LSI Industries Inc

NASDAQ:LYTS

Earnings Call Analysis

Strong Growth and Positive Outlook in Display Solutions Amid Market Challenges

In Q1 2025, sales increased by 12% year-over-year, driven by robust performance in the refueling C-store and grocery segments. The acquisition of EMI contributed significantly, with comparable orders up by 22% from the previous year. Despite challenges, grocery order rates surged by 90%. The backlog also strengthened, predicted to sustain elevated activity through 2025 with operating margins expected to improve. The company anticipates double-digit organic growth in Q2, supported by advantageous project dynamics and a successful product transition to the environmentally-friendly R290 refrigerant. Adjusted earnings per share reached $0.26, with a healthy leverage ratio of 0.8x.

Strong Start to Fiscal 2025

LSI Industries kicked off fiscal year 2025 with impressive results, reporting sales of $138 million, a notable increase of 12% year-over-year. This growth was fueled by robust activity in the refueling convenience store (C-store) sector and solid performance from their Display Solutions segment, particularly following the integration of the recently acquired EMI, which contributed to their successful first quarter.

Building Backlog and Healthy Financials

The company ended the quarter with a total comparable backlog up by over 10% compared to the prior year. Their strong cash generation continued with free cash flow exceeding $11 million, which reduced net debt to $42 million. This left LSI with a healthy TTM leverage ratio of 0.8x, indicating a strong balance sheet to support future growth initiatives.

Segment Performance and Future Outlook

Within their Display Solutions segment, LSI experienced a remarkable 43% increase in total sales. Comparable sales exclusive of EMI also saw a 17% sequential rise. They noted a 16% increase in comparable sales within the C-store vertical, spurred by significant new store activities and renovations. LSI anticipates double-digit organic sales growth in Q2 and expects operating margins to improve with volume increases and favorable sales mix.

Grocery Market Resurgence

The grocery vertical showed signs of revitalization, with order rates escalating by over 90% year-over-year. This is particularly notable given recent court hearings affecting this market, which are expected to resolve by year-end. The transition to environmentally friendly R290 refrigerant is gaining momentum as grocery companies prepare for new Department of Energy standards set to take effect in January 2025.

Operational Enhancements and Integration of EMI

The integration of EMI is progressing smoothly, with both commercial and operational synergies being realized. Feedback from customer pilots related to refrigerated solutions has been positive, indicating strong potential for expanded offerings within the grocery and C-store markets. LSI also plans to leverage its newly acquired capabilities to enhance their overall product offerings.

Lighting Segment Update

The lighting segment's performance has been somewhat inconsistent, affected by delays in larger projects, particularly in warehouse and automotive verticals. However, smaller project activities remain strong, and the company expects more substantial project releases in Q2, which could improve their sales outlook for the latter half of fiscal 2025.

Strategic Future Plans

LSI plans to maintain investment in commercial growth initiatives and continue exploring bolt-on acquisitions. Given their strong free cash flow and healthy balance sheet, the company is optimistic about pursuing organic growth opportunities in tandem with potential acquisitions in the upcoming fiscal year.

Conclusion

Overall, LSI Industries displays a strong start to fiscal 2025, with improved sales performance across various segments, particularly bolstered by the EMI integration. The company's focus on operational efficiencies, coupled with their strive to capitalize on market demand, positions them well for ongoing growth in the upcoming quarters.

Earnings Call Transcript 2025-Q1

[Operator]

Good day, and welcome to the LSI Industries Fiscal First Quarter 2025 Results Conference Call [Operator Instructions]. Please note that today's event is being recorded. I would now like to turn the conference over to Mr. Jim Galeese, CFO. Please go ahead, sir.

[James Galeese, executive]

Welcome, everyone, and thank you for joining today's call. We issued a press release before the market opened this morning, detailing our fiscal '25 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.

[James Clark, executive]

Thank you, Jim, and good morning, all. Thank you for joining us this morning. Today, we'll be discussing our first quarter 2025 earnings results. As you have likely noted from our earnings release, sales are up 12% year-over-year, thanks to very robust project activity in our refueling C-store space, increased activity in our grocery market in our Display Solutions segment, along with strong sales from EMI, which we acquired back in April of 2024.

