Lsi Industries Inc Q1 FY2026 Earnings Call

Greetings, and welcome to the LSI Industries Fiscal 2026 First Quarter 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. 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 '26 first quarter 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-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, for more details. Today's call will begin with remarks summarizing our fiscal first quarter results. At the conclusion of these prepared remarks, we will open the line for questions. With that, I'll turn the call over to LSI President and Chief Executive Officer, Jim Clark.

Thank you, Jim, and good morning, everyone. I appreciate you taking the time to join us today. This morning, we're going to be reviewing our first quarter results for fiscal year 2026. As you likely saw in our earnings release, we closed the first quarter with strong performance across the board. Both our Display Solutions and lighting businesses achieved double-digit growth, and I'm very pleased with our continued momentum and encouraged by our robust pipeline of opportunities in both new construction and remodels as we move towards calendar year 2026. LSI has established a solid footing in the vertical markets we serve. We continue to broaden our portfolio of products and services while building stronger awareness of our capabilities across these markets. There's a lot to cover in terms of our Q1 performance, and Jim Galeese will walk through the specifics and the financials in a few minutes. But before we do that, I wanted to shift to two topics that have been on the top of my mind over the past year. First, our investor outreach. Over the past several months, LSI has expanded our engagement with the investment community by attending more conferences than usual, including a major industrial conference in Chicago next week and another in California shortly after. These events bring together investors with varying familiarity with LSI. What stands out to me most is how much that understanding and misunderstanding of LSI has evolved over the last five years. Today, even those new to LSI have a much clearer picture of what we do, the customers we serve, and the opportunities ahead. In the past, many thought of us as only a lighting company. We'd spend much of our time explaining our broader capabilities, such as refrigeration, print and digital menu boards, in-store kiosks, countertops, checkout stands, beverage centers, bakery cases, and so much more. The conversation is easier today, but I can still sense curiosity about the full scope of what LSI offers and why I believe we're creating an entirely new category of integrated solutions for our customers. Six years ago, LSI made a strategic decision to focus on a select group of vertical markets. We chose those vertical markets based on our existing strengths and the disruption within those markets that we expected would create long-term growth opportunities. Today, we serve a number of evolving markets, including grocery, convenience stores, refueling, quick-serve restaurants, sports lighting, warehousing, automotive, and a dozen or so others. In each of these markets, our goal is simple: to offer a comprehensive range of products and services that makes LSI a true one-stop partner for our customers. Think of us as the Home Depot or Lowe's of the vertical markets we serve. A customer may reach out to us for lighting, much like a shopper goes into Home Depot for a gallon of paint, but we can provide far more, and that's where the real opportunity lies. Very few competitors can match the breadth and depth of what LSI offers. For example, a grocery customer might contact us about indoor lighting or open-air refrigerated displays. That initial discussion often expands to include other areas such as bakery cases, checkout counters, produce displays, aisle markers, deli counters, beverage centers, etc. The same is true in gas stations, convenience stores, quick-serve restaurants, and others. What begins as a single product or solution offer grows into multiple opportunities. Now I realize that most of you on the call today understand this well, but I wanted to take a moment to just reinforce how much potential this model continues to create for us. Our vertical markets are growing, our offerings are expanding. And because of this, I see significant runway ahead of us. The second topic I want to touch on is seasonality and the year-over-year comparisons that arise from time to time. Last year, around this time, the grocery industry was navigating uncertainty surrounding a proposed merger between two of the largest U.S. grocery chains. When that merger was ultimately abandoned in Q2, the grocery sector resumed its expansion and renovation activities. That shift, along with other activity and opportunities in our refueling markets, created a surge of demand for LSI in Q2 of last year, particularly in our Display Solutions. It resulted in more than 100% growth in our Display Solutions segment during Q2. About half of that growth was organic, driven largely by over 60% organic growth in the Grocery segment alone. I mentioned this not to provide guidance or caution, but simply to note that Q2 comparisons this year will naturally reflect that extraordinary period of growth last year, and year-over-year results may not match last year's exceptional levels. I'm bringing it up early just in case it comes up later. Lastly, a few words on our integration progress. As I shared last quarter, both EMI and Canada's Best Store Fixtures are exceeding our expectations. From an integration standpoint, I'm very pleased with our progress and with the progress we have underway. Alan Harvill, who leads EMI, and Nelson Westley of JSI, are currently developing a plan to align our entire sales and manufacturing operations across both platforms. That effort will take time, likely the better part of a year, but it will drive significant efficiencies and unlock new opportunities for those businesses and our broader business. Canada's Best, which joined us just over six months ago, delivered one of their strongest quarters in their company's history. The integration has been strong and seamless, and we're thrilled with their performance. As always, the foundation of LSI's success lies in our culture, a culture that's built on accountability, adaptability, and what we call a high say-do ratio. This mindset continues to drive our growth and our execution excellence. I want to sincerely thank the entire LSI for their commitment and focus. Looking ahead to fiscal and calendar year '26, we remain dedicated to advancing our Fast Forward strategic plan. Internally, this will be a year of focus on our people, developing talent from within, optimizing our processes, and finding new ways to improve our day-to-day operations while continuing to provide superior service to our customers. Again, I just think there's a lot of opportunity in front of us, and I'm thrilled. In closing, I want to thank you for your continued confidence in LSI. We have tremendous opportunities ahead of us. I'm excited about what we'll achieve together. With that, I'll turn the call back over to Jim Galeese for a more detailed look at our financial performance.

