Prepared remarks
Greetings. Welcome to LSI Industries Fiscal 2026 Third Quarter Results Conference Call. Please note, this conference is being recorded. I will now turn the conference over to 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 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.
Thank you, Jim. Good morning, everyone, and thank you for joining us today. Before Jim Galeese walked through the numbers for Q3, I wanted to take a few minutes to step back and frame what you're seeing this quarter in the context of the journey we've been on. When I joined LSI in late 2018, we were a company doing just under $300 million in revenue with EBITDA margins in the low single digits and a stock trading around $2.50. We were fundamentally a lighting company. A good one, but just a lighting company. The question at that point was whether we could build something more durable, more differentiated and ultimately more valuable. In 2019, we introduced our 2025 plan with a goal of reaching $500 million in revenue and 10% of EBITDA by 2025. We achieved that plan early in fiscal 2023, and that gave us the confidence to move forward with our Fast Forward plan, targeting $800 million in revenue and $100 million in EBITDA by 2028.
But the more important change was not just in the numbers. It was in how we thought about the business. We made a deliberate decision to organize around vertical markets instead of products. That changes how you operate, how you invest and how you grow. It also changes how you show up with the customers. We chose markets where there is a sustained need to reinvest in the physical environment driven by the consumer experience. When one brand raises the bar, the competitors have to respond. That creates an ongoing cycle of investment, and that dynamic continues to work in our favor. As we've discussed before, we grow in two ways: first, by adding new vertical markets; and second, by expanding what we provide within the markets we already serve. When we can provide lighting, display, millwork, graphics, and program management as a single integrated solution, we become more relevant to the customer.
We participate in more of the projects, and we build deeper relationships over time. That is where we create real value for our customers and for our shareholders. Over the last five years, we've deployed more than $500 million across four acquisitions, including Royston. Each one has added capability and strengthened our position in the verticals we serve. Just as important, we have done this in a disciplined way, supported by the cash flow of the business. We've been very intentional about what we buy, how we integrate it and how it fits into our broader platform. Today, with roughly 3,000 people in LSI and 23 U.S.-based manufacturing locations and a pro forma revenue run rate approaching $900 million, the platform we set out to build is taking shape. It's broader, it's more capable, it's more resilient than the business we started with. The focus is now on execution and continuing to scale what we have built.
One of the things I'm most proud of is our high credibility ratio this team has built over time. We set our expectations carefully, we deliver against them, and that consistency has been a key part of building credibility with our customers and our investors, and it's something we work hard to protect. The acquisition and integration of Royston is a significant opportunity. It expands our capabilities and strengthens our position across multiple vertical markets. Our approach will be disciplined and consistent with how we've managed prior acquisitions. We will take the time to integrate it the right way, align it with our operating model and make sure we're capturing the value we expect. As we move through that process, we will evaluate the business through the lens of our vertical market strategy and our focus on margin quality. Where there is strong alignment, we will invest and grow; where there is less alignment, we will be thoughtful about how we serve those areas going forward.
That is the part of how we built this business and it will not change. That discipline has been a defining characteristic of the company, and it will continue to guide us. We believe the platform we built is the right one. The markets are there, the capabilities are in place, and the team is strong. The opportunity now is to execute and to continue to build on that foundation. Now before I turn things over to Jim Galeese, I wanted to make a few brief comments on the quarter. We delivered solid third quarter results with growth across segments and continued strong cash generation. The performance reflects ongoing momentum in our key vertical markets and the operational discipline of the team. We are seeing the benefit of the model we've been building with more consistent activity across our core customers and improved execution across the business. Looking ahead, we expect a solid fourth quarter, and we feel good about how the business is positioned as we move into the next year.
While there will always be moving pieces in the near term, the underlying demand drivers in our vertical markets remain intact, and we believe we are well positioned to continue to build on the progress we have made. It's an exciting time for LSI. We have a lot of opportunity in front of us supported by a stronger and more capable platform than we've had at any point in our history. I still feel like we're in the third inning of a nine-inning game. And our job is to stay disciplined and continue to execute. With that, I'll turn it over to Jim for a more detailed walk-through of our Q3 financials.
