Greetings, and welcome to the LSI Industries Fiscal Third Quarter 2020 Results Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. On the call today are Jim Clark, President and Chief Executive Officer; and Jim Galeese, Chief Financial Officer. It is now my pleasure to introduce your host, Jim Galeese. Thank you, sir. You may begin.

Good morning, everyone. We issued a press release before the market open this morning, detailing our fiscal 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-industries.com. Information contained in this presentation will be referenced throughout today's conference call. I would like to remind you that management's commentary and responses to 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 third 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 taking the time to join us today. As I start today's call, I would like to address 3 items right up front that might help frame things up. First, I would like to acknowledge that we're in a strange time. The challenges that we're facing as a global community is of unprecedented nature. Few of us could have imagined 2 months ago that we would be in the middle of a global pandemic. With that in mind, I want to wish you and all your family safety from this challenge. And on behalf of LSI, I want to give thanks to the men and women that are on the front lines fighting through this. Number two. I want to acknowledge the efforts of the folks at LSI that have worked tirelessly to keep our employees safe, maintain business continuity and continue to deliver much-needed solutions to our customers. LSI was categorized as essential services group early on. We proactively reached out to various resources to assure we could provide a safe environment for our employees and to confirm with various government agencies that we are working in a safe manner and one that was consistent with changing stay at home orders. Throughout this trial, we have provided a number of services and products that directly address some of the challenges associated with this fight, including lighting products for temporary and permanent medical facilities and COVID-related graphics and signage for a number of our customers, including grocery, pharma, petroleum, and we've even engaged our electronics fabrication facility in the manufacture of an experimental patient monitoring device that could prove to be a valuable tool for our medical community in the future. Lastly and number three, I want to acknowledge and respect…

Thank you, Jim, and good morning, everyone. To summarize key fiscal third quarter financial statistics, net income was $1.9 million compared to a net loss of $3.2 million last year. Earnings per diluted share were $0.07 versus a loss of $0.12 in the third quarter of fiscal '19. Third quarter results include a nonrecurring $3.7 million pretax gain resulting from the sale of the North Canton, Ohio, facility and $700,000 of restructuring costs. On a non-GAAP basis, adjusted operating income was a loss of $400,000 compared to a loss of $1.9 million in the same period prior year. Non-GAAP earnings per diluted share were a loss of $0.04 versus a loss of $0.08 in the third quarter last year. A complete reconciliation of third quarter GAAP and non-GAAP results is contained in our press release and 10-Q. The company generated $3.5 million of free cash flow in Q3, reducing debt to $7.1 million or 0.5x the company's trailing 12-month adjusted EBITDA. Net debt has been reduced by $31 million since the beginning of the fiscal year. Other income and expense was flat to last year, a combination of lower interest expense, combined with an increase in currency transaction expense related to the change in the peso exchange rate, the majority of which occurred in March. The President signed into law the CARES Act on March 27, 2020. The legislation includes a number of tax provisions, at least one of which will benefit LSI. The CARES Act grants taxpayers a 5-year carryback period for net operating losses arising in the tax years beginning after December 31, 2017, and before January 1, 2021. A corporation can carry back NOLs to offset pre-2018 ordinary income or capital gains thereby generating a current refund and a favorable tax differential. As a result, the company…

[Operator Instructions]. Our first question comes from the line of Craig Irwin with ROTH Capital Partners.

So first thing I wanted to ask about is this $100 million award from a Tier 1 QSR customer. You mentioned in the release that it's an existing customer and you're going to do about 6,000 locations domestically. There's very few QSR competitors that have 6,000 locations in the U.S. So we can kind of guess who it is. But maybe can you frame up for us how this is likely to ramp over the next couple of quarters? Will it ramp quickly or incrementally? And those 6,000 locations, would you expect there potentially to be incremental sales maybe from the Lighting side or other products over the course of the next couple of years that might be additive to that $100 million?

