LSI Industries - Earnings Call - Q3 2025

Executive Summary

• Revenue grew 22% y/y to $132.5M on Display Solutions strength; adjusted EPS was $0.20 as scheduling volatility in grocery temporarily pressured margins. Versus S&P Global consensus, revenue modestly beat ($132.5M vs $129.7M*) and EPS beat ($0.20 vs $0.15*); EBITDA missed on a GAAP basis ($9.3M vs $11.8M*) while adjusted EBITDA was $11.3M.
• Orders/backlog remained constructive: total book-to-bill 1.06 and comparable backlog up 15% y/y; Lighting book-to-bill was 1.13 with backlog +18% y/y; Display book-to-bill ~1.0 as schedules normalized exiting the quarter.
• Management expects reported and comparable sales growth in FQ4, with 200–250 bps gross margin recapture as grocery schedules stabilize; a $5M+ refrigerated case order booked in early April supports Q4 visibility.
• Strategic M&A continued: LSI closed Canada’s Best (CBH) for up to $31M total consideration, expanding Canadian presence and Display capabilities; dividend maintained at $0.05/share.

Note: Asterisked values are from S&P Global consensus/actuals via GetEstimates.*

What Went Well and What Went Wrong

What Went Well

• Display Solutions surged: segment sales +70% y/y to $73.5M, with 15% organic growth, driven by refueling/c‑store programs and grocery demand resumption; EMI contributed $22.4M and CBH $1.4M in the quarter.
• Orders/backlog quality: total book-to-bill 1.06; comparable backlog +15% y/y; Lighting book-to-bill 1.13 with backlog +18% y/y, indicating improving release trends for previously delayed large projects.
• Lighting margin execution: Lighting operating margin expanded 110 bps to 13.3% on pricing discipline and mix, despite lower large-project shipments; management emphasized ongoing quote-to-order conversion improvement.
  “Schedules are improving as we enter the fiscal fourth quarter… we exit the quarter with a strong Display backlog” — CEO Jim Clark.

What Went Wrong

• Margin pressure from schedule volatility: manufacturing/logistics inefficiencies from grocery schedule changes compressed margins; management quantified a recoverable 200–250 bps gross margin impact.
• GAAP profitability down y/y: GAAP EPS fell to $0.13 from $0.18 and GAAP EBITDA to $9.3M from $10.1M despite higher sales; adjusted EPS/EBITDA also trended modestly lower y/y.
• Lighting sales softness persisted: Lighting segment revenue declined 9% y/y to $59.0M due to fewer large project shipments (timing), though orders improved late in the quarter.

Transcript

Operator (participant)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jim Galeese. Please go ahead.

Jim Galeese (EVP and CFO)

Welcome, everyone, and thank you for joining today's call. We issued a press release before the market opened this morning detailing our fiscal 2025 third 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, 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-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 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.

Jim Clark (President and CEO)

Thank you, Jim. Good morning, all. Thank you for joining us this morning. Today, we'll be discussing our third quarter 2025 earnings results. First, let me say we had a very busy quarter. The entire LSI team delivered some very solid results. We achieved sales growth of 22% through some very choppy customer demand schedules. Although our margin was impacted by manufacturing and logistics inefficiencies created by these choppy schedules, our team has been able to serve our customers well, and I'm confident we will regain this margin as things stabilize. The service levels we are able to provide our customers continue to demonstrate why our vertical model and full-service approach is such a compelling benefit. One-stop shopping with a partner you can trust. In the quarter, we completed the acquisition of Canada's Best Store Fixtures in Ontario, Canada, and we welcomed the entire team into the LSI family.

We held our national sales meeting in February in Cincinnati, which we have all our LSI sales, marketing, and product development folks together for four days, introducing our new products, discussing customer and market opportunities, and developing strategies to retain existing customers and pursue new business opportunities. All these efforts resulted in net sales for the quarter at $132.5 million. That is sales growth of 22% year-over-year, driven by strong performance in the Display Solutions business. Total sales in Display Solutions increased by 70% versus the prior year, including 15% organic growth in the segment, with 20% growth in grocery and some strong long-term projects in Petroleum C-Store market space. Last Friday, we celebrated the one-year anniversary of EMI joining LSI, and the business continues to perform very well, and we have worked on cross-selling opportunities and overall margin improvements in the EMI business. Very encouraging.

