Full Transcript: LSI Industries Q4 2026 Earnings Call

On Thursday, LSI Industries (NASDAQ:LYTS) discussed fourth-quarter financial results during its earnings call. The full transcript is provided below.

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Summary

LSI Industries reported record net sales of $689 million for fiscal 2026, a 20% increase from the previous year, with adjusted earnings per share rising to $1.25.

The company completed a significant acquisition of the Royston Group, which is expected to drive future growth through cross-selling opportunities, despite initial margin challenges due to higher raw material costs.

Strong performance in the Display Solutions segment, with sales nearly doubling year-over-year, driven by organic growth in the grocery and refueling convenience store verticals.

Lighting segment experienced a 17% sequential sales increase in Q4, but a 3% year-over-year decline due to uneven project timing in automotive and QSR verticals.

Management remains committed to a 12.5% adjusted EBITDA margin target, acknowledging short-term headwinds due to Royston's lower-margin backlog.

Royston's integration is proceeding well, with future demand expected to increase as multi-year projects ramp up.

The company announced the retirement of CFO Jim Gilles in 2027, with a well-planned succession strategy in place.

Strategic initiatives include leveraging the company's broad product portfolio for larger deals and continuing to build on the 'One LSI' integrated approach.

Full Transcript

OPERATOR

If anyone should require operator assistance during the conference, please press Star-0 on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Jim Gilles, Chief Financial Officer. Thank you. You may begin.

Jim Gilles, Chief Financial Officer

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. 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 Industries President and Chief Executive Officer Jim Clark.

Jim Clark, President and Chief Executive Officer

Thank you and good morning everyone. Thank you for joining us today. Fiscal 2026 was a transformational year for LSI Industries. 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 and give an update where we're headed and then turn the call back over to Jim Gilles 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 with initial sizes launching next quarter.

Lighting orders in the fourth quarter were 5% above last year with a book-to-bill above one times, 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 period year, including organic growth of 18%.

Segment adjusted EBITDA margin rate increased to 12.4%, 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 has steadily 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 multi-year 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, and 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. 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, 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, and 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 and 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 of 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, learning the business and building relationships. I have 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 Case Arts, 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. Note 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 one times on a strong sales basis, and 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 will 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, and I'm 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 Gilles, 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 Gilles 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.

Ahead of Jim's retirement, we've initiated a formal search process for a 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 his 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's led with integrity, strategic insight, and disciplined financial stewardship for 10 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 continued 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 long-standing customer relationships and the trust our customers place in our combined LSI and Royston brands positions 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 back over to Jim Gilles to walk through our financial results in more detail.

Jim Gilles, Chief Financial Officer

Thank you, Jim. I'll start by summarizing our Q4 performance. LSI Industries 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 Industries' 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 Industries' sales in the quarter. My following comments on market verticals will reference LSI Industries' 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 a 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. QSR is a large vertical, and strategic adjustments by industry participants will result in increased opportunities for LSI Industries.

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, and 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 Industries business as we continue to effectively manage project margins.

As Jim outlined, Royston pro forma EBITDA margin was down due to lower-margin projects and 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 Industries, 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 Industries 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 application projects increased substantially. We continue our emphasis on national account growth, with Q4 again generating year-over-year sales growth despite fluctuating market conditions throughout 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 productivity. Lighting book-to-bill was moderately above 1 for the quarter, and 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 was a solid quarter and year for LSI Industries. 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 Industries has built a very accomplished leadership team and has talented employees throughout the organization—people who are passionate about what they do, all contributing to the value of LSI Industries. I look forward to a successful fiscal 2027. I will now turn the call back to the moderator for the question-and-answer session.

OPERATOR

Thank you. At this time, we'll be conducting a question-and-answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. We ask that you please limit to one question and one follow-up. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

One moment, please, while we poll for questions. Our first question comes from Aaron Spicella with Craig-Hallum. Your line is now live.

Aaron Spicella, Analyst at Craig-Hallum

Yeah. Good morning, Jim and Jim, thanks for taking the questions, and congrats, Jim, on the retirement. But good to hear you'll be around for a little bit longer.

Jim Clark, President and Chief Executive Officer

Appreciate that, Aaron. Thank you.

Aaron Spicella, Analyst at Craig-Hallum

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

Jim Clark, President and Chief Executive Officer

Yeah, absolutely. Aaron, it's Jim Clark, and thanks for the question. Yeah, just going backwards. Yeah, we do think we have a good handle on it. I mean, as I look at it, I think that, you know, Royston was 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 where pricing sell it.

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 equipment we have to the projects, it's just going to take us, you know, a quarter or so to a quarter, maybe two, to work through that backlog we have there at a little bit lower margin than we want. In terms of, you know, 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, you know, we can get up north of 11.5%. And with the accretive nature of, you know, Royston, it certainly makes it even easier for us to get there. Now, I'll say easy is a qualified word because we have work to do. Right. We just acquired a 300-something million dollar company. We're working through, you know, 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, you know, that process takes time, and it's, you know, and it takes effort and, you know, you see a little disruption during those times. But we know what the outcome's going to look like, and we're excited by it.

