LSI Industries Inc. Aktie

Greetings and welcome to LSI Industries Fiscal 2026 Fourth Quarter and Full Year Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to 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 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 and 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, 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. Initial sizes launching next quarter. Lighting orders in the fourth quarter were 5% above last year with a book-to-bill above 1x. And we're 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 year period, including organic growth of 18%. Segment adjusted EBITDA margin rate increased to 12.4% for the highest level we've 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 is steady, 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 multiyear 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. 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. The 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 Sign Resources 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. 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 '27 and continue over the next several years. We're excited by that.

I personally visited all but one warehouse at the Royston location 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, 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 Sign Resources 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 1x on a strong sales basis. 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'll 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's not a marketing campaign or a slogan. It doesn't 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's the cultural foundation that underpins our Fast Forward strategy. We're 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's not a change in strategy, guidance, or capital allocation priorities. Jim is with us today. He'll be with us this time next year, and he'll 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 a deliberate, well-governed succession plan, one we prepared for. It's funny, but I'd 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. So I'm thrilled that we've had this time to work together. Thank you.

Ahead of Jim's retirement, we've initiated a formal search process for his successor. That search will be led by me with our executive team, along with the executive committee of our board of directors, in consultation with a global executive search firm. The search will consider both internal and external candidates, and once a successor is named, Jim is committed to supporting that transition for as long as it takes to get it right, including remaining longer than August 2027, if that's what it takes. We're planning for continuity, not a gap, and I want you to leave this call confident that we've thought this through carefully and thoroughly.

On behalf of our employees, customers, partners, and shareholders, I want to thank Jim. He has led with integrity, strategic insight, and disciplined financial stewardship for ten years, and his commercially-minded approach and partnership has been instrumental in building the company we are today. During fiscal 2026, we built on a strong foundation for profitable growth. We meaningfully expanded our capabilities, increased our share of key verticals, and continue to deliver a value proposition that is unique to our market and one that we believe has redefined the retail branding solutions category.

With the addition of Royston, we are focused on realizing the benefits of scale while applying a proven playbook that prioritizes disciplined, on-time, and on-plan execution. Our longstanding customer relationships and the trust our customers place in our combined LSI and Royston brands allow us to become an even more valuable strategic partner and to capture a greater share of wallet over time. We're confident in the outlook for our business, and we look forward to continuing to create value for our customers, our employees, and our shareholders in the years ahead. With that, I'll turn the call over to Jim Galeese to walk through our financial results in more detail.

Thank you, Jim. I'll start by summarizing our Q4 performance. LSI delivered a solid Q4 with sales growth of 51%, including organic sales growth of 8%, generated adjusted EBITDA of over $25 million, an increase of 50% versus prior year, with an adjusted EBITDA margin of 10.9%, and adjusted EPS increased to $0.38 per diluted share. The business generated Q4 free cash flow of just under $10 million, serving to reduce debt by $9 million in the quarter.

Next, I'll recap the Q4 performance of our two reportable segments. Our overall 8% organic sales growth in Q4 was driven by continued healthy activity in several of our key vertical markets, most notably grocery and refueling C-store. This resulted in a strong organic growth rate of 18% in our Display Solutions segment. This heightened demand challenged our supply chain and manufacturing teams, and they responded and met customer requirements. This demonstrates LSI's proven capability to domestically fulfill projects with diverse levels of customer specifications and customization, a key differentiator for our company.

In total, fourth quarter sales for Display Solutions doubled compared to the prior year to $164 million, representing 70% of LSI sales in a quarter. My following comments on market verticals will reference LSI organic performance, followed by separate comments on Royston. I mentioned activity for Display Solutions in the refueling C-store vertical remains strong, with fourth quarter organic sales increasing 16% in the quarter. It's important to note that double-digit growth was realized in both the exterior of the store as well as the interior of the store. Now, many of the projects and sites remain either exterior only or interior only, but we're beginning to see more opportunities involving both. This is consistent with our solution selling strategy and confirms the significant synergy opportunity to improve customer and per site revenue as we move forward.

The grocery vertical also experienced double-digit organic growth as grocery chains continue to realize the return on investment in the consumer experience. Grocery sales continue to be more balanced across a broader customer base than in previous years, an encouraging sign for both the breadth of market activity and our sales penetration efforts for both national and regional chains. The overall QSR vertical remains soft, as inflation unfavorably impacts consumer sentiment and spending. The QSR is a large vertical, and strategic adjustments by industry participants will result in increased opportunities for LSI. Project inquiry levels are steady and we're beginning to realize improvement in quote activity.

Next, a few comments on Royston. Royston sales on a pro forma basis were down slightly year-over-year, driven by account mix. Royston's largest vertical is refueling C-store. While I mentioned the overall vertical remains strong, the top two chains, which are sizable Royston customers, currently lag the industry in renovation and new store construction. The substantial investment plans for both chains over the next five-plus years are well documented, and we maintain our strong relationship with both, working on concept and pilot projects. Activity in the balance of the customer base remains healthy.

The Display Solutions segment also delivered strong fourth quarter earnings, generating over $20 million of adjusted EBITDA compared to $8.7 million in the prior year quarter. Earnings were particularly favorable in the organic LSI business as we continue to effectively manage project margins. As Jim outlined, Royston pro forma EBITDA margin was down due to lower margin projects in signage. Looking forward for Display Solutions, we expect demand to remain at elevated levels for the refueling C-store and grocery verticals.

Bookings matched billings in Q4 on strong sales, and we enter fiscal '27 with a backlog slightly above prior year. For organic LSI, we expect to sustain solid margin performance. For Royston, we expect demand to increase modestly year-over-year, with the top two accounts projected to realize improved demand levels as the year progresses. First quarter display margins will be impacted somewhat as we flush through lower margin backlog on certain Royston signage projects. We've identified the flaw in their project quotation process and have implemented the disciplined approach other LSI businesses utilize to effectively manage this area. As you know, quality of earnings is a high priority for us.

Shifting to the Lighting segment, fourth quarter sales were down modestly as projected. While the market is active, performance fluctuates considerably by vertical. For example, our larger automotive project activity increased for the fiscal year but was down for the quarter, while sports applications were down by a quarter. Application projects increased substantially. We continue our emphasis on national account growth with Q4 again generating year-over-year sales growth. Despite the year, Lighting generated sales growth of 7% in fiscal '26, outperforming the market. Lighting Q4 gross margin rate increased in the quarter and for the full year, driven by project pricing and product. Lighting book-to-bill was moderately above 1x for the quarter.

In assessing scheduling of our project backlog, we expect first quarter sales to be several points below a strong prior year comp while maintaining gross margin performance. In summary, Q4 and fiscal '26 were a solid quarter and year for LSI. Our top markets remain active, and we're well positioned to capitalize on market opportunities. Lastly, Jim, thank you for the kind words. I highly value your leadership and the productive partnership we have. LSI has built a very accomplished leadership team and have talented employees throughout the organization, people who are passionate about what they do, all contributing to the value of LSI. I look forward to a successful fiscal 2027. I will now turn the call back to the moderator for the question and answer session.

At this time we'll be conducting a question and answer session. [Operator Instructions] Our first question comes from Aaron Spychalla with Craig-Hallum. Your line is now live.

Yes, good morning, Jim and Jim. Congrats, Jim, on the retirement, but good to hear you'll be around for a little bit longer.

Well, appreciate that, Aaron. Thank you.

You bet. First question for us, just thinking about EBITDA margins and operational initiatives, can you just talk about some of the goals operationally and integration of M&A? And then it just sounds like these lower margin projects at Sign Resources, you feel like you have a good handle on those, a couple more quarters to kind of work through some of the issues there.

Jim Clark, and thanks for the question. Yes, just going backwards, yes, we do think we have a good handle on it. I mean, as I look at it, I think that, you know, Royston was making sure, working to make sure that their pipeline and their forecast was full and, you know, and maybe a little of the discipline around margin slipped a little bit. You know, that's what we execute, do a very good job on is, you know, managing that pricing. We're price zealots. We look for that margin. We make sure that it's equitable for us and for the customer. And so we'll bring that culture and that discipline in.

But, you know, with the backlog we have right now and the commitments we have to the projects, it's just going to be a lot of work. It's going to take us a quarter or so, a quarter maybe two to work through that backlog we have there at a little bit lower margin than we want. In terms of overall EBITDA margin, our goals remain the same, 12.5%. I think that it's clear we can get there. We've demonstrated in the past that we can get up north of 11.5, and with the accretive nature of Royston, it certainly makes it even easier for us to get there. I say easy as a qualified word because we have work to do. We just acquired a $300-something million company.

We're working through the integration, the cross-selling, all of that type of thing. We're rationalizing the footprints we have, the resources we have, the people we have, and we're working to optimize that. But that process takes time and it takes effort. And you see a little disruption during those times, but we know what the outcome is going to look like and we're excited about it.

All right, thanks for the color there. And then second on QSR, sounds like some indications of, you know, green shoots of a recovery there. Can you just give a little bit more detail and is it similar to some of your other markets where there's good cross-selling potential with that with Royston and the rest of your business?

Yes, I mean, we, listen, just because QSR is facing a little bit of headwinds right now, we still love the market. We love the investment that customer base is making. You know, if you look at some of the projects we've had over the last few years and the results of those investments by those companies, you know, they're doing well. And it goes to show that that investment in the store interior, you know, the location interior, the drive-through menu boards, the, you know, the parking lot refreshing, all the things that LSI does has paid off for them. And I'm specifically talking about one of our customers that's in the lead position right now after struggling for a few years. So I think that's a good thing. I think it's a good indicator to the market overall and anybody that's sitting on the sidelines in that sector that those investments have direct ROI and it's, you know, customer flow and profitability.

So we, you know, we still remain very excited about that, you know, primarily because of our offering. You know, it's so well organized for that market as it is for grocery, as it is for, you know, petroleum, C-store, you know, automotive, so many other of these vertical markets that we're in. I just think it's a reflection of some of their decisions to invest and the project timing. But I don't think it's a statement about the future potential or the momentum that we're going to continue to get off of that.

Understood. I'll turn it over.