EBITDA for the quarter was in excess of $13 million with free cash flow over $11 million. Net debt is under 1x at 0.8. Jim Galeese will give more specifics in a few minutes. We continue to have a very strong project and quote activity level across all vertical segments, but order timing remains a bit choppy as large project activity continues to push from a timing perspective and grocery remains mired in court hearings, which we expect will resolve by the end of this calendar year.

Our thesis around vertical market orientation remains very attractive to us and the durability of our model continues to gain strength as we work to offer more and more goods and services to the markets and customers we focus on.

Within our Display Solutions segment, we continue to execute on an elevated backlog and project activity in the refueling C-store space from awards we achieved in fiscal 2024. We anticipate that, that project activity will remain elevated through 2025 but thanks to investments made in prior years, we have the capacity to handle our current demand and more.

Although our Grocery segment continues to remain under a partial cloud of uncertainty, there has been a marked increase in activity with order rates up over 90% year-over-year and remaining strong early into the second quarter. You may have noticed in our press release, I commented that our book-to-bill ratio was 1.3x in the first quarter based on the success and demand of our R290 cases, along with significantly increased activity in our non-refrigerated display cases.

We're excited about this building activity level in grocery, and I expect the momentum will continue to build as the fiscal year progresses.



Activity at EMI, which we acquired back in April, reached record performance levels in its first quarter as part of LSI. We've been working closely with the entire team at EMI to create and leverage opportunities spanning from commercial to operational procurement to manufacturing, and we anticipate that we'll have a couple of years' worth of synergies to harvest and grow.

The team at EMI has been outstanding to work with. They've been thoughtful, engaged, energetic and the integration is going exceedingly well. On our Lighting segment, Lighting activity in large projects has experienced some headwinds over the last few months, mostly in regards to timing.

We've not lost any of the large projects that we've been working on to the best of my knowledge, but things have remained cloudy and protracted from a timing perspective. There's not one common theme to these timing delays, but it does underline the project timing volatility we've been commenting on over the last few quarters.

Staying within lighting, I'm happy to say that we recently released our next generation of our outdoor lighting product called Velocity. Velocity offers a unique approach to outdoor lighting from its performance to aesthetics to its modular construction and build options.

In the design of this new fixture, we built on top of our prior investments in adaptability and customization and our REDiMount technology, providing a product that offers next-generation performance along with reduced installation time and weight reduction.



This is a significant investment for LSI and Velocity builds on our very popular Maratha series of outdoor products. LSI has always had a very robust indoor product lighting portfolio, but the strength of our brand has always been associated with outdoor lighting and velocity should pay dividends for years to come.

Last month, in early October, LSI, along with JSI and EMI attended NACS, the National Association of Convenience Stores and PEI, the Petroleum Equipment Institute Show. These shows are combined into one and coexist alongside of each other. This is the world's largest trade show associated with convenience stores and attracts a large group of attendees from refueling through grocery.

LSI had a record turnout at our event that we hosted through the week, and the customer engagement was the strongest I can remember.

The combination of LSI, JSI and EMI created connections that span from entirely new customers to existing customers working in different departments across a wide customer base. We're encouraged by the engagement levels, and we look forward to leveraging the contacts we made at this event.

We accomplished a lot through this quarter. We continue to build a stronger, more capable business with a durable platform equipped to deliver profitable growth consistent with our growth objectives outlined in our Fast Forward plan.

We are using experiences of our management team to effectively integrate EMI and optimize other parts of our operations. We believe that we have significant growth opportunities in front of us, and we remain committed to growing our business while balancing the needs of our customers, shareholders and employees alike. With that, I'll turn the call over to Jim Galeese for a closer look at our financials. Jim?

[James Galeese, executive]

Thank you, Jim. Q1 was a solid start to the 2025 fiscal year with sales of $138 million, adjusted EBITDA over $13 million, strong cash flow and increased order rate and EMI integration progressing at an accelerated pace.

Sales increased 12% in Q1, including the first full quarter of EMI performance. Comparable sales, which exclude EMI, reflect continued growth in multiple verticals, including refueling C-store, QSR and parking, offset by ongoing soft sales in the grocery vertical and less large project activity in lighting.