Good morning, everyone. Fiscal Q3 was an eventful quarter for LSI: successfully delivering solid operating results and taking the next step in advancing our vertical market strategy with the acquisition of Royston Group. The six-day Royston stub period is included in our third quarter performance and key metrics, including and excluding Royston, are contained in the press release and as follows: Total sales increased 14% versus prior year to $150.5 million, and increased 9% excluding Royston. Adjusted earnings per share were $0.28 and $0.27 excluding Royston, or $0.07 above the prior year quarter of $0.20. Adjusted EBITDA was $15.0 million, or 10% of sales. Adjusted EBITDA, excluding Royston, was $14.1 million, above prior year, with adjusted EBITDA margin of 9.8%, an increase of 130 basis points over last year. Free cash flow for the quarter was $11.8 million, excluding acquisition-related costs, continuing a high conversion of earnings to cash.
Post-transaction, our pro forma trailing twelve months net debt-to-EBITDA is 2.7x. Now a few comments on the performance of our two reportable segments. All segment comments exclude the Royston stub period. Our Display Solutions segment had a strong quarter, with sales and adjusted operating income increasing 14% and 64%, respectively, versus last year. Grocery vertical sales increased double digits over last year. We conduct business with over 15 sizable chains in this vertical, representing thousands of combined locations, and we're experiencing increased activity with many of these customers. Refrigerated display case products are the lead in our solution set to this vertical, but we've been successful in growing our position in non-refrigerated or ambient product placements as well, with improved margins. Orders in the grocery vertical were 20% above last year, and we exit the third quarter with a backlog also above prior year.
The refueling C-store vertical generated high single-digit sales growth over record Q3 sales realized last year. The mix of large multi-quarter, multiyear programs, along with a growing mix of shorter-term medium-sized projects is driving the increase. Orders for the quarter were double digits above prior year with a book-to-bill over 1. Included is over $5 million of program work awarded to LSI by the largest C-store chain in North America, all to be completed by the end of the calendar year. We are encouraged to see this customer begin increasing investment levels after several years of low activity. Total sales for the QSR vertical were down versus last year, reflecting a mix of growing chains continuing to invest and other chains taking a bit more cautious approach as they finalize plans to adapt to changing consumer habits. Concept and development work remains high in this vertical.
Shifting to lighting, sales increased 2% despite changes in the market environment. While code activity remains active, the quote-to-order conversion period lengthened in the quarter after several quarters of improving timelines. We had a sizable number of quotes expected to convert to orders in the third quarter, which have been extended. We believe macro developments are influencing project proposal and approval activity. Our focus on national accounts continues to move forward with both the number of accounts and projects expanding, both sequentially and versus last year. We continue to effectively manage margins, aligning project pricing to changes in material input costs. Lastly, a few comments on our outlook for the fiscal fourth quarter. Our Display Solutions segment, including both LSI and Royston, is expected to have a solid quarter. Sales are projected to increase on a mid- to high-single-digit percentage basis when compared to the prior year quarter, reflecting ongoing favorable customer program activity in the grocery and refueling C-store verticals.
This builds on the strong fourth quarter of fiscal '25 which generated 13% year-over-year comparable growth. Conversely, near-term softness is expected in the Lighting segment, impacted by a lengthening project quote-to-order conversion cycle, macro factors as well as challenging prior year comps. Recall that lighting sales increased 12% year-over-year in Q4 fiscal 2025. Q4 Lighting segment sales are expected to decline mid-single digits versus last year. As a result, on a consolidated basis, we expect net sales growth in the low to mid-single-digit percent range in the quarter versus prior year. Importantly, we continue to maintain both our price and cost discipline across the organization, ensuring that we continue to realize healthy margins across both of our segments, consistent with our focus on profitable growth. I'll now turn the call back to the moderator for the question-and-answer session.
Questions and answers
Our first question comes from Aaron Spychalla with Craig-Hallum Capital Group. One segment is expected to decline mid-single digits versus last year. As a result, on a consolidated basis, we expect net sales growth in the low to mid-single-digit percent range in the quarter versus the prior year. Importantly, we continue to maintain both our price and cost discipline across the organization, ensuring that we continue to realize healthy margins across both of our segments, consistent with our focus on profitable growth. I'll now turn the call back to the moderator for the question-and-answer session.
Maybe first for me on the guidance. Can you just kind of, Jim, unpack that a little bit? I just want to make sure I heard it's apples-to-apples as if you owned Royston last year. And then maybe just following on that, almost two months since the acquisition has been announced. Can you just talk about the response you've seen from customers, how quickly you can maybe capture some of the revenue synergies from the expanded offerings you have now?