Yes, and please, by the way, the operator said, limited to one question, you know, please, you know, ask the questions everybody has on their minds and, you know, we'll jump in if it gets to be too many.

Our next question comes from Brent Thielman with Oppenheimer. Your line is now live.

Good morning. Congrats as well, Jim, on the retirement. I guess just first question in and around Royston and the lower margin Sign Resources projects you're working through. Is it possible to size that backlog and kind of the margin headwind that caused you or is causing you as you wind those down? And Jim, I think you mentioned you've taken some actions to protect the margins going forward, kind of walking through what you're doing differently there.

Yes, Brent, thanks for the questions. I mean, we don't usually dive too deep into, you know, project activity because it's mixed, right? It's never just one customer or anything like that. And I think it's easy to understand, you know, maybe some of the decisions that were made as we're coming to a close and things like that. You know, I think the most important thing I said it in my comments there is we identify it. We know where it is. They've certainly performed at a higher level before, and so we don't see a lot of headwind getting back to the discipline that they've demonstrated in the past, nor the discipline that LSI has as a bigger company. But, you know, I mean, I think the impact is between 50 and 100 basis points over the next quarter or two, and I think it diminishes as time goes by.

Got it. Maybe just on the other side of that. any margin tailwinds under the hood that you could speak through. I know there's been a lot of focus on procurement execution. I don't know if mixed event markets could make a difference here in the near term. Just be curious what you see kind of behind this headwind that is an underlying tailwind to the business for margins.

Yes, I mean, I think that's a great question and one that we're, you know, deeply focused on. And it's part of our overall thesis here, you know, and there's a number of levers. But, you know, it starts with just our cost of sales, right? I mean, when we look at, you know, coming in as a sign company, a lighting company, or refrigeration company, whatever it is, that's one arrow, one shot. When we walk in as LSI, we have 10 arrows, 10 shots, and we don't necessarily have to go through every arrow to get a win. So the whole idea of making it easy for our customers and being able to service them, multiple levers of their requests and their needs, that's probably the biggest tailwind we have and we see that continuing to build momentum.

But we also have the opportunity, in the background of all the things we've done in the past, LSI executes very well, procurement, manufacturing efficiencies, you know, all of those things are levers we're working on right now. You know, they don't happen overnight and they're not linear, but what we have is a very receptive team in the Royston group. You know, the engagement level by the team over at Royston and by the team at LSI has been outstanding. I think it says a lot of the professionalism of Royston. It's a well-run company. And LSI is a well-run company. And I think we raise each other, by the way. Our investments, our meetings with them, and I talked about our tactical focus, I think are all tailwinds we're creating, and I hope to benefit from them sooner rather than later.

Yes, Brent, Jim Galeese here, just to support what Jim's saying. We commented that the organic LSI margins were pretty solid, and that's a result of a very disciplined process to align this rather volatile environment of material input costs with our project pricing. We are a project-based business, right? And what we saw in signage there was they had a gap in referring to current material input costs, so there was some misalignment there. We're fixing that, we know how to do that, so we're very bold and upbeat about our margin improvement process and capabilities as we move forward. And again, being a project-based business, every day we're quoting projects. So every day we can be alert and respond to changes going on in the marketplace. I was very encouraged, though, with the demand levels in our key verticals remain very strong, very high.

Very healthy. So true in the excitement level. I talked about it a little bit. I wish there was a way I could visualize it, but we've had the opportunity to meet with customers of Royston and customers of LSI about what this new company looks like. And it's genuine excitement. It's there. And by the way, if there was any subtlety in my message, particularly around some of the pricing margin issues. Look at the signs are primarily plastics and polymers and you know they're directly impacted by crude oil pricing and controlling yes and the swing on that was faster than any you know than I think that anybody could react to. And so I'm proud of the work that the team did, even without LSI's involvement, and I think that it will get even better as a collaborative team.

Appreciate all that. I'll take you up on the one extra one, which is on, again, on Display Solutions. I think you were assuming something around mid-single digits to high single digits organic. You came out in the high teens. I guess two-part would be is there any reason to think there's a pull forward in this quarter and I guess if not, what verticals or areas would you call out for kind of outperformance relative to expectations this quarter?

Yes, there's no pull forward of anything. You know, we keep a steady state, you know, all the time, and that's part of our agreement with our customers, our relationship. We want to be very predictable. We want a high say-do ratio. Well, even if we wanted to, we can't. It's project-based. It's going to a site and being installed to a date they specify. So we really don't have a lot of latitude.

Our problems are usually the other way. The concrete truck didn't show up. So, no, there's no pull forward. You know, I mean, I'm pretty excited about -- really excited about the reception in the petroleum C-store space. I mean, these guys see it right away. They're getting it right away. They're like, oh, this is a great combination. I'm also very excited about grocery.

I mean, you know, we said it. We said that, you know, there was a little distraction, a little industry-wide pause back in 2024. And we said that we expect to continue to see that investment and it's been maybe one of the closest linear activities we've had and you know we don't have very many of them so the grocery market has been on a good, nice, steady trajectory. We like the angle it's on. And we listen just like a lot of other investors do to what the CEOs of those companies are saying. And we've seen consistent reference to in-store investments, environment, investment, and the payback. And that's what we provide. And so we're pretty excited about that.

And I'd also say that automotive underperformed where we wanted this quarter, but we like automotive. If you go back and listen to any of my prior calls, I remember coming out of COVID, somebody was calling the death of the showroom and the, you know, traditional auto dealer and we've never seen that and we continue to really enjoy the momentum that that market has in the investments that they make. So, and I'm not leaving anybody out here, there's still a lot of positives in the number of the other vertical markets we have, but those would be three that I would definitely highlight.

You know, just to, you know, add to Jim's comment, specifically, you know, in refueling, you know, C-store, Jim referenced in his comments the award received on the, you know, the 2,500 site program, you know, for large oil retailer, you know, and that retailer recognized, you know, the solution sell capabilities and allowed us then to, you know, win that not on price, but on, you know, our breadth of what we can do to make, you know, their life, you know, easier and allowed us to displace the multiple suppliers it took for them to do the same thing for them, you know, historically. So as Jim said, that's a new customer, and I think that's a really solid proof point, you know, relative to our strategy.

Okay, thank you. I'll pass it on. And by the way, as we're waiting for the next question, I did mention it in my comments in the press release. That award is not really factored into some of the numbers that we were presenting. You know, we'll get more on project timing and that type of thing as it moves forward. You can imagine it's complex. It's got a lot of elements to it. So, you know, we're excited about it.

Our next question comes from Alex Rygiel with Texas Capital Securities. Your line is now live.

You kind of just maybe answered this question, but I want to kind of ask it regarding the 2,500 sites for the large oil retailer. What does that timeline look like? It sounds like you haven't really included the guidance yet, but what does that timeline look like? And it sounds like there's some upside possibly from some interior work. When might that be awarded and how should we think about quantifying that upside?

Yes, Alex, thanks for the question. Good to hear you on the line. Remember, we've talked about this before. There's award and then there's project release, right? So awarding the project is, hey, we're going forward. This is the site scope. This is everything we're doing. Project release is what we and the customer learn through the process. Wow, we bid off, we were going to do 150 stores in you know 180 stores a month that's too much you know we're you know we're not able to process all of that or hey we're going to do 180 stores I think we can step it up to 250. Right now, our initial look, looking around 18 months for that project, the scope of that project.

Some of it will be, we'll learn as we go through here over the next, I think, couple weeks, we'll get more clarity on that. But I think the number one person that comments on this is Jim Galeese on these calls all the time. There's a difference between award and project release, and that is always the thing that we learn together. So where we are right now is the project award phase. The pick-and-shuffle work that we'll do right now is what's that release schedule look like. But right now we're anticipating it over about an 18-month time period.

And Alex, that award, that 18 months, from a historical perspective, the customer's being pretty aggressive there. But what that means is, and we spoke to this too, is our capabilities to be able to fulfill that. All right? This is a specific customer, specific customer specifications, certifications, certain level of complexity associated with that. But our competencies and capabilities to do that is what the customer recognizes as well and allows them to think about this 2,500 site renovation being done in this condensed period of time. We support it. Now, whether they can keep up with it.

Right, yes, I was going to say that we're confident we have the capacity to do it without disrupting our normal course of business. This is that, to the efficiencies, this is what, you know, better utilization, second shifts, all of this flex that we've built into our system to allow us to respond to this. And we learn, along with the customer, I mentioned in the beginning of the comments, we learn as we go through these. Sometimes we press the gas, you know, the pedal a little harder. Sometimes we say, well, you know, let's step it back to 150 or let's step it back to 125. And that's done in collaboration with the customer, and it's almost wholly driven by the customer. We need them to feel comfortable. But we're excited about the project.

And then as it relates to the opportunities interior.

Well, you know, that's something we're working on right now, you know, and I think that where we get our greatest strength is, you know, and this is just like every consumer of every project, of every product, you know, people are going to want to be able to do this. I fundamentally believe people buy from people. We look at specifications, we look at performance criteria, materials, we look at overall, we look at acquisition cost versus total cost, but people end up buying from people based on their say-do ratio, how they do, how they deliver on their commitments, and I think that as we continue to deliver with a new customer on a great project, we'll earn more of their business.

You know, Alex, I think you heard in my comments that, you know, one of the, you know, real positive highlights about the petroleum C-store Q4 was both the outdoor, you know, applications work as well as the indoor work. Our sales were up double digits in both. Now, you know, a good majority of the time, we're not going to be able to do those for still outdoor only projects or indoor, but we are beginning to see more where we're going in with both. That is the big opportunity, and this project is certainly one of those where we have the opportunity now to expand into the indoor solution set as well.

I want to say one other thing because I think you opened up a window for me to make comment on it is that I'm not sure a lot of our people know it. I think that the coverage people that have come to our factories have walked through have noted it. I think that investors that have come and visited us have noted it. I wanted to talk about accessibility and communication and where a customer can reach in the organization and where an employee can reach. In every one of our factories, in every one of our locations, my cell phone number is posted in the factory, in the cafeterias, by the time clocks, available in HR. It's right there. It says you have a question, you have a suggestion, you see something, say something. And it just goes through kind of six steps, you know, like, hey, talk to your manager if you're not getting satisfaction.

