LSI Industries Inc. Q1 FY2026 earnings call

• Investor outreach: LSI has expanded engagement with the investment community, attending more conferences. There's a clearer picture of what LSI does now compared to 5 years ago, with the conversation easier but still curiosity about the full scope. - Seasonality: Last year, grocery industry uncertainty due to a proposed merger affected Q2 comparisons, and this year's Q2 comparisons will reflect last year's extraordinary growth. - Integration progress: EMI and Canada's best store fixtures are exceeding expectations. Alan Harvill and Nelson Westley are developing a plan to align sales and manufacturing operations. Canada's Vest's integration has been strong and seamless. - Fast Forward strategic plan: A year of focus on people, developing talent, optimizing processes, and improving day - to - day operations while providing superior customer service.

For the Lighting segment, first - quarter sales increased 18% versus prior year. This growth is driven by the vertical market approach where priority verticals outperform broader non - resi construction indices, purpose - built products with superior features and functions, domestic production, lead time, and delivery capability. For the Display Solutions segment, total sales increased 11% in the first quarter. Performance is led by the continued recovery in the grocery vertical and sustained program site release activity in refueling C - store. Canada's Best Holdings, acquired in March, delivered an exceptional quarter. Lighting contributed around a certain percentage to total revenue, and Display Solutions contributed the remaining percentage, with both showing strong growth trends.

• Lighting: Recent order levels suggest year - over - year sales growth will continue in fiscal second quarter, and there is optimism about growth carrying forward into the rest of fiscal year '26. - Display Solutions: Proposal and concept work for future programs continues with multiple customers, and the secular growth outlook for the refueling C - store vertical remains favorable. The large national program in refueling C - store is projected to continue through the end of calendar year '26.

• Supply chain challenges: Impacting primarily the Lighting segment, with tariffs and material input cost fluctuations. - Receivables issue: Inadvertent delay in project billing for 2 large accounts due to customers changing invoicing address, though invoicing has been updated. - Credit facility: Current credit facility approaching expiration, need to monitor liquidity and net leverage.

Q: 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?

A: 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 been -- we benefited from a couple of very large opportunities that we've gotten pieces of over the last 2 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. James Galeese: Yes, Aaron, Jim G here. Just to add on to what Jim said, yes, we feel very confident about our lighting business where it's positioned. We referenced that we've been successful in several key account conversions that's going to provide a nice stable business moving forward. And our team, I got to give our team credit. They're doing an excellent job managing the whole tariff, and some instability in the supply chain driven by tariffs. We take -- we have a very strong focus on our project quotation process, ensuring we're referencing the most current costs, et cetera. So this effective project quotation process, along with the volume, is what allowed us to achieve this 170 basis point improvement in gross margin. And as I mentioned in my comments that we see this growth carrying forward into Q2.

Q: 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?

A: James Clark: Yes. So 2 things on that, and I thought we would be kind of proactive on our comments relative to that, just to reset the stage a little bit. Number one, Q2 of last year, we had growth in grocery, obviously, because of the settlement on the merger on the proposed merger, and there was all that pent - up demand. And as you know, when we got that slug of business, we had to really -- we had to staff up. We had to bring materials in quickly. And we made a strategic decision back then to do that and serve the customers based on a number of the quotes they had in front of us, and a number of -- in front of them, and a number of the commitments we had made. And I think it served us well because I do feel as though a lot of that has stabilized now, and our order patterns are getting back to much more normality, a greater deal of normality in terms of customer request and demands for delivery, and that type of thing. Remember that typically, in our Grocery segment, the time between November 1 and we'll say, Valentine's Day is kind of a hands - off. The stores want to focus on stocking up their stores, being ready for Thanksgiving, Christmas, New Year's holiday. And that goes right on through basically Valentine's Day and some a little bit longer. Last year, all of that was ignored because they had deferred a lot of maintenance, and they had across the industry, by the way, it's not just 1 or 2 customers. It was across the whole segment. The next thing I wanted to say about that was we also had a pretty good jump in some of our C - store and petroleum in - display solutions right at that same time last year. I think this year is a more normal rhythm, although we still have growth in it. So I'm very encouraged about the direction we're going. I'm just trying to call out the fact that if you look at Q2 of last year compared to Q2 of this year, we're likely not to have 100% growth, right, 50% of which was organic. James Galeese: 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, 24 months.

