Lsi Industries Inc Q4 FY2025 Earnings Call

Greetings, and welcome to the LSI Industries Fourth Quarter and Fiscal Year 2025 Results Conference Call. As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Mr. Jim Galeese, Chief Financial Officer. Thank you. You may begin.

Welcome, everyone, and thank you for joining today's call. We issued a press release before the market opened this morning, detailing our fiscal '25 fourth quarter and full year results. In addition to this release, we also posted a conference call presentation in the Investor Relations section of our corporate website. Information contained in this presentation will be referenced throughout today's conference call, including certain non-GAAP measures for improved transparency of our operating results. A complete reconciliation of GAAP and non-GAAP results is contained in our press release and 10-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 for more details. Today's call will begin with remarks summarizing our fiscal fourth quarter and full year 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, and good morning all. I appreciate you taking the time to join us today. This morning, we'll be discussing our fourth quarter and full year fiscal 2025 results. As many of you likely saw in our earnings release this morning, we closed the year with a strong fourth quarter, marked by a sales increase of just over 20%, driven by solid performance in both our Lighting and Display Solutions segments. For the full year, we reported total sales just over $573 million, representing a 22% increase over the prior year. Adjusted EBITDA came in at $55 million or nearly 10% of sales reflecting consistent execution and a strong operating model. Importantly, free cash flow remained robust throughout the fourth quarter and the full year, resulting in a net debt leverage ratio of 0.8x. This strong financial position provides us with flexibility to continue investing in growth, innovation and operational efficiency. I'm extremely pleased with our performance in both the fourth quarter and the full year fiscal year. The high level of execution across our teams was evident, and I'm proud of our company's ability to adapt in the face of various challenges and deliver strong results for our customers and our shareholders alike. In 2025, we made substantial progress across multiple areas of our business. One of our key areas of focus was product innovation, particularly in our Lighting segment, where we successfully launched over 25 new products. A particular note was the launch of the V-LOCITY Lighting product last year, which has been a resounding success. This product has effectively built on the momentum from our auto line without cannibalizing it or materially impacting existing sales, a strong indicator of healthy product vitality and of our customer demand. In our Display Solutions group, they also delivered an exceptional year, and the team remains busy with a robust pipeline of projects that will continue to roll into 2026. In our grocery segment, we saw a meaningful recovery and expanded presence within new areas of the store. Notably, we've engaged in several sizable projects within the bakery section, and we're seeing growing interest in the checkout area, categories where we've historically been limited. It's encouraging to see our customers placing their confidence in LSI to deliver in these growing spaces. And we anticipate continued momentum in this segment as the order and project environment becomes more stable moving forward. From an integration standpoint, I'm very pleased with the progress we've made with both EMI and Canada's Best store fixtures. Two companies are proving to be excellent additions to the LSI family. EMI, which has now been part of LSI for just over a year, delivered record sales and profits in 2025 despite experiencing some project delays with one of their larger customers. EMI has quickly become a key driver of cross-selling activity across the organization. The integration process has been smooth and highly complementary to EMI's strong internal culture. I want to take a moment to commend the EMI leadership team for their excellent work in steering the company in these new levels of performance. Similarly, Canada's Best store fixtures which joined us less than six months ago, has also shown impressive results early. Both of these businesses are currently performing above our original expectations, and we're thrilled how they've seamlessly integrated into our operations. At the heart of LSI's success is our culture. A culture built on maintaining a high say/do ratio. Quite simply, we strive to deliver on commitments we make. This focus extends not only to our customers and our shareholders, but also to our coworkers, suppliers, partners, agents and many others who contribute to our shared successes. This culture of accountability and adaptability continues to be the key driver of our growth and execution excellence. I want to extend my sincere thanks to the entire LSI team for embracing this mindset and making 2025 a truly outstanding year. Looking ahead to fiscal '26, we remain focused on advancing our Fast Forward strategic plan. Internally, this will be a year of deep focus on our people, developing talent from within, optimizing internal business processes and continuing to find ways to improve our day-to-day business. Our operations group has consistently set ambitious goals and their embrace of continuous improvement continues to push us forward. There are still many opportunities ahead, and I'm eager to see what the team will accomplish in the coming year. On the sales front, our cross-selling initiative continues to gain traction. Our goal is to offer customers a broader, more integrated set of solutions, products and services that meet their evolving needs. In many cases, the value proposition of sourcing multiple solutions from a single supplier like LSI is very compelling, helping our customers reduce both cost and project complexity. By strengthening our cross-selling capabilities we aim to deepen our customer relationships, increase our share of wallet and drive sustainable incremental growth. This will remain a core element of our strategy in 2026 and beyond, and we're excited about the long-term opportunities it presents. In closing, I want to reiterate my sincere appreciation for the hard work, resilience and dedication of the entire LSI team. Your efforts have made 2025 a very successful year. I'm confident we are well positioned to build on the momentum that we had in 2025 as we head into 2026 and continue advancing our Fast Forward objectives. Thank you again for your commitment and your focus on delivering excellence each and every day. With that, I'll turn the call back over to Jim Galeese for a more detailed review of our financial performance.

