LSI Industries Inc. (LYTS) Earnings

Management highlights

### Overall Full-Year Financial Results - Full-year FY2026 net sales hit a record $689 million, up 20% year-over-year. Adjusted diluted earnings per share grew to $1.25 from $1.04 in FY2025. Adjusted EBITDA reached nearly $70 million, up 28% year-over-year, with a 10.1% margin. Free cash flow was $39 million, representing over 50% conversion of adjusted EBITDA. - The company completed its largest ever acquisition, the Royston Group, during FY2026, marking a transformational year for LSI. - **Acquisition Integration Progress** - Integration of Royston is progressing well, with aligned customer-facing value proposition and go-to-market model already being implemented. On-time delivery at Southern CaseArts (a Royston subsidiary) improved from the mid-70% range to over 90% after applying LSI's existing operational discipline. - Substantial cross-selling upside is identified: the company estimates Sign Resources (Royston's signage business) could grow 2-3x without adding new customers, just by deepening relationships with LSI's existing customer base. Multiple cost synergy opportunities are being identified for realization over the next 24 months, following LSI's proven acquisition integration playbook focused on procurement, cross-selling, and cost optimization. - LSI won a new multi-year 2,500-site renovation program with a large oil retailer, displacing the incumbent supplier, as proof of concept for its integrated one-stop solution platform strategy. The win was not included in the Q4 results reported. - **Organizational and Leadership Updates** - The company launched a new shared values framework called DRIVE (standing for Detail, Respect, Intention, Velocity, Execution) to unify culture across the legacy LSI and Royston teams, serving as the cultural foundation for LSI's Fast-Forward growth strategy. - CFO Jim Galeese announced a planned retirement at the end of October 2027 after nearly 10 years of service. A formal search process for a successor (considering both internal and external candidates) is underway, with an extended transition period planned to ensure continuity with no changes to current strategy, guidance, or capital allocation priorities.

Guidance

- Management maintained its long-term target of 12.5% adjusted EBITDA margin as part of its Fast-Forward strategy, but noted the path to this target will not be perfectly linear due to near-term margin headwinds from the Royston acquisition. - Demand for Display Solutions is expected to remain elevated in the refueling/convenience store and grocery verticals entering FY2027. Royston demand is projected to increase modestly year-over-year, with improved activity from its two largest refueling customers as the year progresses, as those customers begin executing their multi-year construction and renovation plans. - Lighting segment Q1 FY2027 sales are expected to be several percentage points below the strong prior year comparable period, while gross margin performance is expected to be maintained. - The lower-margin Royston backlog (priced before LSI acquisition, without accounting for recent raw material cost increases) will create a 50-100 basis point margin headwind spread over the first half of FY2027, with the impact diminishing over time and fully cleared by the end of Q2 FY2027. Margin improvement will be seen in the back half of FY2027 once this backlog is worked through. - Long-term, the Royston acquisition remains expected to be accretive to LSI margins.

Segment performance

LSI Industries operates two reportable segments: Lighting and Display Solutions. - **Lighting Segment**: Fourth quarter sales declined 3% year-over-year (up 17% sequentially from Q3 FY2026), impacted by soft project timing in automotive and QSR verticals. Full-year FY2026 lighting sales grew 7% year-over-year, outperforming the broader market, driven by national account penetration and increased demand for outdoor area lighting. Fourth quarter orders were 5% above prior year, with a book-to-bill ratio above 1.0. Q4 gross margin increased quarter-over-quarter and for the full year, supported by improved project pricing and product mix. - **Display Solutions Segment**: Fourth quarter sales nearly doubled year-over-year to $164 million, representing 70% of total company Q4 revenue, with 18% organic growth. Segment adjusted EBITDA reached over $20 million (compared to $8.7 million in the prior year quarter), with an adjusted EBITDA margin of 12.4% (up 180 basis points year-over-year, the highest level in nearly three years). Organic growth was 21% year-over-year in grocery vertical refrigerated/non-refrigerated display cases, and 16% year-over-year in refueling and convenience store verticals, with double-digit growth in both outdoor print graphics and EMI store interior products. The recently acquired Royston Group (included in Display Solutions) had modestly lower year-over-year Q4 sales, aligned with management expectations as it intentionally shifts to a higher-value product mix.

Risks & headwinds

- A portion of Royston's pre-acquisition backlog has lower margins, as pricing did not keep up with sharp increases in crude-linked polymer and plastic raw material costs. This will create a near-term margin headwind through the first half of FY2027. - QSR vertical demand remains soft, as inflation negatively impacts consumer spending and sentiment, leading to delayed project investment from industry participants. - Large multi-site customer projects have variable release timelines that depend on customer planning and execution, which can shift actual revenue recognition away from initial forecasts. - Integration of a large acquisition like Royston requires operational adjustments and capacity optimization that do not happen linearly, and can create temporary minor business disruptions.

Analyst Q&A

• Q: How do you plan to address the lower-margin Royston backlog, and what is your outlook for hitting the 12.5% long-term EBITDA margin target? /

  A: The margin issue stems from Royston relaxing pricing discipline to keep its sales pipeline full prior to acquisition, combined with sharp, fast swings in crude oil prices that impacted polymer costs. Management already has implemented LSI's proven disciplined pricing process at Royston. The total expected headwind is 50-100 basis points over the next two quarters, with impact diminishing over time and clearing by the end of Q2 FY2027. The long-term 12.5% margin target remains unchanged, as the core Royston business can support this level, and cross-selling, procurement, and operational efficiency tailwinds will help the company reach the target. The acquisition is still expected to be accretive to margins over time.

• Q: Is the strong 18% organic growth in Display Solutions driven by pulled-forward demand, and which verticals are driving outperformance? /

  A: There is no pulled-forward demand, as LSI's project-based business requires installation on customer-specified dates, leaving little flexibility to shift demand. Key outperforming verticals are refueling/convenience stores, where customers immediately value the integrated end-to-end offering from LSI, and grocery, which has seen steady, linear growth after an industry-wide pause in 2024 and continues to see sustained investment in in-store experience. Automotive underperformed in Q4 but remains a strong long-term market for LSI. The 2,500-site oil retailer win, a new customer that displaced the incumbent, is clear proof of the success of LSI's platform strategy.

• Q: What is the timeline for the 2,500-site large oil retailer project, and is there additional upside from potential interior work? /

  A: The project has been awarded but not yet fully released to LSI, as the customer finalizes its rollout schedule. Management currently expects the project to roll out over approximately 18 months, with details of the rollout pace finalized in the coming weeks. LSI has sufficient capacity to complete the project without disrupting its existing business. The current award covers exterior branding work, and there is potential to expand into interior solutions after LSI proves its performance on the initial scope, aligning with the broader trend of growing cross-selling of combined interior/exterior solutions in the refueling vertical.

• Q: Will fixing Royston's margins require sacrificing revenue growth? /

  A: No, the margin issue is isolated to the pre-acquisition backlog and stemmed from two temporary factors: Royston's team was distracted by the sales and due diligence process leading up to the acquisition, and crude-linked polymer prices swung much faster than expected. After closing, Royston is already quoting all new business under LSI's disciplined pricing framework, and management reports that quoting activity remains strong with no expected material impact to order volume. Royston's business remains inherently accretive to LSI's long-term margins, and the margin headwind is a temporary, fixable issue.