Aaron, this is Jim Clark. Thanks for being on the call. Jim Galeese will give you a recap here in a second, but I just want to make a comment on one thing. You're right, we announced Royston in late February, but remember, it was not a simultaneous single-day close. I know you're aware of it. We've only had Royston for about 28 days—today marks 28 or 29—so a little patience on how Royston contributes going forward. I think we picked up six days here in the quarter, but the graph that Jim put in the release shows the difference between Royston with and without Royston. But I know your questions were more about forecast forward. So I'll let Jim comment on what he had to say.
Yes, with regards to the Royston Group: from a reporting perspective it will go into our Display Solutions segment. And so when I comment that the Display Solutions segment will be up mid- to high-single digits, that is on a comparable basis. So that's pro forma, comparing Royston's expectations for Q4 to last year and LSI's expectations for Q4 to last year. So it is comparable. And I will say both pieces of that business will realize growth in the fourth quarter. So I hope that helps. I know that we've disrupted the equilibrium here a bit with the acquisition and the metrics, so some clarity is required.
No, that's great. I appreciate the color. And then on the $5 million program work on C-stores, can you just talk about that? Is that part of a larger multiyear program? And just how do you see growth broadly in that vertical in the coming years?
Well, Aaron, Jim Clark again. I think it's just a normal part of our business. I think we're calling it out because it's a customer we've been pursuing to get reconnection with for quite a few years. I don't want to go into who the customer is, but we're encouraged by it. That's why we called it out. It's a nice program, and it's the first time this customer that's been absent for a few years is coming back. So we're excited about it.
And Aaron, I take it as just another proof point as to the overall level of activity that's going on in the C-store vertical. You're very familiar with the landscape, which is contributing to our growth and undergoing change: the chain operators, the wall formats, quick-trip formats with fuel, et cetera. The whole vertical environment remains very positive. So it's encouraging to see this large customer start to begin to invest because, frankly, they're a bit behind.
Understood. And then maybe one last one on the EBITDA margin for Display Solutions, 12%. Can you just talk about some of the drivers there and confidence in sustainability? And just maybe talk a little more broadly on some of the cost synergies you think you can realize with Royston in the coming years.
Yes. First of all, this is normal course of business. We've talked about this for years. The greater share of wallet we get with customers, the more engaged we are, and the larger the projects become, the bigger our share of wallet becomes with each of those customers. That creates efficiencies that are realized in the business, and we've been making continual progress on that. There's also a lot of behind-the-scenes activity going on. I mentioned about 15 years ago we hired a procurement lead who has been phenomenal. He's been a phenomenal asset for us, doing a great job with the whole team, really energizing that function and looking for opportunities. Same thing on the operations side. We are operators at our core. I'm a commercial guy, but we're an operating company. All of the changes and investments, although they are incremental, are meaningful. We make those investments to get those improvements, and I think you're seeing a lot of those things pay off.
The jump on the display side is obviously helped by Royston: unlike some prior acquisitions that were dilutive from a rate standpoint, Royston is accretive. So we get the benefit of Royston coming on board. We get a significant contribution from Royston and we get an accretive rate in dollars; those combinations help. But I want to underline that we've been doing our own work and will continue to do our own work in improving the core LSI margins prior to Royston. It's a combination of both of those that is responsible for that number.
To recognize what Jim said, our operations team just did a terrific job this quarter. You may recall that a year ago we were dealing with the transition business in the post-Kroger Albertsons scenario. We were taking on business to meet customer demand, but we were fulfilling it on a very inefficient basis given we were rebuilding capabilities and rehiring resources we had previously reduced. Building our capabilities back took time. The demand patterns have become much more predictable, allowing our factories now to get into a very solid rhythm. I think that was evident in our fiscal Q3 results in display.
Our next question is from Min Cho with Texas Capital Securities.
Congratulations on your strong quarter here. Just a follow-up on Craig's question a little bit. So it sounds like you have pretty good visibility into the timing of your current rollout. So do you expect to see the efficiencies that you saw this quarter continue for the next several quarters, if not longer?