Aaron Spicella, Analyst at Craig-Hallum

All right, thanks for the color there. And then second on QSR, sounds like some indications of, you know, kind of 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 Royston and the rest of your business?

Jim Clark, President and Chief Executive Officer

Yeah, 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. 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 refreshes, all the things that LSI Industries does, rather, has paid off for them.

And, you know, I'm specifically talking about, you know, one of our customers that's in a lead position right now after, you know, struggling for a few years. So 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 customer flow and profitability. So we still remain very excited about that primarily because of our offering. It's so well organized for that market—as it is for Grocery, as it is for Petroleum, C-store, 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.

Aaron Spicella, Analyst at Craig-Hallum

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

Jim Clark, President and Chief Executive Officer

Yeah, I'm pleased. 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.

OPERATOR

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

Brent Thaleman, Analyst at Oppenheimer

Hey, thanks. Good morning. Congrats as well, Jim, on the retirement. I guess just first question, in and around Royston and the lower-margin signage 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. If you don't mind just kind of walking through what you're doing differently.

Jim Clark, President and Chief Executive Officer

Yeah, 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, you know, 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, you know, a lot of headwind getting back to the discipline that they've demonstrated in the past, nor the discipline that LSI Industries has as a bigger company. But, you know, I mean, I think the impact is, you know, between 50 and 100 basis points, you know, over the next quarter or two. And I think it diminishes as time goes by.

Brent Thaleman, Analyst at Oppenheimer

Got it, Jim. Maybe just on the other side of that, any, like, 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 mix of end markets could make a difference here in the near term. You know, just be curious what you see kind of behind this headwind that, you know, is an underlying tailwind to the business for margins.

Jim Clark, President and Chief Executive Officer

Yeah, 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, you know, one arrow, one shot. You know, when we walk in as LSI Industries, we have, you know, 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, you know, 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, you know, in the background of all the things we've done in the past. LSI Industries 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 Industries has been outstanding. Outstanding. I think it says a lot of the professionalism of Royston. It's a well-run company and LSI Industries is a well-run company. And I think we, you know, we raise each other.

By the way, you know, 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.

Jim Gilles, Chief Financial Officer

Brent, Jim G. here. Just to, you know, support what Jim's saying, we commented that the organic LSI Industries 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. All right. And what we saw in signage there was they had a gap in referring to, you know, current material input costs. So there was some misalignment, you know, there.

You know, we're fixing that. We know how to do that. So we're very bullish and upbeat about our margin improvement process and capabilities as we, you know, as we move forward. Right. 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.

Jim Clark, President and Chief Executive Officer

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 Industries 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, the signs are primarily plastics and polymers and, you know, they're directly impacted by crude oil pricing and the swing on that was faster than I think that anybody could react to.

And so I'm proud of the work that the team did, you know, even without LSI Industries' involvement. And I think that it will get even better as a collaborative team.

Brent Thaleman, Analyst at Oppenheimer

Appreciate all that. I'll take you up on the one extra one which is 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, you know, what verticals or areas would you call out for kind of outperformance relative to expectations this quarter?

Jim Clark, President and Chief Executive Officer

Yeah, there's no—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 pretty 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. You know, our problems are usually the other way.

Right. The concrete truck didn't show up. So no, there's no pull forward. You know, I mean, I'm pretty excited about—I'm 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, that 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, you know, the grocery market has been on a good, nice, steady trajectory. We like the angle it's on and we're—you know, we listen just like, you know, just like a lot of other investors do to what the, you know, what the CEOs of those companies are saying and we've seen, you know, consistent reference to store-in-store environment investment and the payback and, you know, and that's what we provide. And so we're pretty excited about that. And I'd also say that, you know, automotive underperformed where we wanted this quarter.

But, you know, we like automotive. If you go back and listen to any of my prior calls, I've been—you know, 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 a number of the other vertical markets we have, but those would be three that I would definitely highlight.

Jim Gilles, Chief Financial Officer

Just to, you know, add to Jim's comments specifically, you know, in refueling, you know, C-store, Jim referenced in his comments the award—refuel seeds on the, you know, the 2,500-site program, you know, for a 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 historically.

So, as Jim said, that's a new customer. And I think that's a really solid proof point relative to our strategy.

Brent Thaleman, Analyst at Oppenheimer

Okay, thank you. I'll pass it on.

Jim Clark, President and Chief Executive Officer

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. So, 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.

OPERATOR

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

Alex Riegel, Analyst at Texas Capital Securities

Thanks. And you kind of just maybe answered this question, but I want to kind of ask it again. Regarding the 2,500 sites for the large oil retailer, what does that timeline look like? It sounds like you haven't really included any 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?

Jim Clark, President and Chief Executive Officer

Yeah, 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. You know, we bid up—we were going to do, you know, 180 stores a month. That's too much. 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. You know, the scope of that project, some of it will be, you know, we'll learn as we go through here. Over the next, I think, couple weeks we'll get more clarity on that. But, you know, I think the number one person that comments on this is Jim Gilles 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-shovel 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.