Thank you, Jim. We delivered a solid fiscal fourth quarter, capping a successful year for LSI. In summary, fourth quarter sales increased 20% to $155 million. Adjusted EBITDA increased to $17 million or 11% of sales, and adjusted earnings per share were $0.34. Organic growth, excluding the impact of acquisitions, increased 11% for the quarter. Fourth quarter performance improved both year-over-year and sequentially to Q3. At the end of Q3, we discussed the surge in store release activity following the resolution of the proposed merger in the grocery vertical and the resulting disruption and unfavorable productivity related to the ramp-up. Working closely with our customers, we have managed through the spike and demand planning has stabilized. Improved throughput and productivity, combined with increased volume across our business, was responsible for the overall quarter-over-quarter 250 basis point improvement to adjusted EBITDA. The fourth quarter was accentuated by the balanced performance achieved across our two segments, Lighting and Display Solutions. Both generated double-digit organic growth in the quarter, with Lighting sales increasing 12% and Display Solutions increasing 10% on a comparable basis. This is the highest quarter of consistent performance across the two segments in fiscal '25. Improved order activity continued in the fourth quarter, with total orders increasing 11% versus prior year with a book-to-bill ratio of 1 as orders matched a strong sales quarter. We exit the fiscal year with a backlog of 13% above prior year. Looking at each segment individually, we're encouraged with the improved demand levels in the Lighting segment, particularly the increase in larger project activity as this section of the market has been down the last 12-plus months. Marked improvement was realized in the warehousing vertical, but upturns were realized in other markets, including automotive and outdoor applications. While project quote and order levels continue to fluctuate, overall Q4 orders increased 12% over the prior year. And as a result, we exit the fourth quarter with a Lighting backlog approximately 20% above last year. Operating income increased 32% in the quarter, driven by volume and consistent gross margin performance, a combination of effective price and cost management. Lighting incurred minimal tariff activity in the fourth quarter as existing inventories were utilized in manufacturing. The impact will increase in fiscal Q1 and as we consume components which were procured during the highest tariff period. The tariff is limited to just several component categories, and we expect to offset most incremental costs with previously implemented price adjustments and other cost reduction efforts. Shifting to the Display Solutions segment, fourth quarter sales increased 28%, including the impact of acquisitions. Organic growth, excluding the impact of acquisitions, was 10%. Growth was realized across multiple market verticals. Comparable refueling c-store sales increased 23% in the quarter concluding a record year for this vertical. Site release activity for several large ongoing programs continues coupled with smaller customer projects. Our revenue per site continues to increase driven by the significant growth in sites where we provide both product and installation services. Our service revenue increased 65% in fiscal '25 and as more customers recognize the value of LSI's project management capabilities. Grocery sales increased 31% in the quarter as grocers resume investments to in-store renovations. Production and store scheduling have stabilized, contributing to improved margin performance. We entered fiscal '26 with a healthy grocery backlog. For the full year fiscal '25, LSI sales increased to a record $574 million or 22% year-over-year growth. Full year adjusted EBITDA increased to $55 million driven by our team's efforts throughout the year to effectively manage the interval business while operating in a dynamic market environment. Adjusted EPS for the year finished at $1.07. Improved earnings and working capital efficiency generated another year of solid free cash flow totaling $34.6 million, our third consecutive year of cash flow exceeding $30 million. We utilize cash to support organic growth initiatives, invest in inorganic growth, acquiring Canada's Best Holdings in March of 2025 and debt reduction. LSI exits fiscal '25 with a healthy balance sheet, including a ratio of net debt to adjusted EBITDA of 0.8x. We expect favorable cash generation to continue in fiscal '26 positioning the business for further investments in both sales growth initiatives as well as strengthening our operational capabilities. A regular cash dividend of $0.05 per share was declared payable September 10 for shareholders of record on September 2. I will now turn the call back to the moderator for the question-and-answer session.