Yes. Thank you for calling in and thanks for the question. We generally look at these as kind of permanent improvements—we look at them as a ratchet that goes up but doesn't come down. Now obviously, there are things that can affect that, but these types of operational improvements tend to be long-lasting and sustainable. We expect them to continue to provide benefits into Q4 and into Q1, and we are focused on continuing to improve those even further. Having said that, we just acquired a very large company. Part of our secret sauce has always been our integration rhythm and how we come up to speed with these companies, and we try to use the resources we have within our business to do all of those activities. I'm not worried about our efforts being diluted or moving backwards, but we may shift priorities to help bring Royston on a little bit faster than we otherwise would, and that may slow down some future activities on other operational improvements. The takeaway is that we still see a lot of opportunities for improvement in operations, and those will be ongoing. We see opportunities with Royston. We like the way the company operates. We like the people and the culture. We're going to learn from them as much as they learn from us. We'll be working together, and that combination will continue to provide opportunities for many quarters to come.
Great. Excellent. And in terms of your Lighting business, I know you've been growing your national accounts base, but do you have a general breakout of what percentage of sales is coming from national accounts versus non-national accounts? Your commentary almost sounds like it's suggesting that the softness is really in the non-national accounts.
We don't break that out publicly and probably it's more for convenience than anything else. We do track those numbers internally and how they perform independently, but to start breaking them out publicly could get us into the weeds quickly. Your comment is spot on though: we expect to continue to grow in the areas where we're investing. Some of the larger project activity remains intact and we don't feel it's in jeopardy. We do see a disruption in timing right now with some larger project activity slowing to ensure all other elements are catching up; customers are not paying a premium to rush something while another element is delayed. I'm happy with the progress we've made in Lighting. As Jim mentioned, it was 12% growth last year in this quarter, and we've maintained growth in pretty much every quarter over the last year or more. I think this is just a reflection of some slowdown in the 90-day window of the Q4 period right now. I don't view it as systemic or something to worry about long term.
As best we can tell, our Q3 performance—2% growth—clearly outperformed the competitive environment, and the competitive environment is seeing the same things. We will continue to generate market performance driven in some part by our increased penetration in national accounts activity, which we identified about a year ago as a real opportunity for our business. Our sales leadership is doing an excellent job pursuing that, and it is, as Jim just mentioned, some of these more sizable projects in the general commercial and industrial side that are just a question of timing.
Got it. Also, I know that you've both been spending some time reaching out to some of Royston's largest customers. Can you just talk about the general feedback that you have received? And also given the cross-selling opportunities, is there a difference in how you expect to bid for projects going forward?
Yes. I think I mentioned in the call that we were actively reaching out to Royston's top customers. Thanks to Royston and our own team, they worked together extremely well and the customers on Royston's side were generous with their time. Many of those customers were entirely new or distant from LSI. We also reached out to some of our own customers. It was a great exercise and one met with a great deal of interest and opportunity. The number-one question was: what can we expect for change? Our answer was: however you've been doing business with Royston in the past, you can continue to do it that way in the future. The second question tended to be around billing and invoicing: will there be changes? No, there will not be mandatory changes. We won't force any customer to change in the short term, but we will look for opportunities to be more efficient and serve customers in the way they want to be served.
If that is separate billing, we'll continue to do that; if that's combined billing, we will do that. The third question was how the company will run differently. The answer is similar to the first: we don't anticipate the company running differently. We take a very deliberate approach to our integration. We want to preserve the culture at Royston, learn from each other, and respect the work they've done. We don't want to destroy any of the value they bring to their customers or the value that we bring as a bigger entity. Those were the big questions, and I will say it wasn't the first time we've done this, but it was probably the best coordinated. I think that speaks volumes to the experience LSI has gained and the professionalism of the team—it was fantastic to work with them.
Our next question is from Amit Dayal with H.C. Wainwright.
Congrats on the execution so far, guys. Most of my questions have been asked, but I'll try to touch on sort of the macro drivers. Jim, you commented earlier that it was a very different business when you came in as CEO, and today it's a very different business. In that context, what are the macro drivers we should keep in mind while thinking about the future of the company?