Lighting sales lagged a bit on a year-over-year basis, but margins continue to do very well with 110 basis point improvement in operating margins. Most of the headwinds in lighting sales have been driven by a slowdown in large project activities, whereas these sales have not been lost, but they have frequently been put on pause with various construction delays and other factors. The good news in lighting is we have seen a strong rebound in the third quarter with large project order activity and our book-to-bill ratio for the third quarter being better than 1.13 times, as we have seen a number of larger project activities and quotes convert to orders. We are exiting the quarter with a lighting backlog of 18% above prior year. This is very encouraging on the large project front, and it is a trend we would like to see continue. Jim Galeese will provide additional financial details in a minute.

Now let me change gears and turn to the remainder of our fiscal year 2025 and the remainder of our calendar year 2025. Back in 2019, LSI as a company was highly dependent on foreign-sourced products and components, particularly in our Lighting Segment. At that time, we were approximately 80% foreign-sourced and 20% domestic-sourced. In that same year, 2019, we made the decision to onshore and reshore a lot of our manufacturing and sourcing activities, and today we stand about 70% domestic product and components and 30% foreign-sourced. The reason why I bring this up is the trade and tariff activities. Now, while no one is immune from the impact of this ongoing trade war, I do believe LSI will have an advantage to many of our competitors who rely solely on or heavily on foreign-sourced products.

We believe suppliers from China who provide direct imports of finished goods will be heavily impacted, and that should bode well for our value-oriented products and create an opportunity for some new customers to experience the LSI difference. Lastly, on the subject of procurement, our folks have been working for the past few months to identify alternative sources for foreign-sourced items that could be impacted, and they continue to look for ways in which we can leverage our current position. More to come on this, but again, I think this could be an advantage for our company, and we look forward to seeing how it will play out. I think the most important message I'm trying to convey is we have a plan. We cannot control tariffs, how they'll be applied and to whom.

We can't control the amount of the tariffs or how other countries will react, but we do have a team of folks that are committed to minimizing impact to our customers and trying to turn this situation into an advantage for our company, our customers, our partners, and our shareholders. We accomplished a lot in this quarter. We continue to build a stronger, more capable business with a strong platform equipped to deliver profitable growth consistent with our objectives outlined in our Fast Forward plan. We're using the experiences of our management team to effectively integrate Canada's Best Store Fixtures and continue our work with EMI. We believe that we have significant growth opportunities in front of us, and we remain committed to growing our business while balancing the needs of our customers, shareholders, and employees alike.

With that, I'll turn the call over to Jim Galeese for a closer look at our financials. Jim?

Jim Galeese (EVP and CFO)

Thank you, Jim. Our focus in fiscal Q3 was effective execution, operating in an environment with significant variability in customer delivery requirements. We engaged in high levels of customer collaboration to manage the ongoing schedule changes, and site release activity steadied as the quarter progressed. Our operations teams did a notable job, pivoting to shift production in process from one project to another, a strong competency in a custom project job environment. The focused effort generated third-quarter sales of $132 million, or growth of 22% over prior year, and adjusted EBITDA of $11.3 million, while attaining adjusted earnings per share of $0.20. Also in the quarter, we announced the acquisition of Toronto-based Canada's Best Holdings. Canada's Best was acquired for an all-cash purchase price of $24 million, with a $7 million performance-based earn-out potential.

LSI generated cash flow of $4.7 million in the third quarter, increasing our TTM cash flow to approximately $35 million. The company's balance sheet after the acquisition of Canada's Best remained strong, with net debt of $51 million, or a ratio of net debt to trailing 12 months adjusted EBITDA of one times. Looking forward, it was a solid orders quarter for the business, and we exit the third quarter with a backlog of 15% above last year. Our 22% sales growth was led by Display Solutions Segment, which realized Q3 sales growth of 70% with organic sales growth of 15%. Growth was led by the Refueling C-Store vertical and continued recovery in grocery. Refueling C-Store sales increased 60% versus prior year, led by multiple ongoing customer graphics programs.

