LSI Industries Inc 2026 Q4 Earnings Call

Welcome, everyone, and thank you for joining today's call. We issued a press release before the market opened this morning detailing our fiscal 2026 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. Included are 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, and good morning, everyone. Thank you for joining us today. Fiscal 2026 was a transformational year for LSI. We delivered record sales and profitability in our core business, but we also completed the largest acquisition in our company's history with the purchase of the Royston Group. I'm proud of what our team accomplished this year, and I'm well aware of the work ahead of us. Today, I'll walk us through the results and give an update where we're headed, and then turn the call back over to Jim Galeese for a detailed look at the financials. Full year net sales reached a record $689 million, up 20% versus the prior year. Adjusted earnings per diluted share grew to $1.25, compared to $1.04 in fiscal 2025. We generated almost $70 million of adjusted EBITDA for the year, up 28% versus fiscal 2025 at a margin rate of 10.1%.

We produced $39 million of free cash flow for the year, representing a conversion of more than 50% of adjusted EBITDA. Turning to the segment results. In our lighting segment, fourth quarter sales increased 17% sequentially versus the fiscal third quarter, but declined 3% versus the fiscal fourth quarter of last year. That decline reflects a soft quarter in our automotive and QSR verticals, where project timing can be uneven. For the full year, lighting sales grew 7%, driven by increased penetration of national accounts and improved demand for outdoor area lighting. Our Velocity family of outdoor area lighting continues to gain traction in the market, and customers are responding to its performance and specifications. We are in the final stages of developing our new Velocity floodlight fixture line with initial sizes launching next quarter.

Lighting orders in the fourth quarter were 5% above last year with a book to bill above one times, and we are focused on continuing to deliver above-market growth as our national accounts and new product introductions build momentum. Our lighting segment has consistently outperformed the broader market, and we think we have a lot of runway in front of us. Within Display Solutions, fourth quarter sales nearly doubled versus the prior period year, including organic growth of 18%. Segment adjusted EBITDA margin rate increased to 12.4% for the highest level we have reached in nearly three years and an increase of 180 basis points versus a year ago period. That growth was broad-based. Organic growth in our grocery vertical refrigerated and non-refrigerated display case sales increased 21% year-over-year as grocery customers continue to invest in in-store decor and the overall shopping experience.

This vertical has steadily strengthened over the past two years following the industry-wide pause in 2024, and we expect that demand to remain elevated as we enter into fiscal 2027. We experienced strong organic growth in our refueling and convenience store verticals, with fourth quarter sales increasing 16% versus the prior year quarter and double-digit growth in both outdoor print graphics and EMI store interior products. Project activity across our multi-brand customer base remains healthy, spanning both new store construction and renovation programs. During the quarter, we were awarded a multi-year program with a large oil retailer to renovate approximately 2,500 sites. This program covers all exterior branding elements with anticipated interior opportunities. I want to highlight that this is a new customer for LSI. We displaced a long-standing incumbent supplier because of the breadth of our integrated One LSI solution set.

This is exactly the kind of win our platform strategy was built to generate, and it did not require us to add a single new customer relationship in order to see the benefit of what an integrated offering could do. Before I go further into the results, I want to address something directly. Fourth quarter adjusted EBITDA margin came in at 10.9%. That is below where we expected margin to land for the quarter. The primary driver is lower margin backlog at SignResource within Royston. This backlog reflects pricing that did not keep pace with higher raw material input costs, and those decisions were made prior to our ownership. As you may know, these signs have a great deal of petroleum-based polymers and plastics that have been significantly impacted by crude oil prices.

We're working through this impact, and we expect it to take approximately two quarters to fully clear. It may run through the first half of fiscal 2027. We expect this to create a bit of a margin headwind in this group for the first half of the year, followed by a benefit as we move into the back half of fiscal 2027 and this backlog is fully behind us. I want to be clear about how we think about this. This is a one-time isolated situation. It's the kind of issue we look for early on into an integration, and then we take corrective action. It does not change our conviction in the underlying margin thesis behind the Royston acquisition, and it does not change our commitment to the 12.5% adjusted EBITDA margin target we've communicated as part of our Fast Forward strategy.