Jim Gilles, Chief Financial Officer

You know, and Alex, you know, that award—that 18 months—it's, you know, from a historical perspective, the customer's being pretty aggressive there. But what that means is, and we spoke to this too, is our capability to be able to fulfill that. All right, you know, this is a specific customer, specific customer specifications, certain level of complexity associated with that. But our competencies and capabilities to, you know, to do that is what the customer recognizes as well and allows them to think about, you know, this 2,500-site renovation being done in this, you know, condensed period of time.

We support it. Now whether they can keep up with it—

Jim Clark, President and Chief Executive Officer

Right. Yeah, I was going to say we're confident we have the, you know, we have the capacity to do it without disrupting our normal course of business. This is that—the efficiencies, this is what, you know, better utilization, second shifts, all of this flex that we 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 product—project and then as it relates to the opportunities, interior, Well, you know, that's something we're working on right now, and I think that where we get our greatest strength is—this is just like every consumer of every project, of every product—you know, I fundamentally believe people buy from people. We look at specifications, we look at performance criteria, materials, we look at acquisition cost versus total cost. But people end up buying from people based on their say-do ratio, 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 one of the real positive highlights about the petroleum C-store in Q4 was both the outdoor applications work as well as the indoor work. Our sales were up double digits in both. Now, a good majority of those were 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. I'm not sure a lot of our people know it. I think that the coverage people that have come to our factories and walked through have noted it. I think that investors that have come and visited us have noted it. But 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 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—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. When I was going through the phone calls with Royston, and this is going back five months now, there were a number of comments from the customers about, wow, surprised the CEO of the company's on the line, nice to meet you, all that type of stuff. And that cell phone number was made available to every one of those customers too.

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 a hold 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 operations, 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.

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.

Alex Riegel, Analyst at Texas Capital Securities

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

Jim Gilles, Chief Financial Officer

Yeah. Jim G here, Alex. It's a combination of both. We did see some of that headwind in Q4. All right. 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, it will start dropping.

Jim Clark, President and Chief Executive Officer

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'd like to mention one other thing just in case it's not apparent. This is about the anticipated, the targeted margin increase—that benefit that we were getting from Royston, that accretive effect—combined with our discipline in our current margins. We're just not going to—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. If this was LSI Industries on a standalone basis, it would be pretty strong in place. Like I said, the most important thing is that this is identified, fixable, and it will be digested and worked through.

Alex Riegel, Analyst at Texas Capital Securities

Very helpful, thank you.

OPERATOR

Our next question comes from Amit Dhayal with HC Wainwright. Your line is now live.

Amit Dhayal, Analyst at HC Wainwright

Hey, good morning, guys. With respect to the Royston—you know, sorry to 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?

Jim Clark, President and Chief Executive Officer

No. Hey, Amit, first of all, good to hear your voice. Thank you. No, I mean, listen, going back to our original thesis and 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.

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: when you go through an acquisition process like this, the company—the acquired company, let alone the acquiring company—are running full speed. There is a little bit of an exhale that happens when the deal gets signed, right? And I think that exhale has happened. Everybody's focused, everybody's going about their business, and I think there's huge potential. But that exhale happens, so everybody 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 returns will be there. So we're very excited about this. I think just the size and scale of it makes it a little bit more visible.

And as we have always in the past, we want to have a very high safety ratio. We want to be very transparent. And so, this is just us being us.

Jim Gilles, Chief Financial Officer

And Ahmed, Jim G 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 quote stage, very busy on the order entry stage. And this new product 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, the market outlook for refueling C-store continues to be very, very positive. I think size was part of that.

Amit Dhayal, Analyst at HC Wainwright

I appreciate that color, guys. That's helpful, I think, for everyone. You know, 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 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 keep in mind as we think about growth for you in the future?

Jim Clark, President and Chief Executive Officer

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 we go through the awareness process with the customer—hey, did you know we can do all of this? And sometimes 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 our capacity and everything, we have the capacity to absorb—we can grow within our footprint 2x. And so now the decisions come: what do you do to optimize that capacity? Because unutilized capacity can potentially be a paper cut, a drain on our margins. But 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 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 LSI started on this path. Number two is that I believe we're already getting some of the largest project awards there are. 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.

Amit Dhayal, Analyst at HC Wainwright

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

OPERATOR

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.

Jim Clark, President and Chief Executive Officer

You know, we were looking at the comments that we made in the opening of this conversation, and we had rehearsed it, and I—and Jim and I, Jim Gilles and myself—both thought this is the longest, you know, intro, the longest call prepared comments we've ever had. And I think it speaks to the, you know, 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 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 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 opportunity.

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 stage ratio, demonstrate it, show it, and, you know, continue on the path we've been on. With that, I'll say thank you very much for taking the time, and I look forward to hearing from each of you or some of you here in the future. Take care.

OPERATOR

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

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