Our first question comes from Aaron Spychalla with Craig-Hallum Capital Group.

First for me, on c-store and refueling, you mentioned your largest program getting 18 months of additional site release activity. Can you just talk about what that opportunity looks like for you, whether number of stations or dollar size? And then just more broadly, as we see more organic M&A in that space. How do you see overall growth in that vertical for the next year or two?

Yes, Aaron, thank you for the question. This is Jim Clark. While I can't provide the exact dollar amount, I can tell you that we are working with thousands of site locations. We are currently about halfway to two-thirds through the project. As with any large initiative, there is a learning curve for both the customer and us as we improve our efficiency in deployment, manufacturing, and alignment with the customer's brand vision. We are now in the mature phase of this project, which I expect will continue into 2026. As we've mentioned in previous calls, there are additional projects in the pipeline, and these types of projects typically take 12 to 24 months to develop. Ideally, we are transitioning from one project to the next. Although we currently have no commitment for another large project like this, there are many possibilities we are exploring, and we feel very optimistic.

All right. Great. And then in grocery, good to hear that release and schedule activity stabilizing there. You noted a healthy backlog and strong production outlook, has that market fully recovered after the merger fallout? Or is there still more recovery to go? And same thing, how do you kind of see growth there looking out for the next year plus?

Yes. I would say there is still some uncertainty regarding the market's full recovery, but we're pleased with its current position. The situation feels stable in terms of order processes and inquiry management. As we reflect on the second quarter, which corresponds to last year's August to November period, we experienced a significant surge due to many deferred programs and maintenance from our customers. Now, that situation seems to have stabilized. Our workforce is steady enough to manage the current order and demand rates. However, I wouldn't claim that the market has completely recovered yet; there is still some potential for growth that hasn't been realized. Overall, I would describe the situation as stable at this time, and we are very satisfied with that.

All right. Yes. Good to hear. And then maybe last for me on EMI. Can you just talk about some of the cross-selling initiatives still sounds like it's early there. And then on margins, you noted the margin expansion. So our EBITDA margins there kind of high single digits, around 8%. And just can you speak to confidence in getting to that 10% plus level over the next year? And just talk about some of the drivers to get there?

Yes. So EMI has been with us just over a year, we've made better than 200 basis points improvement from our starting location. I think that we have a great plan for this fiscal year 2026, which will get us another 200 or 200-plus basis points. So I think that the overall journey to get them performing like LSI is very well established and in motion and I feel very good about it. EMI has done a phenomenal job of integrating with us. The senior leadership team there, Alan and David, fit very well. They see things the same way we see them, and we see things through their eyes, and it's just been a great fit along with the rest of the team there. And I do think that they've come in with a level of momentum and excitement and their own team there to really help in the cross-selling initiative. We just had our Board meeting yesterday and had a review on our cross-selling progress. And I have to say I'm very happy about it. There's a lot of work to do. It requires a lot of education internally. And then that education requires external communication to our customers and create the awareness of the additional solutions and products and opportunities that we can work with in terms of our customer base. And all of it's in motion. None of this happens overnight, but I'm very excited and I'm happy with the progress we're making.

Our next question comes from Alex Rigel with Texas Capital Securities.

First off here, EBITDA margins were nicely back above 10% in the quarter. What's your comfort level with margins sort of staying at this level or going higher?