Well, Craig, thank you for jumping on the call with us this morning. And thanks for recognizing that award. We're very happy about it. It's one that we worked on in the last year to kind of demonstrate our value and the services we could offer. I think when we initially got involved, engaged with this customer was from more of a product standpoint, but we were able to demonstrate to them our ability to manage the logistics associated with the distribution of the products, and then the -- ultimately, the install and then from a post-sales perspective, the ability to manage the projects after. I think that as we demonstrated those through the piloting programs, they became more confident with us, and the conversation became less about price and more about performance. And so aggregating all of those elements together, we were very happy to get the award. We do believe that we have opportunity in excess of just the digital menu systems. As you know, we have print in Graphic Solutions that go along and complement the digital menu systems, but we also have lighting and controls. And our approach has been, if we're going to be on property, are there other things that we can do for you. The most expensive element usually is getting us on property and then the second being any disruption or working in a way to minimize the disruption, why not take advantage of it. We've been -- now that we've moved into this phase where we're working on the actual deployment schedules and the awards, we are actively engaged in each of the locations offering surveys, offering site surveys, offering the opportunity to discuss other solutions we can offer. So I'm very encouraged by that. We don't have enough history yet to determine what that's going to look like in terms of traction. So I can't really comment on it, but we do have a very strong program around explaining those benefits and explaining the other services and products we can offer all under the guise of the solution that not only helps them potentially improve their image and their effectiveness with their customers but also energy savings and performance related to overall Lighting and that type of thing.

Great. So I had no idea that you were chasing $100 million awards. So that was actually a really nice positive surprise to see that press release. Can you maybe share with us are there any other contracts? I mean, I know there's a dozen guys that have 6,000-plus in North America locations. But are there any other contracts that are north of $50 million that you're chasing or at least discussing with customers at this point, either on the identity side or on the lighting side of the business?

Well, the answer is yes. And as you know, when we first started sitting down talking, I came into this spot a little under 2 years ago, and the first thing we wanted to do is make sure we built that better business before we built that bigger business. It did not mean that we weren't in parallel pursuing some of these commercial opportunities and weighing down the groundwork on that improved systems and operations in the background. But to be competitive, we couldn't do it at the cost structure we had. So as you see a lot of the operational changes that have occurred over the last 1.5 years, they've been about rightsizing our ability to deliver a cost effective solution. And then as we get engaged in projects like this, our efforts to demonstrate our ability to manage not just again the manufacturer project -- products, but the delivery of solutions. And that's -- there's multiple facets we've got going on with that from a Lighting standpoint with our agents recognizing, identifying, supporting, training, being in improved communications with our overall agents from a Lighting perspective so that they have more confidence in us, and then we're delivering additional new products and improved productivity relative from a cost standpoint and on-time delivery and all of that. And then demonstrating to these large national accounts that we can work and we have the resources, and I know I've mentioned it before, but it's specifically in a group we call Adapt with inside LSI. I know we don't disclose it publicly in terms of a reportable segment, but it's our project management capabilities. And that extends across Lighting and in the Graphics, and it's demonstrated in our petroleum successes, but it's also demonstrated in the graphics rollouts from a printed…

Great. So I also wanted to ask about the outlook for the lighting market. I understand there's quite a lot of diversity in construction right now. Some areas are moving forward as planned, completely unchanged, particularly, I guess, the large corporates, where you have a good amount of exposure. But then there are other areas of the market that have just been shut off, particularly anything retail exposed. Can you maybe walk us through the dynamic that's going on underneath your Lighting business? I'm not asking for a forecast on this current quarter that we're in now. But how do you feel the fundamentals are working as far as the normal progress in this market versus this COVID-19 environment that everybody is trying to work through?

Yes. I mean it's tricky to comment only in the sense that there's a lot of unknowns. I don't know the timing. I don't know if there's going to be any rebound to opening things up. Different states are going to open at different -- in different stages. I've seen some information out there that some of the trailing -- longer tail states may not be fully opened until the end of June. Some are trying to press things even as early as the first couple of weeks of May. So I think there's a lot of variables there that I just can't comment on. What I can comment on is what we're doing in the background, and I kind of mentioned it a few minutes ago. We sat down and we said, okay, what's best case, what's worst case, and how do we adjust to respond to each of the upside. On our downside, if there's a downside, we're prepared to take whatever actions we need operationally. And obviously, we've implemented a lot of those just as a standard course of business right now. On the upside, what we're doing is preserving the ability to react. We had purposely made a decision in the fall of last year to build inventory in anticipation for demand in this coming summer. We have that inventory available. We've had a number of calls with our agents, with our niche reps, with our specialties, with our specialty market folks. We've become experts at audio conferencing and Zoom and video conferencing. And I'm happy to say many of our partners have become very proficient at it, too. The point I'm getting to is we've laid the groundwork for whatever side this leans. If there is an uptick in business, I feel very confident that…