Total first quarter comparable orders increased 6% over prior year, led by the grocery vertical, where orders rebounded in a strong way. Our total comparable backlog exiting Q1 increased over 10% compared to the prior year period.

A higher earnings conversion to cash generated strong cash flow of $11 million in the quarter. Our balance sheet remains healthy as the high level of cash flow reduced net debt to $42 million, a TTM leverage ratio of 0.8x.

Adjusted net income of $8 million resulted in adjusted earnings per share of $0.26 for the quarter. Please note that at the beginning of the fiscal '25 first quarter, we are including amortization expense related to the acquired intangible assets as an add-back to our non-GAAP reconciliation.

With our increased level of acquisition activity in recent years and inorganic growth being integral part of our strategic growth plan, this change will provide increased transparency to our core operating performance.

Next, a few comments on each of our 2 reportable segments. It was a very active quarter for Display Solutions as total sales increased 43%, including the first full quarter of EMI. Comparable sales for Q1 increased 17% sequentially from the June ending quarter while finishing several points below prior year.

The refueling C-store vertical had a robust quarter with comparable sales increasing 16%, demonstrating the high level of new store and store renovation market activity combined with LSI's recent large program wins. EMI contributed additional sales, increasing the overall growth rate for this vertical.

We're encouraged by the resumption of order activity in the Grocery vertical. We previously commented on our ongoing engagement with Grocery customers on planned programs and program release activity is finally beginning to occur. Order activity was broad-based from both a customer and product perspective.

New DOE refrigerant standards are effective January 1, 2025, and grocery companies are beginning to transition to the environmentally friendly R290 refrigerant.

We exit Q1 with a significantly increased backlog in grocery and expect favorable order levels to continue. We're currently ramping up production capabilities at both our refrigeration and Millwork display facilities to support anticipated demand.

QSR sales also increased substantially in Q1, led by incremental impact of EMI. Project quote activity is steady and the backlog in QSR also increased. Operating margin for Display Solutions was 10.1%, reflecting the mix of market vertical and product sales as well as the addition of EMI.

In summary for Display Solutions, comparable orders increased 22% in Q1 versus last year, exiting Q1 with a measurably increased backlog. We expect double-digit organic sales growth in Q2 versus the prior year. Operating margins will improve with the expected increase in volume and more favorable mix.

For lighting, we're seeing market performance fluctuate across verticals and project size. Q1 sales increased double digits in refueling C-store and parking applications also increased. This was offset by fewer large projects, specifically in the warehouse and automotive verticals.

The number of large projects termed, hold for release, by contractors has increased over the last quarter. This is known committed business, but part of the lengthened quote-to-order conversion process. Smaller project activity remains very healthy and overall quote levels remain at a consistent rate.

Looking forward, we expect large project activity releases to begin in Q2, improving the sales outlook for the second half of fiscal '25. Operating margin was 10.1% in Q1 with selling prices and material input costs remaining stable, supporting margin development as sales volume improves.

For both segments, one of our capital allocation priorities is continued investment in commercial growth initiatives, both capital for new products as well as working with our channel partners and customers on accelerating the adoption rate of new products and expanding and realizing our substantial cross-selling opportunities. I'll now turn the call back to the moderator for the question-and-answer session.

[Operator]

[Operator Instructions]. And today's first question comes from Aaron Spychalla with Craig-Hallum.

[Aaron Spychalla, analyst]

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 given industry dynamics like the move to fresh food and some of the M&A that we've been seeing there?

[James Clark, executive]

Yes. Well, thanks for being on the call. Yes, C-store, I think that we've talked about it the last 2 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, I mean, 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 2 prior years, we have the capacity to handle more, but we have a pretty full slate for 12 to 18 months at this point.

[Aaron Spychalla, analyst]

And then maybe can you just give us an update on some of the pilots that you've had, refrigerated and C-stores and some of the other broader pilots in QSR? An update there, how those have been going, and if you're seeing or expect any of those to kind of turn into larger projects moving forward?