As I said in my comments, it is a very different business, but it's still fundamentally based on the same strategy that we launched in 2019 and refined with the Fast Forward plan. From a public market standpoint, I recognize it's sometimes hard to classify us exactly: are we construction materials, building services, clean tech with LED lighting, or something else? But as you look at the evolution of what we've done, it's becoming clearer that we're a customer experience company. There's a creative element, a manufacturing element, an operations element and a service element. It's how we're executing across that whole band that's separating us. We're solving problems for customers that never had a solution like LSI offers: one stop, one call, one shop. We're able to be more efficient, more integrated and provide a uniform package, look and feel. That can extend down to details like the type of wood species we use across multiple locations. It's us being on site delivering multiple solutions and being visible that is most rewarding from a customer standpoint. We're there, we understand the project better, we understand the people better, we understand how it all fits together better, and we're able to deliver it as one company. It's a unique proposition, and I do feel like we're creating a category of one. That definition will continue to become clearer as we move forward.
Understood. And then on the cadence of revenues with this acquisition now under your belt: how should we think about quarterly revenue flows that may change from the historical way the company has performed?
I think Jim touched on this briefly. With the acquisition and a few more shares outstanding and the assumptions we had three months ago, it's going to require a refreshed look. But in terms of revenue, it stays consistent with how we've been operating: we want a high reliability ratio and to continue to execute and perform to the numbers we project. The company remains growth-oriented, so you can expect us to focus on growth, both top line and bottom line. With any acquisition, and certainly with the acquisitions we've done, we'll look closely at the business Royston brings and seek effective ways to serve those customers and to pursue the concept of greater share of wallet—moving from providing one or two items to providing four, six, or eight items. We have a good opportunity to create revenue growth in front of us. That said, we're in the third inning of a nine-inning game. It takes time to get engaged in projects and to go through the customer education process.
Anyone expecting immediate large revenue streams in 30 days will be disappointed; it typically takes us 12 to 18 months to get engaged in concept, pilot and then project phases. Believe me, nobody is more impatient than I am and nobody respects speed as an asset more than I do, but there's a natural flow to these things. With all that said, you'll see LSI continue to grow. This is a relatively large acquisition with Royston. We like the people and the culture and the hustle there; we feel it's similar to ours. I think we can do great things together.
Network and the concept phase, et cetera.
Yes, that concept phase, that piloting phase, and then that turns into a project. So believe me, nobody is more impatient than I am and nobody respects speed as an asset more than I do, but there is a natural flow to these things. With all of that said, you're going to see LSI continue to grow. Obviously, this is a relatively large acquisition with Royston. We like the people that are there. We like the culture. We like the hustle and we feel like it's very similar to ours. I think we can go do great things together.
Just last one, maybe. Are you using any AI capabilities to potentially accelerate the integration, accelerate cross-selling opportunities? Any background on maybe using new technologies to accomplish these things a little faster?
I think there's a lot that can be done with new technology tools that are available. There are mechanical things that can be done much faster and additional resources to model scenarios. But at the end of the day, it comes down to people. In every acquisition we've done, the greatest asset we've acquired is the people. There isn't any business we've acquired that doesn't have competitors; other companies could provide similar products. The real value in the acquisitions we've done has been the people who have become part of the LSI team. That process doesn't seem well-suited to rushing without risking breakage. We want to learn collaboratively, give everyone a voice, and understand why they do things a certain way. If two processes exist, is one better? Should we combine them? That comes through thoughtful conversations and giving everyone an opportunity to contribute. You've covered us long enough to know I always want speed, but we'll integrate responsibly in a way that creates long-term opportunity. We'll look for every opportunity to accelerate, but not at the expense of long-term value.
We have reached the end of our question-and-answer session. I would like to turn the floor back over to Jim Clark for closing comments.
Listen, I would just say, first of all, thank you to everyone that dialed in. I will say we ran into a little technical issue today where the population of our call actually exceeded the line limits we had. We'll be expanding that a little bit going forward, and I apologize to anybody that may have had a hard time getting on. We're a different company today, and that's another element we needed to adjust. I appreciate the questions and the engagement. I'll close with just a few thoughts. We feel really good about where we are as a company. The strategy is clear. The platform is taking shape and most importantly, the team continues to execute. I think the third quarter reflects that with solid performance and continued momentum in our key vertical markets. I can guarantee we're going to stay disciplined, particularly as we integrate Royston, and we will continue to make decisions that support long-term value creation. We set our expectations carefully and we deliver against them. Looking ahead, we're very confident in the direction of the business and in our ability to continue to deliver focused execution. With that, I'll say thank you, and thank you for your time and interest in LSI.
Thank you. This will conclude today's conference. You may disconnect at this time, and thank you for your participation.