LSI Industries Inc.

and welcome to the LSI industry's fiscal quarter 2023 remote conference call. All participants will be in this lovely night. If you need assistance, please call your conference specialist by phone or start a call at I-0. After 27 days, there will be an opportunity to ask questions. To ask a question, you may press star and 1 on the teleconference tab. To withdraw your question, please press star and 2. Good morning, everyone, and thank you for joining.

We issued a press release before the market opened this morning detailing our peaceful third 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.lsi.org. Information contained in this presentation will be referenced throughout today's conference call, included are certain non-GAAP measures to improve transparency of our operating results. A complete reconciliation of third quarter GAAP and non-GAAP results is contained in our press release and 10Q. Please note that narration 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 can be considered. I refer you to our state harvest 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 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 on today's call. As you've likely seen from our press release, we had another strong quarter in our Q3 fiscal 23. It's hard to believe that we are over just about 60 days from the end of our fiscal year, and I could not be prouder of the efforts and progress of our employees, agents, and partners, as well as the continuing confidence of our customers, choosing LSI to be the partner of choice. Sales for the quarter were up more than 7% year-over-year, with net income up over 29%. We had a strong free cash flow performance, and I'm happy to say our net debt is below $50 million with a one-time net leverage ratio. We are in a good spot going into the first quarter of the year, and Jim's release provides a deep view guide of the financials in a few minutes. Fighting provided another strong quarter of growth, with sales increasing 17% and operating income increasing 31% in what is historically a weaker quarter for LSI against a very strong third quarter last year. As you may have noted last week, we published a press release providing an overview of a recent win with a large easy battery manufacturing plant being built in Kentucky. This is one of the largest manufacturing development projects in Kentucky's history, and it says a lot about the confidence of the customer in LSI that we were chosen to be the lighting provider for this project. It also says a lot about the culture of our selling efforts and the capabilities of our company. As you all know, we have a manufacturing facility in Kentucky, and I'm thrilled that we were able to support a project of this size and complexity for folks that live and work in Kentucky. Thank you to everyone to recognize the importance of this decision. Over the last few weeks, we've had a flurry of customer and agent activity in our facility for both lighting and display solutions. It's great to have the opportunity to sit down and talk with these folks that are making decisions that impact their company's performance. Just this week, we have more than 30 of our top automotive agents in-house for training and discussions. I can honestly say that almost all of our conversations contain an acknowledgement and an appreciation for the values we hold dear, the culture of our company, and the focus on meeting our commitments. Our vertical market orientation and respect for our customers continues to pay dividends, and I'm confident that it will never go out of style and hopefully never go unnoticed. Speaking of our district solutions group, we continue to work on a large number of developing opportunities and projects, including ongoing activity in our digital and print venue boards, along with a 450-site renovation project for a large oil company. Our mobile display group, offering both refrigerated and non-refrigerated displays, had a record-breaking performance in the third quarter, while building some real momentum in the C-Store refueling marketplace. Our ability to offer even more goods and services to our grocery and C-Store customers underlines the opportunities we see in front of us, and I'm thrilled with the progress we are making. New products and innovations continue to be a cornerstone of our performance over the last few years, and I'm happy to say that the company continues to demonstrate our commitment to ongoing investments in this area. Last quarter, I talked about a number of new product introductions in our writing segment, including the ready mouse. This quarter, I'm happy to announce a very meaningful investment in the display solutions group. The continued growth in this segment and opportunities in the future We're extending our efficiency to our refrigerated displays group, adding more than 65,000 square feet of manufacturing, research, and development space. More importantly, we're adding the capacity and capability to provide next-generation refrigerated solutions with the addition of an R-298 product. R-298 is an environmentally friendly, non-toxic, propane-based gas refrigerant It is free of ozone-depleting properties and currently one of the most climate-friendly solutions available, and we're excited to be able to offer this option to our customers. I don't mention this topic on these calls, but I'd like to point out that LSI is making a real impact on the environment. From energy savings that are provided by our LED solutions to reduction in light pollution and the use of ozone-friendly products to the way we run our factories, We're proud to be doing our part to uniquely and positively impact the environment. Going into Q4, our quote activity and prospects across all sectors remain strong. We're still facing some headwinds, but we believe that many opportunities lie in front of us and continue to work to improve both our top line and bottom line. With that, we'll turn the call over to Jim Belize for our look at our financials. Thank you, Jim. Q3 was an active quarter from several perspectives. We delivered a solid quarter of financial performance, demonstrated durable, sustained operational execution, and we continue to make progress on key growth initiatives. I'll briefly comment on all three. Let me start with summary financials. Sales for the quarter were 7% above last year, building on the record setting just for third quarter last year. adjusted operating income, net income, and EBITDA all increased, with adjusted operating income increasing 47%, while adjusted EBITDA of $11.2 million improved 32%. Rate expansion was achieved in all margin categories, with adjusted operating income and adjusted EBITDA improving 210 to 190 basis points respectively. Volume, coupled with improved program pricing, available program notes all contributed to the rate expansion adjusted diluted earnings per share were 19 cents versus 15 cents last year increasing our year-to-date earnings per share to 70 cents 62 percent above prior year pps of 43 cents free cash flow generation was strong for the quarter 11.7 million increasing our fiscal year-to-date cash flow to $31 million. Increased earnings and a reduction in working capital was responsible for this significant year-over-year improvement. Inventory decreased for the second consecutive quarter, while successfully supporting 7% sales growth, reflecting ongoing stabilization and reliability in the supply chain. Our strong free cash flow reduced net debt to $48 million at the end of the quarter, net debt increasing $35 million over the last 12 months. As a result, the ratio of net debt to trailing 12-month adjusted EBITDA declined to an even one-times. Lower debt levels provide the financial stability and optionality for the business moving forward. As part of our capital allocation, the company declared a regular cash dividend of $0.05 per share, payable on May 16, to shareholders of record on May 8th. Now some great comments on segment performance. Lighting had an excellent course, with sales increasing 17% and operating income increasing 31%. It's continuing to make progress in the market, increasing sales in all major verticals. I referenced both initiatives in my opening comment, and we have multiple in lighting.

Lighting has historically had a strong position in outdoor applications, but as part of our overall political market strategy and objective of increasing our customer share of wallets, they have been strengthening our capabilities for indoor applications.