And I don’t have any specific numbers to quote. But I will just say that they continue to be promising. These projects tend to take some time to mature because you are talking about maybe taking an incumbent sometimes and making a change. So, there is oftentimes where we are giving a small pilot program, a small test program. And we are also introducing kind of newer technology, if you will, the whole idea of having this continuity in terms of the way we look at graphics and the materials we are using and everything. We have new buyers come into the situation, and we need to earn that trust. And so I am not unhappy with the pace that we have been moving, and I think you will continue to see wins out of that as we move forward.

Aaron Spychalla: Good. Appreciate all the color. Thanks. I will hop back in the queue and turn it over.

Jim Clark: Thank you, Aaron.

Operator: Thank you. Our next question is from Amit Dayal with H.C. Wainwright. Please proceed with your question.

Amit Dayal: Thank you. Good morning guys. Solid quarter, congratulations. Just to begin with, Jim, maybe if you could provide some granularity on where the operating leverage improvements are coming from? Is it just better pricing or larger auditors or maybe some efforts on the cost side? That would be helpful. Thank you.

Jim Clark: Yes. Amit thanks for joining and thanks for the comments. It’s all of those things. And I know it always €“ everybody always wants to kind of identify one that we are over leveraging or that we are really taking advantage of. But it’s really execution against all of those things. I call it the paper clip effect, which is just small incremental changes across the whole €“ our whole scope is the things that contribute to these improvements. And I underline often that I think that we have a lot of runway left because I do think that we have a lot of continued improvement that we can offer. We are by no means operating at 100% efficiency. And so every time I look at that as a team €“ individually and as a team, we recognize that those opportunities still kind of €“ are in front of us.

So, price is an important element. It’s something that we have been very disciplined about. And along with that price comes reliability to our customers, on-time delivery and that type of thing. And when we have on-time delivery, that means that we need to be operating efficiently and we have less margin for error and waste. And so we work on those things, which creates opportunity. And so it’s really kind of an aggregated look at the business. And it’s us executing against all of the elements you just talked about to gain that. And I can’t underline enough, and I think we have been demonstrating it is that we still think we have quite a ways to go. So, those opportunities are still in front of us.

Amit Dayal: Understood. Thank you, Jim. And then from a revenue growth perspective, are you taking market share in both the Lighting and Display segments from other players, or maybe in other words, is this an expansion story that LSI is benefiting from, or are you winning more market share given how you have executed over the last 2 years?

Jim Clark: I think it’s definitely a market share, right. If you think we have had above-market growth now for seven consecutive quarters, there aren’t too many companies, particularly with the broad-based type of solutions we have that are experiencing double-digit quarterly growth. So €“ and we know that the market is not growing at that rate, although we anticipate that there are opportunities for the market to grow at that rate, particularly when you look at the verticals we are in. So, we think it’s the alignment with the right verticals. Like I said, they may not all be growing at double-digit rates, but they are healthy and they are more resistant to the general pressures, these general economic pressures. Number two is that we are sitting there, we are providing and filling orders, and we are €“ I talk about it often, our say/do ratio that we have a high say/do ratio, right.

We sit in front of our customers, make a commitment and then work exceedingly hard to make sure we deliver to that commitment. And that’s garnering us a lot of favor, which is turning out to be us taking market share from our competitors. So, that’s what I think is happening. We are taking market share and that’s accounting for a lot of our above-market growth, but it’s also underpinned by the fact that we are just in generally healthy markets for the most part.

Amit Dayal: Thank you, Jim. That’s all I have.

Operator: Thank you. There are no further questions at this time. I would like to turn the floor back over to management for any closing comments.

Jim Clark: Well, I just want to say thank you again for everybody that’s dialed in, called in and follows us and listens. I think that we have a great story in front of us here. As we underlined here through the Q&A today, we believe we still have a lot of opportunity in front of us, and we believe we can continue to grow like this. It is an extraordinary effort by a team of folks here. So, I just want to underline and say thank you to the whole team and to our partners, agents and customers. We will continue to deliver. We will continue to look for those growth opportunities. And I look forward to our next call. Take care.

Operator: This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.