Good morning, all. Q1 was a solid start to our fiscal '26 year with sales of $157 million, adjusted EBITDA of $15.7 million, and an EBITDA margin rate of 10%. Adjusted earnings per share improved to $0.31 compared to $0.26 in the prior year quarter, an increase of 19%, all achieved while successfully managing a challenging environment of tariffs, material input cost fluctuations, and component availability. Sales of $157 million represent a 14% increase versus Q1 last year, with organic or comparable sales increasing 7% in the quarter, driven by continued growth in lighting and sustained high performance in Display Solutions. Sales also increased modestly sequentially, carrying forward the momentum from our strong fourth quarter of fiscal '25. Next, a few comments on the performance of each of our two reportable segments. Lighting first-quarter sales increased 18% versus prior year, following fourth quarter fiscal '25 sales growth of 12%. Several areas are contributing to the double-digit growth rate, starting with our vertical market approach. Our priority verticals are outperforming broader non-residential construction indices, providing a larger market opportunity. Secondly, we believe we are gaining market share as our purpose-built products provide features and functions that outperform competitive products. This, combined with our domestic production, lead time, and delivery capability provides a competitive advantage. We have converted multiple end customer accounts to LSI in recent months, and we are aware of at least one competitor who has experienced significant delivery issues. Recent lighting order levels suggest year-over-year sales growth will continue in the fiscal second quarter. Our team has been successful in managing the broader supply chain challenges, impacting primarily the Lighting segment. Our strong focus on margin management, along with increased volume generated a 170 basis point improvement in gross margin and a 43% increase in adjusted operating income. Moving to Display Solutions, demand activity remains at a high level, with total sales increasing 11% in the first quarter. Performance was led by the continued recovery in the grocery vertical and sustained program site release activity in refueling C-stores. Multiple programs continue in refueling C-stores, including a large national program projected to continue through the end of calendar year '26. As mentioned in the press release, proposal and concept work for future programs continues with multiple customers. In October, the largest C-store chain in the U.S. published plans to build hundreds of new stores over the next several years, deploying a larger store footprint and focus on in-store and beverage sales. The secular growth outlook for the refueling C-store vertical remains favorable. Steady demand patterns continued in Q1 for refrigerated and non-refrigerated display cases in the grocery vertical. Grocery customers continue to formulate their go-forward investment plans, but planning guidance remains short-term. We continue to effectively manage demand with the guidance provided. Our focus on designing products for specific applications applies to display solutions in addition to lighting. In the first quarter, we were awarded a multimillion-dollar display case project for a large national grocer based on the quality and functionality of our products, as we were not the lowest-cost bid on the project. Canada's Best Holdings, acquired in March of this calendar year, delivered an exceptional quarter. We remain excited about the opportunities within the growing Canadian market, where we serve multiple verticals, including our strong, established presence serving banking and financial institution customers. LSI has produced solid cash generation in the last several years, and we expect to deliver solid cash flow again in fiscal '26. Free cash flow for Q1 was slightly negative, however, as improved earnings were offset by an increase in working capital, specifically an increase in accounts receivable. The receivables increase was driven by two factors: timing of sales in the quarter, and secondly, an inadvertent delay in project billing for two large accounts. The delay was a result of these customers changing their invoicing address, and the change not properly communicated and processed. These are large, long-standing blue-chip customers, and the invoicing has been updated. These receivables will be current in Q2. Lastly, with our current credit facility approaching one year before expiration, we amended and extended the existing facility. The amended facility increases our availability to $125 million and extends the term for five additional years to September 2030. This further ensures we have the liquidity to support the strategic growth of the business moving forward. Exiting the quarter, we have more than $80 million of available liquidity, while net leverage remains below 1x. I'll now turn the call back to the moderator for the question-and-answer session.