Talk to HR if you're still not getting satisfaction. Talk to our head of operations, Don Kern, if you're still not getting satisfaction, call Jim Clark. Here's his cell phone number. And that is equal to our customer base. And when I was going through the phone calls with Royston, and this is going back, you know, five months now, you know, there were a number of comments from the customers about, you know, wow, I'm surprised the CEO of the company is on the line, you know, nice to meet you, all that type of stuff. And that cell phone number was made available to every one of those customers, too. And I think it says a lot about the culture in our company. I'm one person, it's one cell phone number, but it's that understanding, whether you're a customer or whether you're an employee, that there are no walls in communication there, you can get ahold of people pretty quick.

And I think that gives a great deal of comfort. And I think it says a lot about our organization, anywhere between me and our manufacturing operation, that people are available, accessible, and it's better to act fast than to live with something and have it get caught up in some type of procedural process. And I think we get a lot of equity from that, from our customers. We get a lot of acknowledgement and we're proud of that.

And one last question, your first quarter display margin directional guidance obviously suggests a headwind. Is that headwind incremental to the fiscal fourth quarter? So that margin sequentially could be down or is that more of a kind of a year-over-year kind of broader comment?

Jim Galeese here. Alex, it's a combination of both. We did see some of that headwind in Q4. We will see a bit of an incremental piece of that in Q1 as well, but I don't know in the 30 basis points or something like that incremental. All right. So we did see it in Q4. We'll see it a little larger in Q1. And then, as Jim mentioned, you know, it will start, you know, dropping. It gets better with time. And then, you know, it looks like we're going to flush out of it by the end of Q2.

And I would, I'd like to mention one other thing, just in case. It's not apparent. This is about the anticipated, the targeted margin, that increase, that benefit that we were getting from Royston, that accretive effect combined with our discipline and our current margins. We're just not going to, you know, this headwind is going to hold us back a little from hitting that top, that upper end goal. But the bottom is not dropping out of anything. You know, I mean, it's not like if this was LSI on a standalone basis, it would be, you know, it'd be pretty strong. And like I said, I mean, the most important thing is, is that this is identified, fixable and it will be digested and worked through.

Very helpful. Thank you.

Our next question comes from Amit Dayal with H.C. Wainwright. Your line is now live.

Hey, good morning, guys. With respect to the Royston, you know, sorry to, you know, beat the horse on this one. Are the margin improvements just as simple as repricing the portfolio to adjust for higher costs? Or does the portfolio require any tweaking? Maybe in other words, will Royston margins come at the expense of lower revenue growth?

First of all, good to hear your voice. No, I mean, listen, this, going back to our original thesis and our, you know, in our presentations, Royston as a group is accretive to our margins and it will remain accretive and it will get there. I think that we have two factors that were going on here and it's not hard to understand. One was Royston had the accelerator to the floor through this sales process, right? They're handling the sales process and the due diligence and they're keeping the business going and they took their eye off the ball a little bit. That's number one. Number two was there's a huge input cost that swung very quickly. It's petroleum. It doesn't take much to understand that petroleum prices have been significantly impacted over the last six months, and that's exactly the time period that these projects were exposed to. So the combination of those two make up the overwhelming majority of any headwind that we're facing.

The other thing that I've talked about, I think a lot of times in acquisitions from the outside, everybody looks at it as one plus one equals two. And I've worked really hard through our prior calls to say, there's a couple things to consider about that. One is we don't like all the business that might be in the portfolio right now, so we'll look at that business and say, can we fix this? Can it perform to the level that we want it to perform to? Is it a distraction to our core vertical market thesis, which was work in the sectors that we know well and that respect us? And can we add to this? Is it something we can build on? So some of that's going on. That's number one.

Number two, you know, when you go through an acquisition process like this, the company, you know, the acquired company, let alone the acquiring company, are running full speed. A little bit of an exhale that happens when the deal gets signed, right? And, you know, I think that exhale has happened. Everybody's focused. Everybody's going, you know, about their business, and I think there's huge potential, but that exhale happens. So, you know, everybody takes a, comes off their pace a little bit, relaxes a little bit, so we're paying a little bit of that impact.

And then the last thing, and this is the most important thing as an investor, as an employee, or as a customer, we've got purposeful programs in play right now. We've got the meetings going on. We've got tactical plans to execute against. And those things will get done and the return will be there. So, you know, we're very excited about this. I think it just, the size and scale of it makes it a little bit more visible. And, you know, as we have always in the past, we want to have a very high say-do ratio. We want to be very transparent. And so, you know, this is just us being us.

Amit, Jim Galeese here. I would just add to Jim's comments. I talked yesterday with the LSI leader of our print graphics and signage business combination now, and we talked about that very topic. And he says, you know, no, Jim, we are very busy on the quotes day, very busy on the order entry stage, and this new pricing, we do not expect any type of business volume interruption associated with us making the appropriate price movements and price changes. So as we talked before, you know, the market outlook for refueling C-store continues to be very, very positive.

Appreciate that color, guys. That's helpful, I think, for everyone. With respect to, I was at your facilities, Jim, not too long ago, and really got to appreciate the scale and depth at which you deliver your services. Because of the broader portfolio now that you have, you know, after these acquisitions over the last few years, are you able to pitch bigger deals to customers, and is that a trend we should potentially sort of, you know, keep in mind as we think about growth for you in the future?

Yes. I mean, I think this is more of a customer behavioral change than a capabilities change for LSI. Remember, we're creating what is effectively a new category that's serving this market. And, you know, we go through the awareness process to the customer, hey, did you know we can do all of this? Some of our customer base is just not fully aware that we can do X, Y, and Z. Sometimes their own structure splits those roles and the people that are involved in those meetings. So I think our customer base, as well as our company, are going through an evolutionary development process together. And as we were just talking about, you know, our capacity and everything, we have the capacity to absorb. We can grow within our footprint, you know, 2x.

And so now the decisions come, what do you do to optimize that capacity? Because unutilized capacity is, you know, it can potentially be, you know, a paper cut or drain on our margins. But, you know, taking that capacity out too soon or making adjustments that don't account for that could be a shortcoming for us in the future where we get these projects that are larger in scope and you know, have more elements. I can't speak for the whole industry, but I would say these two things. Remember, number one, we're creating a new category of supplier. It didn't exist before. The breadth of what we can bring was not available before, you know, before LSI started on this path. Number two is that I believe we're already getting some of the largest project awards there are. I mean, we get in some cases, I can think of one right now where a customer gave us a third of the project and within two months came back and said, we're giving you the whole project.

They literally pulled the other two awards and gave it to us. We want more of that to happen. But I think there's just a natural awareness curve and demonstration curve that's going to go on.

Understood. That's all I have, guys. Thank you so much.

We have reached the end of the question and answer session. I'd now like to turn the call back over to Jim Clark, President and Chief Executive Officer, for closing comments.

You know, we were looking at the comments that we made in the opening of this conversation, and we had rehearsed it, and Jim and I, Jim Galeese and myself both thought this is the longest intro, the longest call intro, prepared comments we've ever had. And I think it speaks to the growth of the business, the size of the business, and the opportunity that's in it. I think we had a great quarter. We're very excited about what's in the future. I wish that our growth was linear and it just was, you know, it was just from point A to point B to point C to point D. I don't expect it to look like an EKG, but I do expect, you know, nice growth in front of us. I think we have a lot of potential and a lot of runway.

I can speak for myself and I can speak for a number of our senior leadership team. We're very excited about what's in front of us. We're very excited about the reception the market's given us and our customers are giving us the opportunities. And I think there's just a lot of opportunity in front of us. And now it's our job to just continue to maintain that high say-do ratio, demonstrate it, show it, and continue on the path we've been on. With that, I'll say thank you very much for taking the time, and I'll look forward to hearing from each of you or some of you here in the future. Take care.

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

Greetings. Welcome to LSI Industries Fiscal 2026 Third Quarter Results Conference Call. [Operator Instructions] 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 $2.5. 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 2 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, mill works, 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 5 years, we've deployed more than $500 million across 4 acquisitions, including Royston. Each one has added the 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 CD ratio this team has built over time. We set our expectation carefully, we deliver against them, and that consistency has been a key part of building credibility with our customer 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 9-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 6-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 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 TTM net debt-to-EBITDA is 2.7x. Now a few comments on the performance of our 2 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 change 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 nonrefrigerated 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 market environment. While code activity remains active, the quote-to-order conversion period lengthened in the quarter. after several quarters of improving time lines. 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 to 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.

[Operator Instructions] Our first question comes from Aaron Spychalla with Craig-Hallum Capital Group.

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 2 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 Simon 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 6 days here in but the graph that Jim put in the release and everything shows the difference between Royston and with and without Royston. But I know your questions were more about forecast forward. So I'll let Jim kind of comment on what he had to say.

Yes, with regards to the -- as you know, the Royston Group will from a reporting perspective to go into our Display Solutions segment. And so when I comment the Display Solutions segment will be up high single -- mid- to high single digits. That is on a comparable basis. So that's pro forma comparing Royston their expectations for Q4 to last year. and LSI 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. So yes, 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 mean I think it's just a normal part of our business. I mean I think we're calling it out because it -- as a customer we've been pursuing to get some recarby here for quite a few years. I don't want to go into who the customer is, but we're encouraged by it. And that's why we called it out. But it's a nice program, and it's the first of customer that's been absent for a few years. So we're excited about it.

And Aaron, I take 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 [indiscernible], contributing to our growth and undergoing change, the sheets, the wall loss, quick trips with a [indiscernible], et cetera. The whole vertical, the 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 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. I mean, first of all, this is normal course of business, right? We've talked about this for years. The more -- the greater share of wallet we get, the more customers we get engaged, 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 that are going on. I think I mentioned about 15 years ago, we hired a procurement lead that has been phenomenal. He's been a phenomenal asset for us. He's doing a great job with the whole team, really energize that, really 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, all the investments, although they are small, they're 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 Royston is unlike EMI who was dilutive from a rate standpoint, Royston is accretive. So we get the benefit of Royston coming on board. We get a pretty significant number from Royston and we get an accretive rate in dollars, those combinations help there. But I want to make sure I'm underlining the fact that we've been doing our own work and we'll continue to do our own work in improving the core LSI margins prior to Royston. And it's a combination of both of those that is kind of responsible for that number.