And then I guess on the opportunity theme, right, net debt of, what, $7.1 million, down $35 million year-over-year is huge accomplishment. And in this environment, a lot of the private companies we talk to say that some of their peers are a much greater appetite to sell, particularly people that have been flirting with the idea over the last couple of years. I know that you've been really internally focused on execution and fixing what you can at LSI to get the company positioned to execute well and grow over the next few years as things normalize. But what's your appetite for potential accretive growth? If something came up strategically interesting, would you consider completing a transaction? Are you not interested in transactions? Are you actively looking? Any color would be helpful.

Yes. I mean I think that as you know from prior calls, our strong -- we've worked hard to have a strong balance sheet. And we've also worked hard and have had to maintain liquidity and have that capital available, should we want to invest in something. The answer -- the short answer is yes. I mean I do want and so does the team want to be very opportunistic here. And we are hoping, as opposed to looking at all the downside of the potential -- of this situation, we are looking at the potential opportunity and be opportunistic out there. And I am hoping that it moves the conversation in a direction where more folks are willing to engage in conversation. And as you mentioned, we have spent a lot of time focusing on the structure of the company. We are now spending a lot of time on the commercial aspect of the company. Now that we are a better company, we can be better represented in front of our customers, agents, partners. And it creates that opportunity for us to start to look at those other accretive growth. And we have -- we didn't just turn this on. We've been looking at it for a few months now, maybe going into double-digit launch. And so we have our list, and we're hoping that maybe this does open up an opportunity for more conversations.

Excellent. That's great to hear with that. Congratulations on the really impressive win with that $100 million contract and continued healthy execution. Hope everybody at LSI is healthy in this challenging environment.

Thank you. Thank you. And same to you.

Our next question comes from the line of Amit Dayal with H.C. Wainwright.

With respect to this $100 million win, could you help us understand how this may reflect in the financials over the next sort of 3 calendar years? Is it 1/3, 1/3, and 1/3 roughly?

Yes. So Amit, what we know right now is that we had an initial deployment schedule. Obviously, it's a live project working through our customers, their locations and the kind of the restrictions that we have around it right now in some areas where construction is more restricted than others, or frankly, one of the things we're dealing with right now is, obviously, in this digital menu system, a lot of them are for drive-through. There are some interior, but drive-through is extremely busy right now. So we're working around that scheduling, managing the potential benefits of the updated system along with any disruption to the business and the resources to be able to install it. What I can say to you, Amit, right now is that the plan is within a 30-month or 31-month kind of planning cycle. It may accelerate a bit or it may be delayed, but we haven't -- there's been no disruption to our current deployment schedule, but we have had conversations that, again, we may push things out or we may concentrate things in an area where we can get resources and there's less restriction or those type of things. So those are all real-time things that are going on right now.

Understood. And from the commentary, it looks like you're still deploying and doing relatively well in the petroleum vertical. With what's happening in the energy markets, it doesn't seem that you're losing anything, but should we expect some push-outs and delays? Like how should we view the current environment in that vertical relative to the projects you have lined up and business you're pursuing in that space?

Yes. Great question. And obviously, just within the umbrella of this current challenge, COVID challenge, there's no playbook that any of us can open and say what happens next. So there's obviously lots of variations. I mean you see oil prices crashing and you see all kinds of things happening in that sector. With that said, the conversations that we've had have remained committed. This is a long cycle decision. These are multiyear projects that create -- they have a lot of momentum behind them and a lot of scheduling, logistics, all kinds of things that go along with it. Sometimes, we're simply doing a graphics update. Other times, we're tearing up the whole facility and putting in new tanks and things like that. Right now, as we look out over the 3-plus-month period, we don't see any disruption at all. As far as the customers' appetite to remain committed to this with potential financial pressure on them, we've also heard discussions that say this type of imaging, bright lighting, modern imaging, the updates of the stores are even more critical when oil prices are depressed. As you know, through being in the energy sector within your group, you have the upstream, you have the delivery and you have the retail, and each of them work independent of each other. They work adjacent and with each other, but they tend to work independent of each other. The news that we're receiving right now on the retail end is that there will be no change in course and then that commitment stays as it is. And we've even heard some on the positive side that it now may be a time to accelerate some of those projects, both from a competitive standpoint and because the actual ability to implement disruption to business is minimized. We need to balance it right now, but what I can say to you right now is there has been no disruption to any of our commitments and that's extending 90-plus days as we see it right now.