[James Clark, executive]

Yes. So as you've probably seen, and I think you just mentioned, there's a lot of activity in the C-store space, and there's a lot of pent-up demand in the grocery space. I think that with the administration changing in Washington on a go-forward basis, we're hopeful that the headwinds that we've had with grocery will resolve itself here by the end of the year.

But in terms of pilots, our big pilot programs have been in place now for better than 6 months. They're all based around the transition from our 448 and 449 solution over to our R290 environmentally friendly refrigerated solution. And everything on those testing and on those projects has gone stellar. We're into what I'll call a normalized kind of distribution curve now using R290 and 448.

We will abandon the use of the hydrocarbon refrigerants here at the end of December, and we'll be going on a go-forward basis with R290 starting January 1 on a go-forward basis. But the feedback we've received, the manufacturing process, our workforce, our availability in terms of components and parts, our testing have all gone very well, and we're very excited about being able to offer this product and having a very competitive position to compete against traditional refrigerants, some of the central rack stuff, we feel very strong about our opportunities going into calendar year '25.

[James Galeese, executive]

Aaron, Jim G here. Just to add to what Jim said, we are now in multiple different C-store chains with our refrigerated and non-refrigerated displays. The customer acceptance of that has gone very well. They're very pleased with the sell-through that, that's generating. And we're very optimistic about the continued growth and penetration in the C-store chains utilizing mobile display units.

[Aaron Spychalla, analyst]

And then just maybe last for me on EMI, strong performance, good start there. Can you just kind of give some maybe early examples of some of the commercial synergies and just how you're thinking about those and then also cost synergies with some of the margin expansion targets you've laid out there?

[James Clark, executive]

Well, we've always been excited about thesis is really about that kind of multiple arrows, one target, being centered around vertical markets and being able to solve a lot of the customers' problems with kind of one belly button to push on. And I will say that we walked into JSI very excited about that, and we were able to aggregate together our dimensional signage in grocery, our lighting in grocery, and then our refrigerated and non-refrigerated products in grocery.

We learned a lot through the acquisition and the integration of JSI. And I think going into EMI, we were much earlier, much more directful in terms of the type of relationships and the way we wanted the introductions to happen.

And I will give EMI credit. Relationships with the customer we're probably at a little bit of a higher strategic level. And that, from a commercial standpoint, it couldn't have gone better. Now, I brought this up many times in the past. We're a project-based business. where we certainly have 1/3 of our business is kind of one-off, 2-offs, that type of thing. But the bigger part of our business are these multisite hundreds, if not thousands of site projects.

These things take 12 to 18 months to kind of develop, digest, and execute. It doesn't mean that we won't pick up a dozen locations here or 2 dozen there or anything like that. But to get into the very large project business, I do want to just say everybody should have some patience. It will take some time.

And we saw that play out with JSI. It took probably closer to 2 years for us to really get traction where the customers understood our relationship and the compatibility and the ability to kind of come out of the factory with signage already pre-installed with lighting products that are associated with that to get the uniformity we talk about in terms of the look and feel of the project of the products that are in there.

So, I'm very encouraged commercially on the introductions. I mentioned in my call NAC. I will tell you that we had all the brands in there, EMI, JSI, LSI, and we had all of our customers coming, but it was almost like a family reunion a little bit where we had a customer coming from a particular company, and then their coworkers coming and meeting across the trade show booth, so to speak, it was really pretty exciting to see and lay that groundwork about that we're one company, you're buying from one source, the senior management team is here, the divisional people are here, you have access. So, it was very exciting.

On the operational side, EMI is a very well-run company. We're very proud and happy to have the management team stayed there, Alan and Dave Mueller, Alan Harvill, and Dave Mueller are staying with the company.

They've run the company very well. But as a larger company and particularly one that's brought in all this operational discipline, we're able to share a lot of those learnings and a lot of those activities and a lot of those programs with them. And the receptivity on EMI side has been outstanding. I was down in the factory 2 weeks ago. I had an opportunity to walk the floor and talk to a lot of people on the floor.

And I will tell you consistently, the first comment was, wow your guys coming from JSI are really good guys. We really like them. They didn't come in here and start barking out orders or anything.