To recognize what Jim said, our operations team just did a terrific job this quarter. You may recall this quarter a year ago, we were dealing with the surgeon business on the post Kroger Albertsons scenario. So we are taking that business to meet customer demand, but we are fulfilling it on a very inefficient basis. given we were bringing people back that we had to shed resources that we had to shed so building our capabilities back. So the demand patterns have become much more predictable, if you will, allowing our factories now to really get into a very solid rhythm. And I think that was quite 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 the that you have pretty good visibility into the timing of your current rollout. So you do 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. Thanks for the question. Yes, I mean we -- these are -- we generally look at these as kind of permanent improvements, right? We look at it as a ratchet that goes up, but it doesn't come down. Now obviously, there's things that affect that. But these type of improvements we do operationally tend to be long lasting and sustainable and the answer is yes, we expect them to continue to provide benefits into Q4 and into Q1, and we are focused on continuing to improve those even further. Now with all of that said, though, I do want to mention, 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. So I'm not worried or concerned about anybody's efforts being diluted or moving backwards but we will maybe perhaps shift priorities to help bring Royston on a little bit faster than maybe we would have and that maybe slows down some of our future activities on improvements in operations. But I think the takeaway message would be that we still see a lot of opportunities, areas 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 that are there. We like the culture that's there. We're going to learn from them as much as they learn from us. So we'll be working that together and those combinations -- that combination will continue to persist in terms of 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 because your commentary almost sounds like it's suggesting that it's mostly that the softness is really in your nonnational accounts.

Yes. I mean, we don't break it out and probably it's more for convenience than anything else. I mean we track these numbers, obviously, we track how they perform independently. But to start breaking them out, I mean, we could get into the weeds really fast. But I think your comment is spot on. We do expect to continue to grow in the areas we're investing in. And some of the larger -- we're back to this larger project activity, which is we don't feel as though any of it's in jeopardy. We don't feel as though any of it will go away. We do see a disruption in timing right now with some of the larger project activity just kind of slowing down to make sure that all the other elements are catching up and they're not paying a premium to rush something while another element is delayed or something like that.

So I don't -- I'm happy with the progress we've made in Lighting. As Jim mentioned, it was 12% growth last year in this quarter. we've maintained growth in pretty much every quarter over the last year or more. I think this is just a reflection in some slowdown in the 90-day window of the Q4 period right now. I don't look at it as something systemic or something to worry about long term.

Yes. As best we can tell, our Q3 performance, 2% growth was clearly a market outperformed as compared to the competitive environment and the competitive environment is seeing the same things. We are and we will continue to generate market performance, driven in some context because of our increased penetration in national accounts activity, which we identified about a year ago is a real opportunity for our business. and our sales leadership is doing an excellent job in pursuing that. And it is, as Jim just mentioned, some of these more sizable projects in the general C&I side of the equation that is 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 closing opportunities -- cross-selling opportunities. Is there a difference in how you expect to bid for projects going forward?

Yes. So I think I did mention in the call that we were actively reaching out to Royston as top customers. And thanks to Royston on that and our own team, they work together extremely well and the customers on Royston side were more than generous with their time and taking the time to talk with us. And our biggest thing is we were working to make sure there wasn't a misinformation out there. what kind of changes, how do we normally operate. And some of these customers, as we talked about before, they're completely new or distant from LSI. We also called some of our own customers. It was a great exercise and one that was met with a great deal of interest and a great deal of opportunity, I think, going in front of us.

So I think that there was a number of questions, but probably the #1 question was, what can we expect for change. And our answer was, listen, whatever -- however you have been doing business with Royston in the past, you can continue and we'll be able to continue to do it like that in the future. The second question tended to be around -- we had some customers ask if there were going to be changes to billing and invoicing and things like that. And no, there will not be. We'll force any customer to do anything in the short term, but we will look for opportunities to be more efficient and to serve the customers in a way that they want to be served. And if that is separate billing, we'll continue to do that. And if that's a combined billing opportunity, we will do that.

And then probably the third question was, what about how will the company run differently? And the answer was much like the first question. We don't anticipate the company running any differently. We take a very deliberate approach to our integration. We want to preserve the culture that is at Royston, we want to learn from each other. We want to respect the work that they've done and we don't want to destroy any of the value that they bring to their customers or we bring as a bigger entity. So those were the big questions kind of summarized and I will say it's not the first time we've done this, but it was probably the best coordinated, and I think that speaks volumes to the experiences that LSI is gained. And I think it speaks volumes to the professionalism that offered the team was fantastic to work with.

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, but it was a very different business when you came in as CEO, and today, it's a very different business. So in that context, like what are the macro drivers we should sort of keep in mind while it's sort of thinking about the future of the company?

Yes. I mean, 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, 2020, '23, where we perfected our Fast Forward plan, it is a new category as far as we're concerned. And it does make it difficult from a public market standpoint, I think we're always caught in that mix. Are we construction materials? Are we building materials? Are we clean tech with LED lighting? Or are we -- what are we exactly? And I'm always concerned that we get penalized or that we could get penalized for a lack of understanding. But I think as you look at the evolution of what we've done, it's becoming more and more clear that we're a cuter experienced company, right?

We are -- there's a creative element, there's a manufacturing element. There's an operations element, there's a service element and it's how we're executing across all of that whole band, if you will, that's really 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 come in there and be more efficient and be more integrated and provide a more uniform package, look and feel, and that could go all the way down to the type of wood species we use across multiple this level, and it's us being on site delivering multiple solutions and being visible that I think is the most rewarding aspect 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. So it's really a unique proposition. And I do feel like we're creating a category of one. And the definition will continue to become clearer and clearer as we move forward.

Understood. And then just on the cadence of revenues with this acquisition now under your belt. How should we think about quarterly revenue flows that may change from sort of the historical way the company has performed?

I mean, I think Jim had brought it up briefly. I think it's going to -- with the activity we did with the acquisition, having a few more shares out there looking at all the assumptions we had 3 months ago where it's going to be kind of a refreshed look. But in terms of revenue, I think it stays completely on point to the way we've been operating the LSI business continually. We want to have a high safety ratio. We want to continue to execute and perform to the numbers that we project and that we think we're going to reach. They are growth oriented. The company is still very much growth-oriented, so you can continue to look for us to focus on growth, both top line and bottom line. I think with any acquisition and certainly with the acquisitions we've done and as I commented a few minutes ago in my opening comments, we'll look very closely at the business that Royston brings to us and look for very effective ways to serve those customers and look for ways that we can continue to work on this concept of greater share of wallet instead of providing 1 or 2 items, how do we provide 4 or 6 or 8 items.

So I think we have a really good opportunity to make this -- to create revenue growth in front of us. With that said, I also feel like we're in the third inning of a 9-inning game. It takes time to get engaged in projects and do go through the customer education process anybody that's expecting that we pick up a new customer or a great new revenue stream in 30 days, that's not the timing, right? I mean it typically takes us 12 to 18 months to get engaged with the project to make sure that we've provided the design...

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 greater 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. Like I said, we like the people that are there. We like the culture. We like to hustle that we feel like it's very similar to ours. And 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 mean I think there's lots of things that can be done specifically with new technology tools that are available. There are things that are kind of mechanical things that can be done much faster. There's another resource there to model things. But at the end of the day, it comes down to people. And I will tell you that in every acquisition we've done, the greatest asset we have acquired is the people of the businesses that we've acquired. I mean, I have to be honest, there isn't any business that we've acquired there aren't competitors to and there aren't other companies that can provide it.

The real value in the acquisitions we've done has been the people that we've acquired and had become part of the LSI team. And I don't know if that can be rushed without exposing too much room for breakage. And we don't want to do that. We want to learn collaboratively. We want everybody to have a voice. We want to have a greater level of understanding why are they doing it this way? This is the way we do it. They do it different, which is best should both processes exist? Is there a way to trim one or the other? Should we melt these 2 processes. And that comes through thoughtful conversations and that comes through giving everybody an opportunity to have a voice and I think that certainly, Amit, you've been covering us long enough.

You know speed is something that I wanted to -- I always want it to happen faster. I always want it to happen faster. But we'll do it in a way that's responsible and we'll do it in a way that it creates an opportunity for everybody to contribute. So I think that we're going to have some -- we have a great compelling story. We're going to continue to have growth and I don't know if the risk to accelerate something for short-term gains is worth the long-term opportunity here. But believe me, we'll be looking for every opportunity to make it go faster than we can.

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 for everyone that dialed in. I will say we ran into a little technical issue here today where the population of our call actually exceeded the line limits we had. So 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 do adjust. I appreciate the questions that everybody answered.

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 really continued momentum in our key vertical markets. I can guarantee we're going to stay disciplined, particularly as we integrate Royston and we 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 on our ability to continue to deliver focused execution. And so 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.

Good morning, ladies and gentlemen, and welcome to the LSI Industries acquisition of the Royston Group Conference Call. [Operator Instructions] Please note that this event is being recorded.

I will now hand you over to the Chief Financial Officer, Jim Galeese. Please go ahead.

Good morning, and thank you for joining today's call. After the market closed yesterday, we issued a press release announcing that LSI has entered into a definitive agreement to acquire privately held Royston Group. In addition to this release, a conference call presentation is currently available 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 with regards to our operating results.

Please note that our commentary and responses to questions on today's call may include forward-looking statements regarding our business outlook. Such statements involve risks and opportunities, and actual results could differ materially. Please refer to our safe harbor statement, which appears in the transaction press release issued yesterday for more details.

With that, I'll turn the call over to LSI's President and Chief Executive Officer, Jim Clark.

Thank you, Jim, and welcome all. After the market closed yesterday, we issued a press release announcing that LSI has entered into a definitive agreement to acquire privately held Royston Group, a leader in identity and equipment solutions for retail environments from industrial opportunity partners.