That's really interesting to hear that you have that level of traction despite what is happening at the macro level. Maybe one last one from me. The balance sheet is deleveraged. You have engaged in M&A previously. If you were to sort of revisit those opportunities again, is there any particular vertical that interests you most at this point?

As we talk and the management team, we talk about it in 2 tranches or 3 tranches really. We talk about core, adjacent and additive. So core being -- and I'm just making this up, core being a core lighting company, something that adds to our solution set and our product portfolio or something like that. Adjacent would be a technology -- I mean, a market enabler maybe getting into new verticals, maybe adding to our portfolio in terms of a solution set. And then the last aspect is kind of -- is there something we can do that broadens our share of wallet, and it may be a completely different solution set. We're looking across all 3. It's a pretty wide lens, but we want to be opportunistic like that. We hope that some of the conversations we've had will be reenergized. We hope that maybe some that hadn't considered talking with us or that we hadn't reached out to yet, that the barrier will be a little bit lower. But I do want to say this. It is definitely something we're putting time into right now.

Our next question comes from the line of Joseph Osha with JMP Securities.

Well, I'm out here in permanently shut California. So per your comments, we're one of the trailing economies, I would say. Just following on a couple of the earlier questions, not talking about the -- necessarily the near term, but the longer term, how do you think about positioning this business based on changes from this pandemic that might prove to be more permanent? In particular, how you position your petroleum and your convenience store businesses?

Well, that's a complicated question, but I'll say this. First, through this challenge, the award of that QSR business, which is multi-site, multi-year complex, our customers that we deal with in the petroleum space, which are also heavy logistics and the ability to kind of coordinate and provide services beyond just products. So you really start to talk about a solution. During this challenge with COVID, we were tapped on the shoulder by a number of our customers, petroleum and grocery farmer being the ones that come to mind -- at the top of my mind about immediately responding to COVID-related graphics, both from a print and branding standpoint, the ability to manage some of our digital assets and update them with warnings and information related to COVID. And what happened through that is we were able to demonstrate our ability to pivot and respond. And I think it gained us a lot of credibility with some of these larger customers. And it also attracted the attention of maybe some of the folks that are just peripherally doing business with us or haven't fully engaged with us yet. So as I look at it, that combination of Graphics and Lighting continues to be a potential opportunity that maybe is leveraged in a different way or recognized in a different way than it had traditionally been. We have a very mobile society, as you know, and these solutions that we're deploying really kind of address some of that mobility. I also think that there's going to be some changes that we're going to adopt kind of culturally as a nation about distancing and about maybe less eating, more pickup, delivery, drive-through-type things. And the solutions we've been rolling out for the past couple of years, I think, are going to really appeal in that market and appeal to maybe what is a developing market or a new market as we go kind of expanded market as we go forward, if you will.

Yes. It's interesting to think about. On that note, thinking about acquisitions, which, again, this has come up here a couple of times, what stepping away from just buying another lighting company, what kind of enabling technologies do you maybe imagine plugging into your enterprise as you think about how to position yourself?