It does mean the path there will not be perfectly linear, and I'd rather tell you that right up front than assume otherwise. The Royston integration within Display Solutions continues to move at a good pace as we align on a single customer-facing value proposition and go-to-market model. Royston's fourth quarter sales declined modestly year over year, consistent with our expectations as we intentionally narrow our focus towards higher value products and project mix. Several of Royston's largest customers are in the early stages of multi-year awards and new construction cycles, with project activity expected to ramp beginning in fiscal 2027 and continue over the next several years. We're excited by that. I personally visited all but one warehouse of the Royston locations since the close, and I visited most of these locations multiple times.

I've led town halls, walked the floor, and spent time directly with the people doing the work every day. Our senior and mid-tier leaders across LSI are actively engaged with the Royston organization, learning the business and building relationships. I've met personally with a number of Royston's top customers, and the reception has been universally and outstandingly positive. On the commercial side, we see substantial cross-selling opportunities. At SignResource alone, we believe we could double or triple the size of that business without adding a single new customer, simply by deepening our relationships within the customers we already have on our roster. This is the kind of organic upside that makes this acquisition so compelling. On the operational side, we are seeing many encouraging progress points.

At Southern CaseArts, we have made measurable improvements in on-time delivery performance, moving from the 70-something percent range to on-time delivery in excess of 90%. This is a direct result of applying the same operational discipline across Royston that we've applied across the rest of LSI. We are also identifying cost-saving opportunities that we expect to realize over the next 24 months, and we're approaching that work carefully. We don't want to do anything that could destabilize the business, and we'll share more detail of these plans as they mature. Know we're applying the same integration playbook that has served us well across prior acquisitions, with dedicated teams focused on procurement, cross-selling, and cost synergies. Value creation from an acquisition of this size is never perfectly linear, but I'm excited by the progress, and I'm confident in the direction we're headed.

Order rates within Display Solutions remain strong, with a book to bill of approximately one times on a strong sales basis, and that figure does not include the new program award I just described. I also want to share an important update on our organizational structure and our leadership team, and I want to spend a bit more time on it than a single headline, because I want you to understand just how purposeful this plan is. As part of this broader transformation, the leadership team and I spent the second week of July in a working session planning the go-forward plans of our company and the tactical activities we will seek to execute over the next 12 to 24 months. I say tactical because this was not a strategic discussion. This was a get-down-to-work discussion. We also introduced a shared values framework this year called DRIVE.

DRIVE stands for Detail, Respect, Intention, Velocity, and Execution. It is not a marketing campaign or a slogan. It does not change who we are as a company, but instead it builds on our current values, and it gives every person across every facility, regardless of history or legacy, a shared language and a program of how we collaborate, how we make decisions, and how we hold ourselves accountable as One LSI. It is the cultural foundation that underpins our Fast Forward strategy, and I am already seeing it show up in how our teams are working together across the combined organization. Finally, I want to share an important update on our leadership team. As announced in a separate press release earlier today, our Chief Financial Officer, Jim Galeese, has announced that he will retire next year at the end of October 2027 after nearly a decade of service to LSI.

I want to be very clear about what this means. Jim Galeese is not going anywhere soon. It is not a change in strategy, guidance, or capital allocation priorities. Jim is with us today, he will be with us this time next year, and he will stay with us through an orderly transition that he himself will help lead. We are telling you about this move more than a year in advance for a reason. We believe that giving ourselves and the market this much runway is exactly what creates the best opportunity to get the right person in this seat. This is deliberate, well-governed succession plan, one we prepared for. It is funny, but I would like to mention that when Jim and I first met in 2018, he said that he was only staying for two years. That was eight years ago.