Atlanta-based Royston is a vertically integrated provider of custom store fixtures, internal and external signage and refrigerated and heated case displays. Through 5 facilities in 4 U.S. states, they offer a build-to-order solution that integrates design, engineering, fabrication, assembly, distribution and turnkey installation capabilities that span the full project life cycle.

Royston provides retail branded solutions across an array of growing high-value vertical markets, including refueling, C-stores, grocery, quick-serve restaurants, among others, where LSI has an established market presence. Royston is an established partner of the choice of 3 of the top 5 C-store and grocery store chains in 4 of the top 5 U.S. refueling station chains by location count.

The acquisition of Royston will be transformational for our business, customers and shareholders alike, and we believe it may position LSI as a significant scaled platform in branded retail solutions. With the addition of Royston, LSI meaningfully expands its integrated unique-to-market offering that provides a one-stop solution-based approach to support the new build and remodel programs of leading global retail companies across North America.

Over the last 5 years, with the acquisition of JSI, EMI, Canada's Best and now Royston, we've demonstrated a focused approach towards value creation through accretive complementary acquisitions while delivering consistent organic growth, margin discipline and profitability within our base business. As previously outlined within our Fast Forward value creation plan, LSI established 5-year financial targets extending through fiscal 2028. We have also communicated that this projected 5-year revenue growth would be driven by a balanced combination of organic initiatives and targeted inorganic expansion. The acquisition of Royston positions LSI to potentially deliver on these targets 2 years ahead of plan with pro forma TTM September 2025 combined revenue for LSI Royston of approximately $864 million and adjusted EBITDA of approximately $95 million.

Allow me to provide a bit more detail on our investment case and why we're excited about the value creation potential of these combined businesses. First, the combination of LSI and Royston will create a leading solutions-based platform that integrates custom design, engineering, manufacturing, installation and maintenance capabilities across lighting, fixtures, branded signage and display cases, establishing a one-stop partner for leading retail brands. Vertical integration is a critical piece of the value proposition here as it allows us to control customer requirements and product specifications all under one roof. It's a major competitive advantage for us and for Royston as it will position the combined businesses to maintain a high say-do ratio that our customers and partners have come to expect from us.

Second, this transaction meaningfully strengthens our leadership across our core vertical markets. On a pro forma basis, approximately 60% of the combined LSI Royston sales will be from the refueling, grocery and C-store markets, positioning the go-forward platform as a leading partner of scale to both regional and national retail chains. The key takeaway here is that these verticals not only represent a large market for us, but they also represent some of our fastest-growing markets as customer adoption of our solutions continues to grow over time. And because our combined businesses serve largely distinct customer bases despite a shared vertical market focus, we anticipate significant cross-selling synergies from the transaction, which I'll discuss more shortly.

Third, Royston brings another 5 domestic manufacturing facilities to LSI. Increasing our total facility count to 23 locations, resulting in nearly a 40% increase in manufacturing square footage capacity to support our organic growth. Here, we're not only adding facilities, we're increasing our skilled workforce by nearly 900 employees, which will support us as we continue to scale.

Fourth, similar to LSI, Royston has a recurring revenue model supported by long-term customer relationships. Royston serves many of the leading retail brands in North America, including customers operating thousands of serviceable locations. In fiscal 2025, approximately 70% of Royston's revenue was generated from remodel projects with the remaining 30% from new store construction, creating a durable revenue base tied to recurring store refresh cycles. Similar to LSI, where the average tenure of our top customers span decades, the average tenure of Royston's top 10 customers exceeds 20 years.

Fifth, we anticipate meaningful cross-selling synergy potential across the combined businesses. Approximately 47% of Royston's customers currently purchase a single product from them, creating an opportunity for us to expand share of wallet across the combined offerings while including LSI's branded lighting solutions.

Next, we like the accretive margin profile of this transaction. In calendar year 2025, Royston generated adjusted EBITDA margin of 14%. On a pro forma basis, for fiscal year '25, the combined businesses generated adjusted EBITDA margin of 11%, approaching the 12.5% fiscal year 2028 adjusted EBITDA margin target outlined in our Fast Forward plan. Importantly, on a pre-synergy basis, the acquisition is expected to create 130 basis points of EBITDA margin expansion.

Finally, similar to our approach with previous acquisitions, we see a clear pathway to reducing pro forma net leverage resulting from this transaction over the medium term. At transaction closing, we anticipate a pro forma net debt to adjusted EBITDA ratio of the combined entities of at or below 3x and expect to reduce our net leverage to at or below 2x by the end of fiscal '28, consistent with our track record of pragmatic deleveraging following the completion of prior acquisitions.

With those comments, I'll turn the call back over to Jim Galeese for additional details around the transaction.

Thank you, Jim. On February 20, 2026, LSI entered into a definitive agreement to acquire privately held Royston Group Industrial Opportunity Partners for an aggregate purchase price of $325 million, subject to final working capital adjustment. $320 million of the purchase price will be payable in cash at closing and the remaining $5 million payable in the issuance of shares of the company's common stock valued as of the closing price of the company's common stock on February 19, 2026. The transaction is expected to close during LSI's third quarter of fiscal '26, subject to customary closing conditions, including regulatory review. Upon closing of the transaction, Royston will become part of LSI's Display Solutions segment on a reporting basis.

Royston has a proven track record of delivering organic revenue growth, margin expansion and profitability. For the 12 months ended September 2025, Royston generated total revenue of approximately $272 million and adjusted EBITDA of approximately $38 million or 14% of revenue. The transaction price represents 8.1x trailing 12-month September '25 adjusted EBITDA, a combination of the purchase price of $325 million net of tax benefits transferring to LSI.

The acquisition of Royston is expected to be accretive to LSI on both the margin rate and diluted earnings per share basis upon closing of the transaction. Importantly, this acquisition is supported by a fully committed bridge facility, although permanent financing is expected to include a mix of equity and debt financing.

With that, I'll hand the call over to Jim for his concluding remarks.

Thank you, Jim. In conclusion, we believe the acquisition of Royston is a transformational transaction for our business, our customers and our shareholders that may position LSI as a significant integrated retail branding solution platform of scale in North America. After several years of smaller bolt-on transactions, Royston represents our single largest platform acquisition to date, one that positions us to further enhance our unique go-to-market solutions-based model in the support of the new build and remodel programs of leading global retail companies across North America.

This transaction accelerates our growth across targeted vertical markets. It expands our suite of solutions within the higher-margin product categories, and it further entrenches LSI as the partner of choice for leading retail brands. After the closing of the Royston transaction, we intend to update our long-term financial targets as we introduce the next phase of our Fast Forward plan, highlighting the value compounding power we anticipate from the combined businesses.

That concludes our prepared remarks for today. I want to thank you for your participation in today's presentation and your continued interest in LSI.

Thank you, sir. Ladies and gentlemen, that concludes today's event. Thank you for attending, and you may now disconnect your lines.

Greetings, and welcome to the LSI Industries Fiscal 2026 Second Quarter Results Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce Jim Galeese, Chief Financial Officer. Please go ahead.

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 second 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 second 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 joining us today. This morning, we'll be reviewing our second quarter results for fiscal 2026. As you likely saw in our earnings release, we delivered a solid second quarter with results that were in line with our expectations. Revenue was essentially flat year-over-year at $147 million while profitability and free cash flow improved. Given the strength of the prior year comparisons, particularly within Display Solutions, I'm pleased how this quarter performed and how our teams executed throughout the quarter. .

Jim Galeese will walk through the financial details in a few minutes, but I want to spend some time on a few areas that I think were important as we move into the second half of the year. As we've discussed previously, the second quarter of last year benefited from unusually strong event-driven demand, most notably in the grocery vertical, following the resolution of a failed merger between 2 large grocery chains. The release of pent-up demand drove exceptional growth of 100% in our Display Solutions segment with 50% of that being organic growth in Q2 of last year. This demand pattern in groceries have returned to a more normalized level.

And against that backdrop, flat consolidated sales and improved margin represents solid execution. More importantly, we continue to see healthy customer engagement, active planning discussions and increasing order trends as we exit the quarter. Lighting delivered another strong quarter with sales growth of 15% year-over-year and meaningful margin expansion. This follows 18% growth in the first quarter, and we're encouraged by the consistency of performance across multiple end markets. Several factors have contributed to the strength in Lighting, including the addition of aluminum poles to our [ steel ] pole product line, an increase in large project shipments, continued momentum in our National Accounts strategy, and solid traction from recent product introductions as we remain focused on product vitality.

As we exit the second quarter, Lighting orders were up approximately 10% year-over-year resulting in book-to-bill above 1. This gives us continued confidence as we look ahead. In Display Solutions, we maintained a high level of execution across several large multiyear customer programs, particularly in the refueling area, convenience store, quick-serve retail and casual dining restaurant verticals. While revenues declined slightly year-over-year due to the prior year comparisons, orders improved sequentially and were up year-over-year, supporting an improved backlog entering into the third quarter.

What's particularly encouraging is how the opportunity set within Display Solutions continues to evolve. Historically, much of our growth in food services has come from quick serve restaurant customers. These programs often involve a large number of sites, sometimes hundreds at a time with individual product values ranging from $20,000 to $40,000 per location. This work remains an important and durable part of our business, and we continue to win and execute well in that space. While at the same time, we are now seeing meaningful traction beyond traditional QSR into the casual dining space and premium food services.

With these programs, they typically involve fewer locations and the value per site is significantly higher, often ranging from $250,000 to $1 million per location. These opportunities align well with our capabilities in custom fabrication, integrated design and program execution, and they represent a natural extension of the platform we've built over the past several years. We're also encouraged by improving activity in the international market, particularly in Mexico and the islands, where conditions strengthened during the quarter after several softer periods. Based on what we're seeing today, we expect the activity to remain elevated into fiscal and calendar year 2027.