The first question is from Aaron Spychalla from Craig-Hallum Capital Group.

First, on our end, maybe just starting with Lighting. Obviously, a good quarter. It sounds like the outlook is good there. And most of it seems like it's coming from volume. Can you just maybe talk about volume versus price there? And then just how you're thinking about growth and kind of margins in that business as we look towards fiscal 2026? How does that pipeline and kind of book-to-bill look in that business?

Aaron, Jim Clark here. Thanks for the question. Thanks for joining the call. Yes, I mean, it's almost exclusively volume. Our pricing has been fairly stable here for at least a couple of quarters, a little bit incrementally up. But for the most part, it's been stable. The majority of that increase you're seeing in lighting is definitely volume. We've benefited from a couple of very large opportunities that we've gotten pieces of over the last two quarters, and I think that we're going to see even more in the coming quarters. Jim, I don't know if you want to talk about.

Yes, Aaron, this is Jim G. I want to add to what Jim mentioned. We are very confident about our lighting business and its current position. We have successfully converted several key accounts, which will provide us with a stable business moving forward. Our team deserves credit for effectively managing the tariffs and the instability in the supply chain caused by them. We are focused on our project quotation process to ensure we are using the most up-to-date costs. This efficient project quotation process, along with increased volume, has led to a 170 basis point improvement in our gross margin. As I mentioned earlier, we expect this growth to continue into Q2.

And then I appreciate the commentary on seasonality and kind of the rapid snapback we saw in grocery last year. But it still sounds like the pipeline is strong there. You're expecting growth for the full fiscal year. Can you maybe just talk a little bit about what you're seeing there? Is it kind of more rational measured spend from your grocery customers? Yes, just some color there would be helpful.

Yes. I want to address two points regarding this. Firstly, in Q2 of last year, we experienced growth in grocery due to the merger settlement and the resulting pent-up demand. We had to increase our staff and quickly source materials to meet this demand. This strategic decision allowed us to serve our customers based on the commitments we had made. Now, I feel that things have stabilized, and our order patterns are returning to a more normal state in terms of customer requests for delivery. Typically, in our Grocery segment, the period between November 1 and around Valentine's Day is a time when stores focus on stocking for the holidays without much additional activity. Last year, this routine was disrupted due to maintenance being deferred across the industry, not just for a few customers. Additionally, we noticed a significant increase in our convenience store and petroleum solutions at that time last year. This year, the situation feels more balanced, although we are still seeing growth. Overall, I'm optimistic about our direction. However, it's important to note that when comparing Q2 of last year to Q2 of this year, we should not expect 100% growth, as 50% of last year's growth was organic.

And Aaron, I'll just add to that. Our best forward indicator about activities and so forth is our involvement in proposal and concept work with these companies. And I think we mentioned in the press release and our comments both that, that activity remains very healthy. So that's a pretty good barometer as to how we see these markets develop over the next 12 to 24 months.

And then maybe just one more, if I could. On operational efficiency and kind of capabilities, Jim C, you kind of touched on staffing up and bringing materials in. Can you just kind of talk about some of the priorities from an operational standpoint here in FY '26, maybe in the coming quarters?

Yes. In my prepared remarks, I mentioned that we are investing significant time and effort in our employees this year. We always prioritize our people, as this is a people-first business. We don't produce anything unique compared to other companies; we simply believe that our delivery is far superior and more efficient. Achieving operational efficiency starts with our workforce. We are actively seeking ways to enhance our operational efficiency, which is essential for reaching our goal of 12.5% EBITDA. This focus on efficiency is vital, and I'm pleased with the progress we're making.

The next question is from Alex Rygiel from Texas Capital.