Sales of refrigerated and non-refrigerated display case products to the grocery vertical generated a substantial growth of 20%, despite the vertical incurring the highest level of order fulfillment changes in the quarter. EMI continued its solid performance, generating year-over-year proforma growth, and integration activities are progressing ahead of schedule. Display Solutions' adjusted operating income increased 11% compared to prior year, while the rapid increase in demand, high level of scheduling disruptions, together with the mixed impact of EMI, resulted in a lower margin rate. We continue to collaborate closely with major customers and expect scheduling to further stabilize, improving efficiency and operating margin performance. Display Solutions' order activity remained at a high level, with orders matching a strong sales quarter. Subsequently, a large order was booked in early April, further increasing our backlog.

The $5-plus million order from a large grocer is for refrigerated display cases, more indication of the resumption in planned store renovation activity. The project will be produced and shipped to customer sites across the country over the next five months. For the Lighting Segment, adjusted operating income was approximately flat to prior year on lower sales. Operating margins increased 110 basis points over the prior year quarter, led by project pricing aligned with current material input costs as well as project mix. While large project shipment activity was lower in Q3, we realized a stair-step improvement in lighting order levels. Lighting increased order levels generated a book-to-bill of 1.13 as numerous large project quotes converted to orders. We have discussed previously the lengthening quote-to-order conversion process for larger projects and are encouraged by the improved release levels.

The increased order activity occurred in verticals which had been soft for several quarters, including warehousing. We believe favorable order rates will continue, but performance for any one period will be choppy due to the lengthened quote-to-order conversion cycle. In summary, our business is built to be effective in demanding environments, and our high-level execution in Q3 generates repeat business as customers recognize our capabilities and value as a partner. Led by favorable third-quarter orders and increased backlog, we expect to generate both reported and comparable sales growth in the fiscal fourth quarter. I'll now turn the call back to the moderator for the question-and-answer session.

Operator (participant)

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. First question comes from Aaron Spychalla with Craig-Hallum. Please go ahead.

Aaron Spychalla (Senior Research Analyst)

Yeah, good morning, Jim and Jim. Thanks for taking the questions. Maybe first for me on just the fluctuating demand levels and kind of changing customer schedules, can you just give a little bit more color on any certain verticals or examples of kind of some of those changes? Sounds like some grocery, but just curious if there's others. You noted stability exiting the quarter. Sounds like that's kind of continued, but just wanted to make sure understand those dynamics of that continuing since early April.

Jim Clark (President and CEO)

Yeah, Aaron, good morning. Jim Clark. Yeah, the fluctuating demand is almost exclusively around grocery. I think it speaks a lot to the decision at the end of the merger, the decision for the industry to kind of come back, and then them trying to cram a lot of things into last year's calendar year and then brought a little bit of that chaos and that speed into the first quarter of this year. Definitely feel like things are getting back to normal in terms of this is the store we wanted at, this is the construction schedule, this is the timing. It was just kind of messy. I think there were a lot of fingers in the or a lot of cooks in the kitchen, and we did not get the efficiency that we normally have. I think you hit the nail on the head with the word stability.

We definitely feel like things are much more stable now, or predictable might be the better word, in the sense of scheduling and all of that.

Aaron Spychalla (Senior Research Analyst)

All right. Thanks for that. Maybe second on display margins, can you just quantify maybe the margin impact from those schedule and kind of inefficiencies on the production side versus the EMI mix and just how you see those margins trending moving forward the next handful of quarters?