Over the last 2 quarters, I've emphasized that our focus for 2026 and what will continue into 2027 will be our people. That commitment remains unwavering. Talent management through thoughtful role design, succession planning and deeper cross-team integration are not just priorities, they're essential to creating a single unified organization as we continue to bring JSI and EMI together under the LSI umbrella. While there will be opportunities for operational consolidation in the future, the greatest return on our investment will continue to come from empowering our people, aligning them around shared goals and enabling them to collaborate more seamlessly. The core objective of this integration is to unlock meaningful cross-selling opportunities by breaking down silos, improving transparency and ensuring our teams are working as one cohesive commercial engine.

A few months ago, we brought on a senior sales leader within our Display Solutions group specifically targeted to enhance visibility into our current sales activities, pipeline development and near-term conversion opportunities. Just as importantly, this role is helping us to strengthen alignment between sales, operations and execution, ensuring that we are not only identifying opportunities across brands, but we act on that quickly, consistently and with unified customer experience. Next week, we will take another important step forward as we host our national sales meeting here in Cincinnati, bringing together nearly 120 sales employees and marketing professionals from across the organization.

We will be spending several days together, including time over the weekend focused on collaboration, alignment and building the relationship that makes true cross-selling and coordinated execution possible. This time together is not just about strategy and planning, it's about reinforcing our shared purpose, our culture and continuing to work on coming one integrated team moving forward as one organization. From a customer perspective, we continue to see increasing engagement from large, sophisticated organizations that place a premium on supplier scale, geographic coverage and manufacturing depth.

In several cases, customers have specifically cited our ability to design, fabricate and deliver across multiple regions as a key differentiator. This capability continues to elevate the types of programs we're invited to pursue. Profitability and cash generation were highlights of the quarter. Adjusted EBITDA increased year-over-year to $13.4 million, and margin performance benefited from discipline, project pricing, productivity improvements and effective cost management, which together helped to offset ongoing cost inflations. Free cash flow was strong at $23 million, driven by profitability and continued working capital discipline. We use that cash flow to reduce our total debt by $22.7 million during the quarter, ending with a net leverage ratio of 0.4.

The balance sheet strength supports our Fast Forward strategy, allowing us to invest in our organic growth, pursue operational improvements and maintain optionality around future acquisition opportunities all while continuing to return capital to our shareholders through our dividends and other programs. Execution across the organization continues to reflect LSI's high [indiscernible] ratio and culture. Our team stays focused during the quarter that required careful management of mix, margin and timing and I'm proud of how they delivered. The collaboration between sales, operation, design and supply chain continues to be strong and that alignment is showing up both in execution and in customer confidence.

Looking ahead to the second half of fiscal '26, we expect continued progress on our goals, supported by improving order trends in backlog. We remain confident in the secular growth outlook across our key vertical markets and in our ability to grow above market through differentiated solutions-based approach. In closing, I want to thank you for your continued support in LSI. We're executing well. We're financially strong. We remain focused on building long-term value through disciplined growth and operational accidents.

With that, I'll turn the call back over to Jim Galeese for a more detailed review of our financial results.

Good morning all. LSI generated sales of $147 million in Q2 consistent with prior year and successfully offsetting challenging prior year comps. Adjusted net income and adjusted EBITDA were modestly above prior year, and all were double digit above the same quarter of fiscal '24. Adjusted earnings per share were $0.26 for the quarter. Cash flow in the quarter was higher than expected over $23 million following a timing-related softer first quarter. The strong cash flow lowered our debt-to-EBITDA leverage ratio to 0.4x, providing significant capital allocation flexibility.

With our amended financing facility, LSI has cash and availability of approximately $100 million. Next, a few comments on our 2 reportable segments. As mentioned, Lighting had an outstanding quarter, realizing sales growth of 15%. This represents the third consecutive quarter of double-digit growth as compared to the prior year quarter. Referencing various reports on nonresi construction, our double-digit growth rate continues to outperform the market. As a result of volume and effective margin management, adjusted operating income increased 29% with the adjusted gross margin rate improving 190 basis points versus last year.

One of the growth opportunities identified for Lighting was increasing our business with National Accounts. We felt our operating model capabilities aligned closely with satisfying strict customer requirements. So investments were made to support this initiative. Results reflect a significant progress in gaining new customers and sales. This, along with the health of our key vertical markets, is driving our strong growth rate. We expect the favorable momentum to continue into the second half of fiscal '26 as Lighting orders for Q2 were 10% above prior year, a book-to-bill ratio above 1 on strong shipment quarter and an improved backlog.

Shifting to Display Solutions. Jim did an excellent job providing context to the current quarter's performance for display and how to interpret comparisons to the prior year. I'll just add a few additional comments. For the grocery vertical, second quarter sales reflect a return to normal seasonal demand. Implications were lower sales this quarter versus the pull forward of last year, but also return to more predictable demand flows, allowing us to plan and fulfill customer programs more efficiently. For example, Q2 adjusted gross margin improved 30 basis points despite lower production volume, reflecting improved productivity enabled by more stable production scheduling.

Orders also hauled a return to steel demand patterns. Q2 grocery orders increased double digits year-over-year, generating a strong book-to-bill ratio of 1.2 versus under 1 last year and building backlog. We expect sales growth in grocery in the second half of fiscal '26. Activity remains high in refueling/c-store vertical, as we continue to execute against several large customer programs. In addition to our established foundation of large customers, we recently added multiple midsized projects, representing a combination of new and existing customers and brands.

Building relationships with new customers provides the opportunity to expand our sustainable repeat business model successfully built and executed over time. On growing growth in our service business is also providing cross-selling opportunities for one refueling C-store customer where we are currently active with service at over 140 sites, the opportunity to present our broader solution set resulted in a significant number of sites specifying our Archer perimeter lighting system generate an expansion of revenue per site. The QSR vertical has been sluggish as large chains manage multiple priorities, inflation, leadership changes and shifting consumer habits.

Our teams, however, are very busy working with customers on numerous programs in the concept and development phases. So future investments are planned, but timing of release remains unclear. In summary, LSI delivered a solid Q2 and first half of fiscal 2026. And we remain encouraged by the level of activity in the majority of our key vertical markets. Work to market the value of our LSI solution set is ongoing, and we expect to generate growth in Q3 and the second half of the fiscal year. I'll now turn the call back to the moderator for the question-and-answer session.

[Operator Instructions]. Our first question is from Aaron Spychalla from Craig-Hallum.

Maybe first on refueling and c-store. You talked about onboarding multiple midsized projects, given some more targeted sales initiatives. So it sounds like a little bit more consistent growth is expected there. Can you just maybe help frame that opportunity a little bit for us more on what that looks like and just some of those initiatives?

Aaron, it's Jim Clark. Thanks for the question. I mean, I think that the word I'd use is [ eddy ]. And we -- I can think about this call last year this time and we were looking at a project that we knew in the refueling sector was going to run out into fiscal year '26 and that has proven true. Right now, I would say we have a number of those projects, smaller in scale, but the same kind of makeup where we have where we receive the order, we're looking for the releases, and we've got a nice kind of pathway in front of us going to bring us through the remainder of '26 and into '27.

So I can't -- there's no color to give on any one particular or all a little bit different. But I would say they're geographically spread, both internationally and domestically, and the business is healthy and both in its content and in its pace.

Yes, Aaron, Jim G here. I'll just add on to Jim's comments that we have this very strong foundation what's our large core repeatable customers that we've done business with multiple cycles for years. And some of these midsized customers, I think it indicates 2 things. Number one, the health of the vertical, the level of activity going on there. And then secondly, it is a combination of -- we've done business with some of these customers before, but several of them are new, and some of those are actually nondomestic entities.

So it is an opportunity now for us to develop -- further develop relationships and build on this foundation that we have. But it does -- positive signal about the health of the vertical.

Yes, that's helpful. And then maybe on that, Mexico, good commentary on activity levels there. Can you talk about some of the market drivers? You talked about noted elevated demand into FY '27. Maybe just what level has that business been for you? And where can kind of get to if we look out into FY '27?

I mean, I think that in general, we're relatively conservative, right? So we look the best we can when we start to kind of forecast out 6, 9, 12, 18 months, it gets difficult for us. But I'll comment on this that if you look at that market in general, and it's just one of the markets, right? I don't want to get overly focused on c-store because we've got grocery in there. We've got QSR. We've got casual dining that I just talked about today. We've got auto. We've got a number of other segments.

And we talk a lot about grocery and c-Store, but they're not our only verticals. And I feel good about the momentum in all of them right now to tell you the truth. What we're seeing is a competitive environment that's accelerating. If you look at companies like [indiscernible] and you look at some of the conversations around Circle K around [ 711 ] mean I just think it says a lot in that particular vertical about the pace of that industry, the competitive forces that have come to play. New construction is driving remodel. Remodel is driving remodel and this pace to continue to refresh their location, refresh the aesthetics of the location, the capabilities both in food services and other services, it just bodes really well for us.

And to be completely honest, I mean we see this going on for many years. And that's just within that vertical. Like we talk about grocery, I'd like to underline that we think that things have returned to their normal again. But that normal has a nice upward curve to it. We believe that the competitive forces in grocery also have a lot of the same dynamics we talk about in c-store, which are competitors raising the game and the -- and kind of the guys that are the foundation in those industries raising their game along with it. And that just bodes very well for us.

Somebody asked me just the other day to kind of recap that new construction versus remodel. We love new construction, but it is a smaller component. I mean it is 80-20. It's 80% is remodel. And that remodel just is on a nice curve where it's trending kind of 5-year remodels right now. People are investing in those stores and putting money in there to be competitive with all these new upstarts in the changing environment.

Okay. That's helpful. And maybe just on -- I mean, kind of the non-U.S. or the Mexico component. Just -- how does that potentially look as we kind of move out like pipeline and just maybe what that business can become for you?

Yes. I mean I think that basically Mexico -- I mean, all the chaos, the global chaos of trade and duties and immigration and all of that just caused a lot of question marks over the heads in Mexico. And I think a lot of that has normalized now and folks are ready to get back to their original plans. I would argue that we're that we're far behind based on their plans. And now it's just a matter of how much effort will they -- will they start and just try to go on their plan from day 1? Or are they going to start and try to catch up with some of the things that they are in arrears. And that's, I think, will materialize over the summer. We'll have a better -- kind of better vision on that.