Yes. I mean, as we've talked before, we've made some decisions from everything from working capital to acquisitions to manufacturing processes to what we spend in capital and all those types of things that have our eye on the ball for our Fast Forward 2028 plan. I think that what we've been able to demonstrate consistently quarter-over-quarter is our ability to be in the EBITDA margin ranges of 11% plus. And we have a plan to get there. With that said, we also make decisions that temporarily impact that EBITDA margin. EMI is a good example. We knew that they were an underperformer from a margin standpoint, but we also felt that working with them and then working with us, we had an opportunity to move that up. So I think there's variation. You're going to see variations in the margin and some of those are activities that we're executing in the background. But I also think that the 11% becomes more normal, 11% plus becomes more normal than 9%. And we continue that track up to 12.5% in 2028.

That's great. And then how should we think about the total addressable market for bakery and checkout in the grocery channel relative to some of the other departments?

The thing I would say is beyond our current ability to serve. I mean the market is massive. We have always been a small player in that section in that segment, but we've gotten larger project awards and larger project activity. In exchange for that, we become more efficient. We've developed the processes and have the equipment to respond to our customers' needs. We have the design expertise in-house that gives us the opportunity to meet the current design goals of our customers and reflects the current market trends. So we feel very good about it. It's pick and shovel work, but there's a lot of it out there. I think that we've certainly made a mark over the last couple of years in our ability to deliver and offer complementary products to our customers, whether they're newer projects or whether we become the mainstream supplier for them. And I expect that there's a lot more room there for us.

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

Congrats on another solid quarter. Jim, have any cross-selling benefits started to emerge yet? Or do you expect these to materialize in the next few quarters?

We've seen positive results from our cross-selling efforts, reaching the double-digit millions, and we believe we are still just getting started. As I mentioned earlier, it's about raising internal awareness and ensuring our team understands the message we want to convey to customers. This awareness prompts customers to engage with us across multiple segments of solutions for their businesses. It’s a long-term process, and I anticipate that it may take years for some customers to fully recognize and utilize the range of products and solutions we provide, including refrigerated solutions, dimensional graphics, standalone displays, installation services, and checkout counters. Our focus now is on enhancing customer awareness, and I commend the sales and marketing team for their efforts. However, this process requires time, especially for customers to become aware and to experience some form of disruption from their current suppliers. We need to keep executing and showing our capabilities. I’m pleased with the progress we're making, and I see many opportunities ahead, even with our current offerings, not to mention the additions we may make in the future.

Understood. And then just at a more sort of a higher level, the story seems to be getting more closely associated with the retail side of things. What are the risks? You've had some good growth this year, partly helped by acquisitions. But going forward, if the consumer slows down and some of these spending related initiatives slow down, like how should investors think about your exposure and whether you may still have other retail opportunities or opportunities closer to the consumer that haven't been explored? Just trying to get a sense of how the company's position is relative to some of the macro themes in which it is playing.

We have consistently discussed this since developing our initial Fast Forward plan, focusing on key sectors that we believe will experience long-term growth. We don't anticipate any disruption in our current sectors, and our original outlook suggests several years, potentially up to a decade, of growth ahead. We believe these sectors will outperform many related markets we have been involved in historically. Despite having significant retail exposure, we feel we have strong diversification. The same customers who frequent quick-service restaurants also shop at grocery stores, fuel stations, and automotive services. However, the factors driving their purchases and their engagement levels vary. Therefore, we don't perceive a significant risk that a downturn in one area will adversely affect all of them. Often, when one sector declines, it can lead to improvements in another. Overall, we maintain a good balance within the retail sector and have embedded diversification and balance as essential components of our strategy, as we recognized a few years ago.

Our next question is from Leanne Hayden with Canaccord Genuity.

I'll just start off with a brief follow-up on the previous response. I believe on last quarter's earnings call, you mentioned a decent opportunity in the automotive vertical. Just wondering if you could provide any update on that and whether or not you've noticed any thematic changes in automotive representative discussions?