Well, for us, if we look at adjacencies or we look at some type of enablers, it's really things that are adjacent to the solution we offer now where that expense of being on-site and coordinating everything from construction to electrical permits to business interruption and all of those type of things, if while we're in there, we can offer additional services or place additional solutions in, I think it's a really compelling story to say to the customer, hey, listen, we'll be in and out, and we can deliver all of this value and it's wider than just Lighting, it's wider than just graphics and digital menu systems, it's wider than controls. So I don't want to constrain myself in saying that I know exactly everything that we can do. And I also want to -- I want to be careful about stating too much about things we're looking at right now. But I think the easiest way to say it would be, is there a way we can create a greater share of wallet with those customers and show the value through minimal disruption. And that -- those are the opportunities we're going to kind of look at. And when you start -- when you get me talking about customer penetration and value-added services and technology we can bring in, I get excited but -- and the conversation can really roll. But one other element that I think is key, and we're seeing here, and it's played out, it's gotten a little magnified, we always know it's good, it's something we want to tap on but we've got -- we've hit the accelerator a little bit is that services. And it's not just the services in terms of the deployment, but it's the after sales services, the reoccurring revenue, the maintenance and management not just from a performance standpoint relative to is the product working or not, does it need repair, but from a management standpoint of can we post more information up there, can we change price, can we put information up there that we didn't even conceive of 3 months ago. And all of those things are starting to be things that we can bring into the conversation. They don't happen overnight, but awareness, the awareness has really been accelerated lately.

Yes. Yes. And I remember you saying at one point that you weren't sure you could necessarily get paid for stuff like that, but things are always changing. Just the last question, I guess, Jim G, this is more for you, the comment about your supply chain not being disrupted and you amplified in this a bit. Do you think that's a result of the work you have done or could you say broadly that the lighting supply chain hasn't been disrupted?

Well, I can say with absolute certainty the opposite, the lighting supply chain and many of our competitors that are importing products from importing finished goods and are heavily reliant on components from foreign sources are absolutely feeling a disruption right now. It's active every day. What we did -- it started 18 months ago, really picked up steam about 12 months ago was that diversification of the supply chain, and it was in advance of the concentration of imported products from China and the tariffs that were put on place -- put in place and that disruption that occurred there. We were already a couple of steps ahead of that, and we were gaining momentum on that supply chain diversification. We could have never anticipated the current situation we're in, but the work that we did to decentralize that concentration -- I mean decentralize the single-source purchasing and the concentration we had is really paying off right now. And there is another aspect, I think, I mentioned, which was last year, because we weren't as efficient as we needed to be, we actually had more orders come in than we could serve. And I talked about that last year, and I'm sure everybody remembers that. Knowing that we didn't want to get into a situation like that again, we've done a lot of operational changes that we've talked about. And obviously, they reflected in our conversations and in our balance sheet and in all kinds of other ways that you can see that having occurred. But one of the things that had happened with that is we decided to look at components, parts, pieces, subassemblies and our ability to deliver and pivot quickly. So I mentioned a minute ago that we had built some inventory in anticipation of this year of our high season, if you will. So we have those components in-house. We're able to manage with a much greater degree of flexibility. We have subassemblies prebuilt. We have finished goods prebuilt. So we feel like we can really react, but it's all underpinned by that breaking up that concentration in our supply chain and looking for multiple sources whether they're domestic, which I do want to underline. We did move to a -- we did make a purposeful move to get more domestic suppliers to underline that U.S. made, U.S. manufactured, and then also to globalize a little bit more our supply chain so we weren't heavily concentrated in the Far East and one country.

We have reached the end of the question-and-answer session. I would now like to turn the floor back over to management for closing comments.

This is Jim Clark, and I'd just like to say, first of all, thank you again for taking the time to call in, and thank you for the questions. My closing remarks would be around many of the things we just talked about. We've been building a better business for the last 18 months. We were well positioned coming out of Q3, we had minimal impact, and we're well positioned to go into Q4 and into next year. And that positioning is going to serve us well as we're in the middle of this situation with COVID and the challenges are going to be in front of us. The thing that I would leave with each of you is that we're prepared. We've done the background work. We've done the infrastructure work. And we're prepared whether this creates a pressure on the business or whether it creates opportunity. And we are certainly looking at how can we underline, how can we create those areas where there is potentially opportunity. I did like some of the questions related to conversations on M&A and will those conversations look different. And I hope they will. And we're all in business. We're all in the markets. Multiples had gotten very frothy lately, and it was sometimes difficult to have conversations grounded in reality. And looking for the silver lining in the cloud, maybe there is an opportunity here that engages some additional conversation. We remain focused on employee safety. Our ability to service our customers and support the work that we put in so far is very important to us. And I want to just assure you that we have plans in place to maintain business continuity and adjust either way. Thank you again for taking the time to spend with us, and I look forward to the time when we can all meet in person again. Take care. Stay safe.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.