And Aaron, I would just add that the deregulation of the [indiscernible] retail order environment, it's been a nice win for LSI. And it's had its ebbs and flows and probably we'll continue to have some ebbs and flows. But one thing is certain that our partners, the [indiscernible] company partners who entered Mexico that does truly reflect that we are partners with them. So it's not a supplier. So we bring some experiences to them as they enter and grow in that market and vice versa, right? And right now, that activity is on an upswing. And in the intermediate term, we see that upswing looking positive to continue.

And we're in the second inning on that, by the way. I mean, to even say we've scratched the surface would be an overstatement. .

Okay. Okay. Understood. And then maybe just one last on EMI integration. Can you talk about where margins today as we get closer to the 2-year mark, talk about some of the operational initiatives there and maybe just more broadly across the business as well?

Well, first of all, we love EMI. We love the whole team and fit in. So I think we've talked about this before. But when we look at M&A, we don't just look at the financials. We look at culture and everything else associated with the business as much as we look at any element, and I want to underline the culture part. What I usually say is we look at the operational efficiency, the sales synergies and the balance sheet, which is with as much weight as we look at culture. .

And our thinking behind that from a M&A perspective is, look, if we're a square and they're a triangle, that just takes a lot of work to kind of get them into our company and get them operating in the same rhythm. They were -- they demonstrated -- the people there and their culture demonstrated very close to LSI's culture. So it was -- as a real win-win together, just like JSI was just like Canada's Best is. We've talked about it before. They've had better than 200 bps of improvement in their [Audio Gap] margin. And we're continuing on that. I think that for us to reach to get them up to that 10.5% and better, we probably still got a full year left in that journey, but I'm very pleased with the progress.

Our next question is from [ Chris Figlin ] with Oppenheim & Company.

I wanted to go into your comment about the premium food services, the better picture what that entails. And I had a couple of other opportunities in mind. I don't know if they fit into premium food services or other. But how do you look at like the campus meal plan infrastructures and maybe hotel buffets.

Yes. Chris, thanks for the question. So I wanted to kind of highlight what we're going to do is kind of monitor as kind of premium food services, and it was just really to kind of delineate and differentiate between QSR. We've always had a very strong position in QSR. We remain in that. We see a lot of growth opportunity in that both from our -- particularly on our Display Solutions side, but -- both on our Lighting and Display Solutions side and across the gamut, right, our digital menu board, our refrigerated products, our food-grade countertops, all of that, we love QSR. .

But we've always had a spot in this premium food services, and I want to break it up into 2 pieces. One, we'll call casual dining. And that -- those are restaurants that are -- think about waiter service restaurant that you're going to come in typically a chain and some of them are larger, some of them are smaller. But the numbers tend to be smaller than QSR, but the investment inside the store is measurably bigger, right? So we were just looking at a project. I was just looking at it last week that's going to tip over $1 million just for this -- just for the restaurant interior. And we don't talk about it a lot, but we have steady business in that. And I'll just say there are indications that that's improving.

On the campus side and on the food services side, particularly related to refrigeration, we have been making inroads there that we sat down, I'm going to say, just over 2 years ago to really kind of double our effort there. We have a steady business, but we don't have the volume that I think we deserve. And they've been working across EMI and across JSI. They've been working very hard to kind of put themselves in those spots. So the difference between our core business where we have multiple projects that span across multiple years. When we get into this premium food services side, a campus for a college, [ capturior ] plans, these casual dining restaurants,

Hospitality.

Hospitality. The number of locations tends to be smaller. If we get a project, a lot of times, it's a project of 1 or maybe a regional project of 5 or 12 or something like that. But the scale of the project is much bigger. 10, 20x the size of our smaller projects are same kind of development time, but we think that our spot in that is unique to their demands because we -- we're able to come in and truly be a one-stop shop. And from refrigeration to countertops to steel to lighting to graphics to mill work, it's really a nice fit.

And I think that the work we're doing in these other sectors has really created more visibility for us and more credibility. So we come in a much more credible, much more recognized. And I think we're starting to see the beginning of that as a very viable market for us, one that we can continue to grow exponentially.

Yes, yes. It seems like campus could be a nice size vertical at some point. And then you've talked about the 3 acquisitions today and the one integrated team, appreciate that explanation, messaging really well packaged and obviously suggests opportunity to continue to do the appropriate consolidation. So I was just curious what -- how you think about what might be an appropriate leverage ratio ranges for the right kind of deal?

When we're talking M&A, what we look at for multiples. Is that what you were saying? Or you were talking about [indiscernible]

Yes. Your balance sheet.

Leverage ratio. No, I mean, we've talked about this before. I mean certainly, anything below 3, we're comfortable with, and we sleep even better when it's below 2. Right now, we're 0.4. I think we have a demonstrated history of kind of using our debt revolver, using debt inside the company to go and make strategic acquisitions and then quickly put ourselves into a leverage ratio where we're comfortable. But generally, we want to be certainly below 3%. If we had something extraordinary, we always talk about it in terms of incremental or exponential, right?

So incremental is something we do within our debt revolver and it's $50 million, $80 million, $100 million, $125 million maybe, and we're very much there. And then we look at exponential, which might be something that pushes us into the 3s. I can't see a scenario where we would go in -- the first number wouldn't start any greater than a 3. But yes, I mean, that would be exponential. And we're always on the look for that. We just haven't found the right fit for us at this point.

Yes, Chris, we feel very strong about our cash flow generation. As you saw, we had an excellent cash flow quarter. We're on pace now for our fourth consecutive year of cash flow exceeding -- free cash flow exceeding $30 million. So we're comfortable at looking at many transactions of multiple sizes and then the ability to bring that leverage ratio down pretty quickly, given our cash flow generation capabilities. .

Our next question is from Alex Rygiel with Texas Capital.

Very nice quarter. First question here. Could you give us an update on Canada's Best acquisition integration activities and the traction, in particular, on entering the banking vertical in the U.S.?

So Alex, thanks for the question. Canada's Best has worked out very good for us. Again, I just talked about it a minute ago about culture and they were just another good fit. And I couldn't underline that enough that -- like I said, we look at the balance sheet, but we look at culture with as much diligence and as much focus as we look at anything else in the business.

These guys have been great the hustle, they are proud and energized to be part of LSI and part of a bigger team. But I got to tell you, they are true entrepreneurs, the whole team up there. They look for opportunities. They are more emboldened with the financial strength of LSI and the capabilities. I didn't talk about this specifically, but we have -- JSI has a facility up there in Collingwood. Our Canada's Best facility is just outside of Toronto. We're in process right now of integrating those 2 and making them a stronger Canadian operation under one umbrella. So it has worked out very well for us.

We have begun to talk to retail bank here -- retail bank environments here in the U.S. These projects typically -- when we're talking about hundreds or thousands of sites, it's not unusual for the gestation period to be 12, 18, 24 months for us to get involved in a large project. I can't say that we've had any meaningful wins yet, but I will say that we've been investing time. They will have a spot at our sales meeting next week to talk about the markets there in the diversity and how they're addressing those markets. We have teams that are collaborating on that.

So we're very hopeful that we're able to talk about retail banking is another kind of top 5, top 10 market for us within the next 12 months. And so summary is the activity started. We've had some small wins, and we're looking to just kind of continue to push that forward.

And then secondly, more broadly on price increases, I believe your last price increase might have been around March of last year. Can you talk to us if there have been any recent price increases or if there's sort of a need for price increases, given tariff implications or other raw material cost inflation?

Yes. I mean when you look at the 2 segments, 2 reportable segments, our Display Solutions is minimally impacted by tariffs. And I'm not giving specific numbers, but I would just broadly say no more than 10% or 15% of any material or any product we use in Display Solutions has been impacted by tariffs. Lighting a little bit more because of some of the sourcing locations on some key components and things like that. But I would say in terms of pricing, we'll make price adjustments now as opposed to price changes.

And some categories and some products are more susceptible to it and others are more stable. I would say that we're always looking for the opportunity. We're price sell it. We're very disciplined. But we also want to respect fairness and be good partners for our customers, where we're market competitive and we make it difficult for others to kind of -- we put a moat up and pricing is one of them, but we're disciplined in the way we do it. And we don't ever want to get to a spot where we're overstepping our bounds and then bringing different competitive forces into our customer environment. I would just summarize by saying we're price [indiscernible]. We're very focused on it. And most of what we're doing now is price adjustments instead of as opposed to blanket price changes.

Yes. Just to reinforce Jim's comments. As you know, we are principally a project-based business. So given that, that gives us the opportunity on a regular basis to examine pricing and make sure we are aligned with what's going on with our cost structure, particularly our material input costs. So our group does a very good job. Our team does an excellent job of maintaining what we call current cost. So when we're making these project quotes, we are accurate, and we can make the pricing decisions that allow us to optimize our margin management.

And I'll just add on the closing comment, we always reserve the right for price review. So even when we have -- when we win an award, we have a 3-year project, we're not -- at no time are we locking ourselves in pricing for 3 years or anything. We have good relationships with our customers. We're upfront about our negotiations and project costs. And that discipline around price goes both ways. We want to make sure we're good stewards for LSI, and we want to make sure we're good partners for our customers. .

And then lastly, you talked a little bit about some operational improvement opportunities. Are there any notable sort of CapEx needs associated with that over the next, say, 12 months?

Nothing notable. Our CapEx is relatively small. We don't see we don't see anything material impacting that, at least in the foreseeable future. But I will say, not -- related to that question, but not specific to capital spending. We're looking for these opportunities, right? I mean we always talk -- I used to talk a few years back about building a better company before we built a bigger company. We've built that better company. We built the bigger company. Now we're going back and we're making those improvements, and we're doing it in respectable ways for the people within our company for our customers to make sure we're not doing anything disruptive, but we're after all of those improvements and that consolidation and that rationalization and all the opportunities are hitting in it.

Alex, I would just broaden your comment that it's just not about capital spend, but I would brought into, say, investment. We invest in multiple ways, not just CapEx, right, in terms of looking at our facilities' footprints, our talent structure, new product introductions, so development costs, et cetera. And we are very aggressive in having our team put forward proposals to us in all those categories, and we invest accordingly. And I think those investments are showing up in some of our performance areas across our 2 core segments. .