They came in here. They're a good partnership. And then the second comment was universally really excited about the continued improvements we can make. And I will tell you that some of the improvements we've made already just in terms of layout and product flow and material on the floor and small things like that have already yielded improvements.

And the bigger things, the procurement, the kind of consolidated purchasing, those type of things, those will continue to go. Like I said in my comments, I think we have years of synergy here that we're going to be able to harvest and we'll harvest it at the right pace so that we don't exhaust anybody or create friction, but we're really excited about it, and they've done an outstanding job. Very proud of the whole team there.

[Operator]

And our next question comes from George Gianarikas with Canaccord.

[George Gianarikas, analyst]

I'm just curious as you mentioned that there are fluctuating demand levels within some of your vertical markets. You did provided 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 could you kind of unpack a little bit what particular verticals are showing varying trends?

[James Clark, executive]

Yes. George, thanks for attending. Thanks for the question. I mean there's always fluctuations that we see within all these verticals. I would say, 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, have a little bit more headwind. Warehousing is definitely down. There are some other markets that have picked up. QSR is up. C-store is up spectacularly. I mean 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 will continue to do very well. Automotive is flat, maybe slightly down-ish. 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 2 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 at 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 requote.

Our quotes have an expiration to them. And that has been pretty steady. That activity, that requote activity hasn't come back a lot, and that's usually an indicator to us that the commitment is there, the timing is not right.

And so, I would just say most of the headwinds we had in lighting have been large project activity, our small project and our multisite project activities remained pretty steady, but large project has been off.

[George Gianarikas, analyst]

And as a follow-up, obviously, inorganic growth is a big part of your strategy. You define net leverage as of the first fiscal quarter at less than one turn. To what extent does a certain amount of time need to pass for you to consider additional bolt-on acquisitions? Or should we just assume that given that EMI appears to have gone well that you'll consider that those in the near-term?

[James Clark, executive]

Yes. I'm actually glad you brought up the question. I think that we've touched on it in the past. We want to be very fiscally responsible, and we also want to look at our resources within the company, our ability to integrate, our ability to make sure that we have a plan and we're executing against it.

Certainly, with a project like EMI, it shortens that window that we would normally kind of look at. They're very receptive to the changes. We have a lot of opportunity. We have a time horizon that gives us time.

So, the best thing I could say is that we're consistently looking. We have a funnel of opportunities we've been working. I don't see anything that would stop us from moving forward if the right opportunity came in front of us, if we could execute at it with the same type of strategies that we had with JSI and EMI. I would say that it's very likely we're doing something in calendar year '25.

[Operator]

The next question comes from Amit Dayal with H.C. Wainwright.

[Amit Dayal, analyst]

Nice to see the execution continue to come through despite some challenges in some of your 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?

[James Clark, executive]

Yes. So, I mean, 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 in the EBITDA, they kind of balance out, right? And a lot of that is because of our channel in Lighting versus our channel in Display Solutions, 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. It was 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 types 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 to 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 graphic sales. So, given the ramp-up we had to do, I'm pretty happy with it.

[Amit Dayal, analyst]

And then you commented earlier that you're expecting sort of double-digit growth year-over-year for 2Q fiscal. With EMI now going sort of full-fledged, should we expect sort of that type of performance or a year-over-year improvement compared to last year's quarters through this fiscal year?

[James Clark, executive]

All right. Well, I'm going to have to hit the rewind button because I don't remember saying double-digit growth. I want double-digit growth or display. For display. Yes. I mean, you have to add in, there's a recovery going on. Certainly based on Q1 and the early indicators in Q2, we feel like grocery, just as we've discussed for the better part of the year, there was going to be a tipping point at some point where the grocery market in general was going to have to start to reinvest and not be able to stay on the sidelines.

As we've also commented that we fully believe that there wasn't going to be any decisions prior to the election. And I think given the incoming administration, it probably favors that, that project moves forward or at least the obstacle, the mountain isn't as big as it was maybe a week ago. But with all of that said, we're starting to see that court come out of the barrel with just maintenance and required investments and strategic execution by a broad base of our customers in that Display Solutions side.

