LSI INDUSTRIES INC Q1 FY2025 earnings call

• Sales up 12% year-over-year due to robust project activity in refueling C-store, grocery market, Display Solution segment, and EMI acquisition. - EBITDA over $13 million, free cash flow over $11 million, net debt at 0.8. - EMI integration progressing well with record performance in first quarter as part of LSI. - Launched next generation outdoor lighting product V-LOCITY. - Participated in NACS and PEI shows with strong customer engagement. - Grocery segment order rates up over 90% year-over-year with increased activity early in Q2. - Lighting segment had large project timing headwinds but quote levels remained elevated.

Display Solutions: Total sales increased 43% including the first full quarter of EMI. Comparable sales in Q1 increased 17% sequentially from the June ending quarter while finishing several points below prior year. Refueling C-Store vertical had comparable sales up 16%. Grocery order activity rebounded with broad-based orders, and QSR sales increased substantially led by EMI. Operating margin was 10.1%. Comparable orders increased 22% in Q1 versus last year, exiting with a measurably increased backlog. Lighting: Q1 sales increased double digits in refueling C-Store and parking, offset by fewer large projects in warehouse and automotive. Large projects termed hold for release by contractors, but smaller project activity healthy. Operating margin was 10.1% in Q1, with selling prices and material input costs stable.

• Display Solutions expected double-digit organic sales growth in Q2 versus prior year. - Lighting expects large project activity releases to begin in Q2, improving sales outlook for H2 2025. - EMI integration anticipated to yield synergies over a couple of years.

• Project timing volatility, especially in Lighting large projects. - Grocery market still mired in court hearings though expected to resolve by end of calendar year. - Large projects in Lighting continuing to be delayed with no common theme to delays.

Q: Maybe first on C-store, obviously, commentary on the strong backlog there. Can you just give an update on where you're at with the rollouts of a couple of those larger programs and just how does that pipeline look overall, like the move to fresh food and some of the M&A that we've been seeing there?

A: C-store, I think that we've talked about it the last two quarters, the order volume that we got in 2024 is going to carry us out. Even back then is 12 to 18 months, and we've added a number of projects on top of that. So, the simplest terms, the backlog we have is going to carry us through 2025, fiscal 2025. And as I mentioned in my comments just a few minutes ago, thanks to some planning we did over the last two prior years, we have the capacity to handle more. But we have a pretty full slate for 12 to 18 months at this point.

Q: You mentioned that there are fluctuating demand levels within some of your vertical markets. You did provide some detail around that, but is there, to the extent you can tell a common thread between the markets that have strength and those that don't, is it just maybe size related or are there – can you kind of unpack a little bit what particular verticals are showing varying trends?

A: There's always fluctuations that we see within all these verticals. If I was going to call any out, and I did make a comment earlier, I was saying that there doesn't seem to be any kind of common thread between these projects. Although I will say from a project standpoint, our larger projects seem to be moving at a slower pace. Regardless of vertical market or one-off kind of large project activity, they just seem to be more choppy than I've ever seen, or I've seen in the last 10 years, certainly. Specific to verticals, there are a couple that are definitely feeling, I think, have a little bit more headwind. Warehousing is definitely down. There's some other markets that have picked up. QSR is up. C-Store is up spectacularly. I couldn't overstate the activity in C-Store. Grocery is recovering nicely. You saw the numbers here in this quarter. And early indicators coming into the second quarter say it'll continue to do very well. Automotive is flat, maybe slightly downish. And automotive, I think I've talked about it since the pandemic. Automotive has resisted every comment made about it, every press release made about it, all the forecasts around automotive, at least from our perspective, have been absolutely 180 degrees out to the story that was written. It's been very strong, but it is a little flat right now over the last two quarters we've seen that. No other vertical market stands out to me. I'd say that the majority of the impact in lighting are the large projects. We had some really large projects last year, consistently last year, and those just seem to be – none of them – I don't feel like we've lost any of them, but they've consistently been pushing out, pushing out. Quote activity has still remained at that very elevated level. It hasn't dropped at all. It hasn't grown right now, but it hasn't dropped, and it's a very elevated level. Requoting has slowed down a little bit. To keep consistent with our pricing and inventory supply chain, whether it benefits, whether we have reductions or we have increases, we re-quote. Our quotes have an expiration to them. And that has been pretty steady. That activity, that re-quote activity, hasn't come back a lot and that's usually an indicator to us that the commitment's there, the timing's not right. I would just say most of the headwinds we had in Lighting have been large project activity or small project and our big – our multi-site project activities have remained pretty steady, but large project has been off.

Q: Nice to see the execution continue to come through despite some challenges in some of the end markets, Jim. On the gross margins, this quarter, it seemed it was a little bit lower than the prior quarter. Any particular reason for that, or is it just the product mix that you saw this quarter?

A: I think we've talked about this before. When you look at the two segments, the gross margin performance, Lighting versus Display Solutions, are significantly different. But when you look at operating side, when you look down on EBITDA, they kind of balance out. And a lot of that is because of our channel in Lighting versus our channel in Display Solutions, where we're direct in Display Solutions, where we have some direct in partnerships in Lighting. The models are just different. Also in Display Solutions, you saw the recovery occur in our grocery side. A good piece of it was refrigeration, but an equal piece was non-refrigerated, and the margins are generally lower in that non-refrigerated millwork type display side. Also, I would say that we took corrective actions last year when things began to slow down in grocery. As quickly as they slowed down, you can see from the numbers, they picked up almost equally in Q1, 90% improvement. We had to ramp back up and there were costs associated with that and there's inefficiencies associated with that. So I think that it's important to realize that the two segments have very different margin profiles on gross margin, but when you look down at the bottom line, they all come together. So I would encourage you to make sure you're looking at the two components. And then in terms of any of the weakness in gross margin, I think it's temporary as we work through that ramp up and as we get a better balance between refrigerated, non-refrigerated, and some of our dimensional graphics sales. So given the ramp up we had to do, I'm pretty happy with it.