I've discussed this over the years. The automotive market is one where we excel and has been very beneficial for us. Our customer base is quite varied. The customers purchasing from us tend to look ahead at their products. Some of these influences come directly from auto manufacturers, who recognize that the right lighting over their products, as well as consistency and uniformity, are crucial. They invest significant amounts of money into color combinations, interiors, and similar aspects. When a manufacturer showcases a new dynamic red color that has required a substantial investment, it represents an appealing option for their customers. They want to ensure that the display is done correctly and that uniformity is maintained, so it looks the same in every showroom indoors and outdoors. When I was in college, I worked at a car dealership, and I remember how an exceptional red in the showroom could appear as a washed-out pink outside at night. We provide that consistency and uniformity. Additionally, we comprehend what drives customer requests. We are not just offering a light that fits auto applications; we are creating lights specifically designed for this sector. Therefore, we feel confident about the automotive market. Many have predicted its decline since COVID and the rise of e-commerce, suggesting that people will mainly purchase cars through their phones. However, we are seeing that many of our customers truly value the customer experience. They are inviting customers in, and we assist them in showcasing their products in a way that emphasizes the uniformity and highlights the features they want to promote. This process begins in the parking lot, moves into the showroom, and extends to the customer service areas with effective signage and digital graphics, and it continues into the service area. Service spaces are now often as clean and well-lit as kitchens, and they play a significant role in revenue for dealerships. Our ability to support this entire process makes us very optimistic. Moreover, parking has recently gained some traction. We've had a fluctuating presence in parking, especially coming out of COVID, where it has been less prioritized. However, there is emerging technology and consumer experiences related to parking lighting that can influence display, signage, and other elements. We are quite positive about the progress we're seeing in some parking initiatives. Overall, all automotive-related activities for us are currently performing well.

Got it. That's very helpful. On a completely different note, I know you mentioned pending tariff impacts, specifically in the first quarter of fiscal '26. I'm curious about how you expect this to take shape throughout the coming quarters and how we can think about this tariff-driven margin impact on fiscal full year '26.

I wish I had a clear answer on how this will unfold. As I mentioned before, the most challenging aspect is navigating the fluctuating scenarios. That said, our Display Solutions group will be hardly affected by any tariffs. This highlights our commitment to manufacturing and sourcing in America, which could create valuable opportunities for us. However, we don't solely drive total sales costs. In lighting, we use a similar approach, though we may have slightly more exposure to electronic components and materials sourced overseas. Nonetheless, this exposure is still much lower than what our competitors face. Historically, our company has been balanced between Lighting and Display Solutions, with minimal impact on Display and only a bit more on Lighting, but still significantly less than many of our key competitors. Overall, we see this as an opportunity.

Got you. That's very helpful. I'll just sneak in one more quick one if you both don't mind. This is a little bit more of a broad question about the competitive environment. Over the last decade or so, you've really carved out this categorical niche in Lighting and Display segments. I'm just curious how you view your market share relative to competitors and your positioning and what you expect going forward from a competitive environment perspective.

I think it shifts depending on the market you're in. We're very strong in the c-store market, particularly from an image branding perspective. Our Lighting sales are very strong in that market. We're creating great awareness of our other solutions, which are internal graphics and dimensional signage, refrigerated, open air, refrigerated products as well as closed case products, beverage centers, all of those types of things. I think we're on that awareness journey in that segment. You flip over to some of the others like grocery. Grocery is continuing, expanding market for us. We just talked about some very large project activity in the bakery and some other areas in the store, developing awareness in checkout counters. I mean I would sum it up in saying that we have a lot of opportunity. I think that in some of these markets, we are almost always have a seat at the opportunity. We don't always win every one. We win pieces of some and lose pieces of others. But I think we have 10-plus years of growth opportunity in these segments. And I believe overall, these segments remain very healthy. And I believe we're still a single-digit share player in many pieces of them.

We have reached the end of the question-and-answer session. I'd now like to turn the call back over to Jim Clark for closing comments.

I think that our opening comments, Jim's review of the financial performance and some of the market performance. These questions have really kind of ferreted out everything. We're very encouraged with the quarter we had. We feel we have momentum coming into our Q1 here. We're solidly entering 2026. And I think our Fast Forward plan is well established a pathway for us to get there, both internally and externally, and we remain very excited about the future here. I just want to say thank you. I said it in my notes, but I always take the opportunity this time of the year to say thank you to our customers, say thank you to our partners, our suppliers, our agents. And most importantly, to our people, the whole team at LSI. Great job. We're looking forward to a very solid 2026, and thank you to our shareholders who have continued confidence in us. With that, I'll turn the call back over to the moderator.

Thank you. This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.