Our next question is from George Gianarikas with Canaccord Genuity.

Maybe to focus first on your statement here in the press release that you expect above-market growth for the year. Can you sort of talk about -- a little bit about the competitive environment and what you're seeing there and what gives you the conviction that you can grow faster than competition.

Yes. George, thanks for the call. And I think we hit on it a little bit earlier, and I appreciate bringing it up again. We think that there's just a lot of dynamics going on in the spaces that we're playing in. We purposely if you remember the whole story, how we constructed our first plan and then the Fast Forward plan, it was really about narrowing the aperture and looking for markets where we thought we could make an impact and differentiate ourselves. But the other component to that, the other leg of the stool was that those markets had some type of disruption that was going to cause some type of long-term growth.

And we define growth long term, rather, as 5 or 10 years. And I would just underline that these new entrants in the convenience store space they're very aggressive. They're very committed to the customer environment in those stores, and that aligns very well with what we're delivering. You look at the grocery market, the work and the investment they're putting in for shopper experience and branding and customer experience is so key. And I think that Lighting made such a big piece of this, but really, our entry has been Display Solutions.

It gets us in the door and then the combination of these products, the uniformity of it, our ability to deliver our services component, I think it puts us in a category of one. And I feel like we just have an opportunity to continue to win and not only win those projects, but accelerate our win rate with those projects.

And maybe just last question for me on focusing on the M&A opportunities that you've been focusing on for while that you've executed on. I'm curious as to what the return dynamics look like with the sort of bump up in rates here that we've seen and your willingness and desire to use debt as a way to finance them, what has that done sort of to the pipeline and the available pool of acquisitions in the marketplace?

Yes. I don't want to poke the bear here. But I mean, obviously, I don't like that the rates are higher, but I do feel like there's been a leveling effect particularly as it accounts to private equity. The multiples are more realistic. The conversations are more business oriented. I don't feel like there is as much of the fever pace as there was a couple of years ago where deals were just getting done, sometimes 1, 2, 3 turns higher multiple than we would even consider. So I feel like even with the higher rates, the environment is better for a strategic acquirer like us, it just comes down to the selection process.

We're picky buyers, right? And I've talked about it a couple of times on -- just on the call today. It can't just be the company performance. It can't just be the products. The culture has to be there because we don't want to go in and try to rework anyone or fight an opposing culture or just a different one. It doesn't necessarily mean theirs isn't good or ours is better. But we want to have a similar thought. We want to have a similar goals. We want to have -- be familiar with the similar tools. And that makes it trickier because we are so selective. But I have to be completely honest, the rates are not that bad as we look at them.

And I do think that they have helped turn the conversations more realistic and more business-oriented. And I wouldn't mind lower rates, don't get me wrong. But I feel better in this environment than I did when it was free money.

Our next question is from Sameer Joshi with H.C. Wainwright.

Congratulations on a better-than-expected quarter, really good performance on the display here -- Display segment here. Most of the questions were answered, but just digging a little bit deeper into the implications of meaningful traction in the casual dining and the premium fast food services where there are large projects. I think you mentioned that timing is similar, so that is good. But in terms of visibility, order visibility and profitability, how do that -- how does this compare with QSR?

Yes. Well, first of all, Sameer, thank you for the question. Very good to hear your voice. I will say that I was hesitant to even bring up casual dining because when you look at QSR, typically, the projects we're involved in are multisite, hundreds and hundreds of sites. And when we talk about them, we talk about a project award and then a project deployment or release schedule that tends to go on for 6 months or a year, and it's much easier for us to get the visibility and talk about it.

But at the same token, I felt like it was -- we were underselling the work that we were doing in particularly because we see the real cross-selling happening more in the casual dining space more quickly, I should say. And I want to draw our attention to it. But the casual dining space is going to be counted in the dozens as opposed to the hundreds. And the project sizes are going to be a much larger and they tend to be larger. And the combination of goods and services we offer tend to be much bigger. And I would just say that it's a work in progress developing and picking up speed.

And if you give us 2, 3 more quarters to talk about it, I'll have more visibility and maybe a stronger story to tell. But we've always been in this space. I don't want anybody to think that it's new. I don't want anybody to think that all of a sudden, it represents a significant turn, but I did want to bring it up because I just feel momentum building in it, the project sizes are much bigger, which I think reflects on our cross-selling opportunity. The -- and just in general, I think that we see some more accelerated market activity right now.

And that could end tomorrow. That could end with one bad quarter of sales in that casual dining spot. But right now, we're looking ahead for the rest of 2026 even though it's just January, we feel pretty good about it.

Yes. I mean bringing this out gives us a better insight into -- in the workings of the company. And then just one immediate question sort of I know the fiscal 3Q is historically a low quarter, especially in the display segment. Are things any different for the current year fiscal 3 quarter -- third quarter?

Well, I mean, I'm not going to hide the fact that I said it in my comments and et cetera. I mean I'm enthusiastic about what Q3 could be, but I'm moderate in a sense that I think it's going to track similar to our other Q3 on a comparative basis to any other quarter. Q3 is always our toughest, but on a comparable basis, prior year, I don't have any -- I have very little doubt that we will outperform prior year. How much will we do that? I mean I'd like to say that we have opportunities. I feel good about Q3.

But if it -- Q3 bleeds into Q4 is more moderated over 3, 4 and 1, I can't -- I just don't -- I can't tell right now. But I feel good.

There are no further questions at this time. I'd like to hand the floor back over to Jim Clark, President and CEO, for any closing remarks.

I'd just like to say that we were proud of the accomplishment of the team in Q2. Myself and Jim are 2 people out of 2,000 that are here. We're very happy with the work they're doing. We're very happy with the confidence our customers have in us, and we're encouraged by what we see in front of us. And as a good quarter, and we're looking for even better ones in the future. Thank you for your time and attention and your interest in LSI. .

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

Greetings, and welcome to the LSI Industries Fiscal 2026 First Quarter Results Conference Call. [Operator Instructions] 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, 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 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 2 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, 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. And what stands out to me most is how much that understanding and misunderstanding of LSI has evolved over the last 5 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 on 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, et cetera. The same is true in gas stations and convenience stores and 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 2 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 Vest, which joined us just over 6 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. And 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 represents 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 2 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-resi construction indices, providing a larger market opportunity. Secondly, we believe we are gaining market share as our purpose-built products provide features and functions, which 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 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-store. Multiple programs continue in refueling C-store, 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 low-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 2 factors: timing of sales in the quarter; and secondly, an inadvertent delay in project billing for 2 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 1 year before expiration, we amended and extended the existing facility. The amended facility increases our availability to $125 million and extends the term for 5 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.

[Operator Instructions] 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 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.

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.

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. 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.

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.

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?

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.

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 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.

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.

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, 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?

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.

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, 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.

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 were saying, are we getting -- I missed that one word.

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?

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.

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. 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.

And just the recent sort of reemergence of these headlines around some consumer softness, some of these retail-oriented stocks have pulled back quite substantially. You play into some of these sectors. Any view on sort of how the macro environment for you is looking like? I mean, it seems -- you seem pretty positive about the next few quarters at least. But any sense of whether there is some hesitancy with customers in terms of how they are planning future investments, given some of the recent softness. If you can share any color on that, I think that would be helpful for everyone.

Yes. Well, as we were just mentioning a minute ago, a lot of our business is project-based business, right? So these projects tend to be well thought out, 18- to 24-month development cycle. And then in some cases, anywhere between 6 and 18 months of a deployment cycle, in some cases, longer. We have not picked up on anything that will disrupt that. But I will tell you that if they are facing headwinds, we are part of the solution. We're not just an expense. We're an investment because when they're investing in their stores, when they're investing in the environment that their customers are engaging in their stores, there is a direct correlation between increased sales and the products and the services we deliver.

When a customer makes a decision to invest in the aesthetics of their location, when they make the decision to invest in the feel and the look and feel of their location, those all translate to increased sales for them. So we're part of the solution as opposed to being part of the burden or part of the caustic equation.

We see the petroleum market and the C-store market continuing to grow. When you look at entrants like Wawa and Sheetz and Bucks, and Circle K, and all of these folks that are real leaders in that C-store market, we see continued growth. We see continued growth in the big oil locations, Texio, ExxonMobil, these guys that are now competing with these new entrants. They want to make sure they maintain their position and share. Grocery continues to grow. I mean, grocery has had some pent-up demand, like I said, overall, the industry did through those merger discussions. And it was mostly around -- if you were a competitor to any one of those 2 that were thinking emerging, you were like, okay, where am I going to have to compete and where am I going to have to invest? -- with better clarity around that right now, I think that we continue to see growth and investment in that.

And in QSR, we're seeing -- maybe that one is a little disrupted. You're seeing spurts, what I'll say is spurts. One guy is up and investing, and another guy is staying holding steady. So maybe within those top 3, as it relates to Display Solutions, we're seeing a little bit more disruption there. But again, nothing that causes us great concern. The other markets, we see a lot of growth in our sports court. Warehousing is actually recovering. I would say that 1.5 years ago, there was kind of more headwinds, and warehousing is picking up activity again. So overall, if I look at a broad swath of our markets, I feel pretty good.

The next question is from George Gianarikas from Canaccord Genuity.

I just had one question, and 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 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.

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.

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

I just want to say thank you again for everybody taking the time to remain invested and connected with LSI and what we're doing. I feel very good about fiscal year '26. I think we have a lot of runway in front of us. I really feel like we're -- we continue to gain traction in our whole vertical market thesis. Our customer base, our competitors are -- better understand how we compete and how we work in the market. And I believe all of those things bode well for us.

Even I just said -- I mentioned competitors on purpose because they understand that we're competing quite differently, right? It's not just in there competing on one product we have or one element that we're manufacturing. It's more of a true solution set -- and I think that, that drives higher value for our customers and higher value for our shareholders and our company. So I'm very encouraged about what the future holds. And I'm hopeful that here on our next quarter, we'll even have more good news to share. So with that, I'll say thank you, and good day.

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