Jim Clark (President and CEO)

Yeah, again, I think most of that pain and pressure is being felt on the grocery vertical, and it kind of mix is one thing, priority in terms of what we deliver is another. We talked about there's been a pretty significant recovery. We scaled up with human capital, with people coming back on board. I always like to use the analogy as kind of like professional sports players. They've been off for a quarter or whatever. They're coming back to training camp. They're not catching the ball as well as they did or running as fast as they did, but I think that we've gained a lot of that efficiency back through this last quarter, and I think that you'll see it much more stable as we come into the fourth and next year as a whole.

Jim Galeese (EVP and CFO)

Yeah, Aaron, Jim Galeese here. Just to add to Jim's comments, the disruption was pretty large when you combined, again, the rapid increase in volume requirements, so bringing on people and getting our processes established, but then getting calls to halt status of certain orders and replace with another and so forth. Those interruptions were pretty significant. I assess that to be 200-250 basis points that we're going to recover as we stabilize here.

Aaron Spychalla (Senior Research Analyst)

All right. Thanks for that, Jim. And that kind of 200 to 250 basis points, is that EBITDA margins, gross margins? Just want to make sure I understand that.

Jim Galeese (EVP and CFO)

That'd be gross margin, Aaron. Yeah.

Aaron Spychalla (Senior Research Analyst)

Okay. Thanks. Maybe one last one, just on the tariffs. Appreciate the color. You noted continuing to adjust pricing and kind of sourcing decisions depending on how that progresses. Maybe just talk a little bit about what you've done thus far on pricing, anything kind of still to come down the pipe, and what changes you could potentially make on sourcing and any kind of timing or investments that might be needed there would be helpful.

Jim Clark (President and CEO)

Yeah. I mean, let me break that into two. In terms of the planning and alternative sources and locations, this is something we've been working on for years, and I think most of that is locked and loaded. What are alternative sources? Who are we going to keep buying from? The decision on what we're going to pay for tariffs and what we're not going to pay and all of that type of thing. I think a lot of that groundwork is done and we'll continue to monitor it. In terms of pricing, what we're doing, most of our activity is around awareness to our customers and our agents. We are not trying to take the tariff situation and leverage it against any of our customers or anything like that. We're taking real cost impacts and passing them on when we're feeling them.

In some cases, we have inventory that's going to buffer us from any type of tariff, even if it is a direct import product. We have inventory that will buffer us and our customers from any price increases. In other cases, we have things that we're feeling almost immediately. I would say that from a workload perspective, our job is to make sure we're properly applying the tariffs and capturing that cost in the areas that we're experiencing them, and then carefully monitoring what our buffers look like and what those things will look like to the customer in terms of the end-use delivery. The challenging thing is the stops and starts: is the tariff on? Is the tariff off?

The strategic decisions about where we relocate sourcing, because what we don't want to do is maybe with a tariff, we have a 50% increase in the price of a component. If we go to an alternative source, we have a 20% increase in the price of that component. If the tariff goes away, then we have a 20% premium. It is all that balancing. I have a lot of confidence. I mean, we've demonstrated our ability to work through this before. I have a lot of confidence in our procurement team and in our operations team. It is just a lot of kind of where do we put our focus? What's the current message? What's the current tariff?

It'd be hard to describe exactly pieces or components where we've increased price today or where we may increase them tomorrow, but I will underline that we'll be very diligent about looking at those prices and making sure we're capturing costs that impact us.

Aaron Spychalla (Senior Research Analyst)

Understood. Thanks for taking the questions. I'll turn it over.

Operator (participant)

Next question, Amit Dayal with H.C. Wainwright. Please go ahead.

Amit Dayal (Managing Director of Equity Research)

Thank you. Good morning, everyone. Appreciate you taking my questions. You talked about potential opportunities to increase sales within existing customers. Is this mostly on the display side, Jim, or is it possible with the Lighting Segment as well?

Jim Clark (President and CEO)

Yeah. Normally it goes both ways, right? We see a lot of our lighting customers as potential customers for our Display Solutions, particularly when you look at the vertical markets we're in. As an example, petroleum, we may have a customer that's fully committed to our Lighting Solutions, fully committed to our exterior Display Solutions, but we're not doing as much work with them interior. Those are always opportunities, and those are ones that we continue to pursue. I would like to mention EMI products like beverage centers and food-grade countertops and cabinetry and all of that. If we flip that equation around and we look at Display Solutions customers, we have a lot of Display Solutions customers that don't take advantage of our Lighting Solutions or take advantage of a section of our Lighting Solutions.