Nice quarter. As it relates to Lighting, you mentioned that it could be up in the second quarter. How are you thinking about growth for the balance of the year in Lighting?

We feel encouraged. We believe there is still a lot more to come. As Jim just mentioned a moment ago, much of our business has an 18-to-24 month development cycle. Therefore, projects we've been working on for nearly a year, and in some cases even longer, are beginning to come to fruition. When we examine this alongside our flow business, which comes through our agency network, we are very optimistic about what we see in lighting. I want to be careful not to overstate things, but I expect that we will continue to experience growth in lighting throughout the year.

Yes. I'll add to Jim's comments that our primary verticals in lighting are performing better than the wider non-residential or commercial market. This presents an opportunity. Additionally, since our products are designed for specific applications, we are making progress with key accounts, which helps us increase our market share. This combination makes us optimistic about the lighting outlook for the remainder of the fiscal year.

And I would say I'm enthusiastic on top of it. So we'll see how that plays out, but we feel pretty good.

And then as it relates to the C-store outlook, it included the possibility of rolling out of one large project and into another fairly large program pretty smoothly in 2026. Is this still tracking? Or could you possibly stack the second one?

We have the ability to take on multiple projects at once. Typically, we are managing several projects simultaneously; sometimes we have three or four ongoing at the same time. For example, one might be a smaller project, another may be concluding from a major renovation, while new significant projects come in, along with additional smaller ones. From a capacity perspective, we have at least 20% available to take on extra projects. We also have the potential for a second shift, which could further increase our capacity by an additional 20%. Our expansion largely depends on timing. Interestingly, I've noticed that among a group of over 20 customers, they seem to be aware of when others are making significant investments in their programs. Overall, I'm not worried about our capacity to handle more work.

And then if I can ask one last question. Grocery is down in the second quarter, yet up for the year. Can you talk about your confidence and visibility into achieving this growth for 2026?

Yes. Well, I mean, I think what we are pointing out in terms of second quarter is just that there's some seasonality that was unique last year. The grocery industry as a whole tends to really monitor what's going on in the stores during November, December, and January. Those time frames are very busy for them. They put a lot of inventory on the floor to deal with the rush that comes in. They really don't want a lot of construction going on inside the store during that time. Last year represented kind of an anomaly. That doesn't mean that the business just goes to zero. We still have a lot of stock and flow business that we're doing. And I mean that in the sense that we've got orders and we've got prescheduled installation, and we're doing things at night and all of that. But if you look at it on a comparative basis to last year, I just want to kind of remind everybody that there was a slug of business that came in last year that was pent-up demand. Overall, we think the demand is higher than prior year's levels. And in Q2, we anticipate that if you normalize last year, you would see continued growth in Q2. You're just not going to see the 100% growth and the 50% organic growth, which grocery made up almost 60% of that organic growth. So I just want to kind of temper everybody.

The next question is from Amit Dayal from H.C. Wainwright.

Most of my questions have been already discussed, guys. But from a pricing improvement perspective, are we getting close to being capped on that front? And what potentially could be the impact on future margins if that were to play out?

Amit, you mentioned something that I didn't catch. Are we approaching the peak of our pricing? I must have missed that point. For the near term, do you think you're facing some constraints due to inflationary hesitancy in the market when it comes to raising prices like you have over the last 18 months? I mean, I think that we brought this up before. We're the best partner our customer is going to have because we're not trying to over-leverage the inflation or materials pricing going up. We work very hard to be fair and deliver a fair product for a fair price. It's interesting to see the variability in terms of the actual effects that flow through on tariffs and all of that. So the agreements that we have with the majority of our customers is if the material input price goes up, our selling price is going to go up. But if it goes down or if it's holding, we're going to hold that with the customer. So I mean, I think that there's still going to be some price variations going on, driven by input costs. But I mean, I think we're holding a fair price. I think we're going to hold it. I don't think that our customers are going to be pressuring us for lower prices. I think we're competitive, but I think we're delivering a fair product, a good product, a great product for a fair price right now.

Amit, I would just add that, as you know, we're principally a project business, right? And I commented then on our quotation process and so forth, and how, therefore, we can adapt quickly to any changes in things such as material input costs, as Jim mentioned. Looking forward here, tariffs and other things have become more stable. So we do look in the near term for things to be stable along the pricing front. Right now, we don't see a need to make any kind of sizable changes there. However, we remain very alert to any changes that may occur in our cost structure, particularly around material input costs. The team is doing a good job, as I mentioned before.