Q: 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. I mean, can you just kind of talk about some of the priorities from an operational standpoint here in FY '26, maybe in the coming quarters?

A: James Clark: Yes. Well, I did make a comment in my prepared remarks that -- and I've made this in our last quarter call, too, we're putting a lot of time and effort into our people this year. I mean we always take care of our people. It's a people - first business. We don't make anything that other companies don't make. We just think that we deliver it in a much better and more efficient manner. And that starts with our people. And we are looking for that operational efficiency. We are turning the dial in collection with our people to look for ways that we can be more operationally efficient. And that's part of that story on our way to 12.5% EBITDA, that efficiency has to be there, and we are putting that time and effort in there, and I'm very happy with the progress we continue to make.

Q: 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?

A: James Clark: We feel encouraged. We think that there's a lot more -- Jim just mentioned a minute ago, a lot of our business, it has an 18 - to 24 - month development cycle. And so things that we have been working on for the better part of a year, in some cases, longer, those are really starting to materialize now. And we look at that along with our -- what we'll call our kind of flow business, the business that comes in through our agency network, and that type of thing. And we're very encouraged by what we see in lighting. I want to go -- I don't want to get too far out over my skis, but I anticipate that we'll continue to see growth in lighting through the year. James Galeese: Yes. I'll just add to Jim's comments that we had commented in the prepared remarks that our primary verticals where we focus lighting, they are healthier than the broader nonresidential or commercial market. So number one, that provides opportunity. And then secondly, we are making -- we continue because our products are built for specific applications, not just general applications, continuing to make share inroads with certain key accounts to enable us then to improve and grow our share position. So the combination of both gives us a -- we're -- as Jim said, we're optimistic about the lighting projection for the balance of the fiscal year. James Clark: And I would say I'm enthusiastic on top of it. So we'll see how that plays out, but we feel pretty good.

Q: And then as it relates to the C - store outlook, and 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?

A: James Clark: Well, we have the capability to stack the second one. And in almost all cases, we're working multiple projects. This is not one project to another. We always have overlap. In some cases, we have 3 or 4 projects simultaneously going on. One may be a smaller project, one is rolling off the end of their large remodel, the new big ones coming in, and then we have 2 or 3 that are infill there. But I'd say from a capacity standpoint, we have at least 20% capacity to take on additional projects. And we have a whole kind of second wrong to the ladder, if you will, that we're able to enable if the projects take off beyond that. We work a first in skeleton second shift right now. So from a utilization standpoint, just staffing up our second shift gives us another 20% on top of the 20% we have right now. So we have the capability to kind of expand. A lot of it's timing. And the way it tends to work out, I don't know how these guys know what each other is doing, but I will tell you that -- and I'm talking about a subset of 20 - plus customers, they all kind of know when somebody is making a big program investment. And it's just kind of interesting how they layer in. I'm not concerned about our capacity capability.

Q: 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?

A: James Clark: 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, 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. And last year represented kind of an anomaly. That doesn't mean that the business just goes to 0. We still have a lot of kind 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 growth -- 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.

Q: 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?

A: James Clark: Amit, you were saying, are we getting -- I missed that one word. Amit Dayal: Are we getting it to the top of our pricing? Or I guess I missed that. Yes. At least for the near term, do you feel like you may be sort of being constrained at this point given sort of inflationary hesitancy in the market from being able to raise prices maybe the way you have been able to over the last 18 months? James Clark: 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 overleverage 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 price -- fair product a good product, a great product for a fair price right now. James Galeese: 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. James Clark: Yes. And I think that Aaron had the first question was asking about what's volume and what's price. And you're seeing -- I'd say the majority of what you're seeing in increased sales is volume. where the pricing, we remain alert to it, as Jim was just saying, but we're taking -- we continue to take share and our -- what I was trying to underline a little bit in my prepared comments was the whole theme of us being able to be a one - stop shop and offer more continues to take hold, and that represents volume for us. So we're very happy about it.

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

A: James Clark: 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 of 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, 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 that 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. And 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. And 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 and our employees, and our 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 20 -- our fiscal year 2026 will yield some benefits in terms of the M&A side. James Galeese: And 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? And so through the years, you've seen that 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.