Maybe they're an interior customer, but they haven't made the transition to exterior. I still feel like that cross-selling opportunities across these markets is wide open. I mean, we're making progress, but most of the progress and most of the opportunity still lays in front of us.

Amit Dayal (Managing Director of Equity Research)

Understood. Thank you for that. I know it looks like you have a pretty solid plan to manage the tariff environment, and you've already migrated a lot of the manufacturing and sourcing to U.S. suppliers. In terms of the customer exposure, given where the majority of the revenues come from, what is the risk on that side? Are these also mostly domestic customers, etc., that are not really directly kind of impacted by the tariffs? I know everybody will be impacted in some fashion, just trying to get a sense of what the customer's exposure may be as far as you know to the tariff environment.

Jim Clark (President and CEO)

Yeah. We can look at across—I don't have an exact number for you, but we can look across our customer base, and we can see that almost every one of our customers could be potentially impacted, right? Even if they're a domestic customer, source a lot domestically, they could be impacted, particularly when it comes to construction-related activities. As an example, I'm making this up. This is not an actual example, but I just want to use it as an example. Maybe one of our customers is getting a microwave oven from an international supplier right now that's going to be subject to tariffs. They may pivot and go to a domestic supplier. They may decide to stick with their international supplier. They may be constrained because of a relationship with an international supplier.

How much impact that has on their business and their go-forward plans, I can't say that we know across the entire spectrum of our customer base, but it's something we're going to have to watch and look at. I think our initial feeling is the impact to their core operations of most of our customers will be minimally impacted, but things like construction and remodel and those types of things have a lot of elements in it that could be impacted. Automotive is a big vertical market for us. As a matter of fact, I should mention we just had 70 of our automotive reps in yesterday and today. I just gave an introductory speech to a pretty full house of folks yesterday.

The sentiment across the dialogue that I had with them and stuff is they do not anticipate much change in any type of short term, maybe extending out through the remainder of this calendar year. If incoming sales of automotive, if the duties and tariffs on importing cars and everything has a market slowdown on their market, yeah, it could create a slowdown. We have heard this narrative too, it could create an increase where they use that time to be a little bit more aggressive on some remodels or things like that. I think a lot of this is going to have to just play out for us to have a real position on it. The message I would leave is we feel pretty positive right now about the market. We talk about the building backlog, great recovery in lighting that has been going on since February.

One side, but all the signs internally here point to some pretty good momentum on the other side. We just have to take a wait and see.

Amit Dayal (Managing Director of Equity Research)

I really appreciate that, Clark. That was very helpful. Thank you, Jim. Just last one for me. You're creating this niche or carving out a niche in this Lighting and Display segment. Do you think you are one of the sort of bigger players in that niche with a focus, specialty focus sort of in that space? What are your thoughts in terms of continuing to maybe find relevant acquisitions that allow you to maybe dominate sort of that market niche?

Jim Clark (President and CEO)

Yeah. I mean, I think our market space is the way we deliver it. I do not think a lot of people are packaging it the same way or representing it or selling it and integrating it into a company the same way. I think any of our competitors that we deal with usually have to get a piece of that type of product, and then they go and source the solution from somebody else for the other part. I think it creates a unique opportunity the way we interface with our customers, the way we talk with our customers. We believe there is a tremendous benefit to really marrying up the lighting aspect and the display along with the colors and shapes that we have. We think it is pretty unique. It is a solution sell as opposed to a component sell.

I think most of our competitors approach it from a parts and pieces, from a component sale, where we're offering a true solution set. I do think we stand alone in that, in the way we go to market, and it really moves us from a supplier to more of a partner. I think it's unique, and we're enjoying some opportunity in there. In terms of what it does for M&A or growth activities, I don't think it diminishes our opportunities at all because we can pick up the pieces, and it's unique once we get them into our family. Then it becomes part of that. It moves from a supplier or component provider to a solution provider. I think the net actually increases in size. Our opportunities increase in size from an M&A perspective as opposed to decreasing.