Yes. I believe Aaron's first question was about volume and price. The majority of the increase in sales is due to volume. While we are staying vigilant on pricing, as Jim mentioned, we continue to gain market share. I wanted to highlight in my prepared comments that our ability to be a one-stop shop and offer more is becoming established, which contributes to our volume growth. We are very pleased with this development.

Recently, there has been a resurgence of headlines regarding some consumer softness, and many retail-focused stocks have experienced significant declines. Considering your involvement in these sectors, what is your perspective on the current macro environment? You seem optimistic about the upcoming quarters, but do you sense any hesitancy among customers regarding their future investment plans due to the recent softness? Any insights you could provide would be appreciated by everyone.

Yes, as we mentioned earlier, much of our business is project-based. These projects typically involve a well-planned development cycle of 18 to 24 months, followed by a deployment cycle that can range from six to 18 months, and sometimes even longer. We have not noticed anything that might disrupt this trend. If our clients are facing challenges, we aim to be part of the solution rather than an expense. Investing in their stores and improving the environment where customers interact correlates directly with increased sales from our products and services. When customers choose to enhance the aesthetics of their locations, it leads directly to increased sales. We position ourselves as a solution rather than a burden. The petroleum market and convenience store sector are still on a growth trajectory, particularly with leaders like Wawa, Sheetz, and Circle K entering the market, alongside established players like Texaco and ExxonMobil who are responding to this competition. The grocery sector is also on the rise, experiencing pent-up demand that had built up during recent merger discussions. Competitors are now better informed about where they need to compete and invest, which is encouraging growth. In the quick-service restaurant (QSR) segment, we are noticing some fluctuations, with some companies increasing their investments while others remain steady. Therefore, we see some disruption in our Display Solutions within this segment, but it doesn't raise significant concerns for us. Other markets, such as sports courts, are experiencing growth, and warehousing is recovering after facing challenges about a year and a half ago. Overall, examining a wide range of our markets, I feel optimistic.

The next question is from George Gianarikas from Canaccord Genuity.

I just had one question, any thoughts on the M&A environment?

George, good to hear you. And yes, I mean, we remain very active. I do think that as we benefited over the last few years from the successful acquisitions we've done. I think every time we're able to talk about an acquisition, in this case, Canada's Best had almost a record-setting quarter for them. I think that bodes well for us. It talks to the market. It talks to the owners of these businesses. They like to hear that success story. I think the interest rates have helped clip the wings a little bit of the PE multiples that sometimes are out there. We heard a comment the other day that there's more PE firms in the U.S. right now than there are McDonald's franchises. Why that's important to us is because in many cases, those are competitors of ours when we're looking at different opportunities, different acquisition opportunities. I think we remain well invested. We spend a lot of time doing our own self-origination, meaning creating relationships with businesses that we think would be a synergistic fit with LSI. We try to engage owners maybe before they're even thinking of selling. We try to create those relationships. It's just investment, kind of like planting a seed. So I think our pipeline looks very good right now. I think that we've demonstrated to our shareholders, employees, and customers that we're good stewards, and we execute well at this. We respect the cultures of the businesses we look to acquire. I feel pretty good about our pipeline, and I'm hopeful that our fiscal year 2026 will yield some benefits in terms of the M&A side.

As you know, George, ours is a vertical market-based strategy versus a product strategy approach. So as a result in M&A, we cast a wide net, right? Through the years, you've seen us acquiring companies that get us into product segments that we were not in previously. And why is that? Because it fits so well into our vertical market strategy approach.

There are no further questions at this time. I'd like to turn the floor back over to Jim Clark for closing comments.

I want to express my gratitude to everyone for staying invested and engaged with LSI and our initiatives. I feel very optimistic about fiscal year '26 and see significant opportunities ahead. We are gaining traction with our vertical market strategy, and our customer base and competitors are beginning to understand our unique approach in the market. This understanding works in our favor. I've deliberately mentioned our competitors because they recognize that we compete differently; it's not just about one product or one aspect of our manufacturing. Instead, we offer a comprehensive solution set, which enhances value for our customers as well as for our shareholders and the company. I'm very encouraged about our prospects and hopeful that in the next quarter, we will have even more positive updates to share. Thank you and good day.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.