Amit Dayal (Managing Director of Equity Research)

Understood. Thank you for that. That's all I have. Thank you.

Operator (participant)

Next question, Leanne Hayden with Canaccord Genuity. Please go ahead.

Leanne Hayden (VP of Sustainability Equity Research)

Morning, everyone. Thanks so much for taking my questions. Just to start, can you please discuss your acquisition strategy going forward, and do you anticipate any additional acquisitions in specific markets or geographies? In addition to that, how important do you expect future acquisitions to be to reaching your 2028 Fast Forward targets?

Jim Clark (President and CEO)

Okay. There is a lot there. I'll mostly focus on M&A, and I'll just say that, yeah, we remain very active in the M&A space. I've talked about this before. We have a lot of the known players that provide us opportunities. We also do a lot of work to self-originate, creating relationships with customers and companies that we feel we have a unique position if they were internal or part of LSI. We do a lot of work around that, and we're continuing to do a lot of work around that. We look at M&A in two flavors. One is that kind of incremental M&A that we must execute on pretty consistently, making something like a $50 million, $60 million, $80 million, $100 million business. Maybe it's underperforming in terms of margins or even our performance, or maybe we see things that we can help move or consolidate.

We are going to continue to look for those types of opportunities. On the other side of that coin, we have what we call transformational, something that might add $200 million of revenue or might really add a whole new segment for us, whether it is a new vertical market or an entirely different solution set. We are just as active in that space. We just have not been able to cross the finish line with any of those projects where it has not been able to meet our requirements or whatever it is. We are very active in both of those, and we intend to continue to be very active in them.

I think we have a good demonstrated track record of being able to bring in those companies and integrate them very well, make them part of the team, make them part of the story, and then provide back to them resources, whether it's procurement or operational or processes around selling or whatever it is. We like that equation, and we're going to keep doing that.

Operator (participant)

Got it. Thank you. That's very helpful. Just one quick one from me. How has the V-LOCITY demand been since its launch? Do you anticipate right now any future Lighting or Display Segment products going forward?

Jim Clark (President and CEO)

Yeah. I recognize this. It's so funny. I recognize this in my conversations with our lighting agents the other day. We're still on track. We still release 20-plus new products every year. We've never fallen below that number. In fact, as my product development team consistently reminds me, it's 30-plus products every year. We've never actually fallen below 30. That continues. V-LOCITY has met all of our expectations. In fact, it has kind of marched past some of our initial launch targets. The difficult part when you come out with a whole new category like that is anticipating initial demand on that short term. I think we're better on the longer term, but we've been very pleasantly surprised on the take-up on the short side.

I think it says that we got that product right, that the customers and our agents recognize the flexibility in it and how to properly apply it, when to use it. I am very happy with it. We continue to release a lot of new products each year. That product fatality is important to us, and we are going to continue to do it as we move forward.

Leanne Hayden (VP of Sustainability Equity Research)

Got it. Thanks so much. Thanks for taking my questions. I'll jump back in queue.

Jim Clark (President and CEO)

Thanks, Leanne.

Operator (participant)

Thank you. I would like to turn the floor over to Jim Clark for closing remarks.

Jim Clark (President and CEO)

Thank you, everyone, for taking the time to call in. I think, as I said, it's a very busy quarter. There's a lot of external kind of elements that everybody's facing right now, but I think the team is doing an exceptional job of managing them. I think the majority of our customers have been very transparent and have done an excellent job of communicating with us. I feel good about the quarter we just had, and I feel even better about the upcoming quarter. There is going to be a lot of noise. It's going to continue to impact the markets in general, but I think that we have a very good plan about how to navigate those choppy waters. I'm looking forward to a good, strong finish to our fiscal year here as we're a good way into our Q4.

With that, I'll just say thank you for taking the time, and thank you for your continued interest in LSI.

Operator (participant)

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