So we do think that coupled with EMI, we are going to have that kind of growth in Display Solutions. And I never like to give too much guidance or forecasting looking out, but we feel pretty strong about almost certainly Q2 and into Q3 and likely through the year. But I don't want to put myself on a hook on that. You guys have been following us long enough.

Our [ say-do ] ratio is very important to us. We would rather always overdeliver and undercommit than do the other way around. There's a lot of variables, there's a lot of things that could happen, but we feel pretty strongly about what's going on in Display Solutions.

[Amit Dayal, analyst]

Just last one for me. For this new refrigerated product, I'm wondering if there are other markets you could potentially enter outside of the core grocery segment you're targeting initially for this?

[James Clark, executive]

There absolutely is. And remember, part of our thesis is that these displays become a grab-and-grow center for the convenience store market, which continues to expand the goods and services they're offering in their engagement with their customer.

And we've already had a number of customers that we're in pilots with or that have just assumed regular purchase rhythm with putting these refrigerated R290 displays in their facilities. So, we think that there is a long-term opportunity there that could match and be on par with grocery. It's just what the speed of that looks like because this is kind of a transformational change for them and something that they're adding.

I will say that coming off of [ NACS ], it was a common and consistent topic of discussion. And I don't want to get too far ahead of myself, but we're taking the technology that we have right now, particularly combining it with what EMI has done, and I brought this up when we acquired EMI.

Remember, our specialty is open air, open case refrigeration. EMI does a lot of closed door refrigeration. I will give you some insight. JSI will be the center of excellence for refrigeration in terms of the technology, the design and all of that.

EMI will continue to be the center of excellence in the construction of the displays of the cases. Our ability to manufacture and customize these cases now with both open and closed door cases is something that will evolve over the next couple of years, and we will definitely leverage it.

[Operator]

The next question is from Rick Fearon with Accretive Capital Partners.

[Richard Fearon, analyst]

Congrats on another solid quarter. So, the 90% increase in order rates on the grocery side sounds incredibly promising. And you mentioned the stronger margins from refrigerated displays. Just wondered if you had any additional color you could share on the nature of incoming orders sort of refrigerated versus non-refrigerated and the backlog you're working through now as compared to first quarter?

[James Clark, executive]

It's a complicated question because what we see before an order is the quote, the pilot, the project design, those discussions. What we're always kind of blind to and it accelerated a little bit through this Albertsons, Kroger merger is the timing. I can comfortably say that the activity level in terms of those conversations, test systems, evaluation have all been going very strong.

The non-refrigerated displays, that accounts for a big piece of that uptick we had in Q1. And we can see out into Q2 and a little bit into Q3, we expect that demand to remain very solid going out into Q2 into Q3.

What's still a little bit murky is the speed at which the refrigerated displays come and it doesn't surprise me because we're going into what we call a quiet period. As we come into November, December, January, a lot of our grocery market, they're not doing a lot of work in the stores. They are really focused on holiday activity from Halloween through Thanksgiving, Christmas into New Year's and in some cases, all the way in through February and March with Easter and that type of thing.

But what we do start to see in the beginning of the year, in the beginning of the calendar year, January, February time frame, we start to see that planning and that activity getting ready for the seasonal vegetables, blueberries, strawberries, all those type of things, which really lend themselves very well to that open air casing.

So, I think we're probably a quarter early in terms of having great visibility, but we're encouraged at what we see so far, and we expect that we'll continue to see an uptick in the refrigerated sales side of things. Certainly, we had a lot of activity in Q1, and everything says that we'll continue to have that in Q2, but we're really excited about what we could be shipping in Q3.

[Richard Fearon, analyst]

And evolution of the Kroger Robertson merger will hopefully release a lot of that demand that's been pent up. So you answered a question about bolt-on acquisitions and inorganic growth and exciting to hear, that process continues to be active and your expectation of something in the next 12 months.

I was curious about with the strength of the balance sheet and your really strong free cash flow, are there other sort of organic growth opportunities that are accelerated by the additional cash generation things that otherwise you may have kind of put on hold until you felt, okay, we're on really solid footing? I mean EBITDA, a debt-to-EBITDA ratio below 1% or 1x is exciting stuff?

[James Clark, executive]

Yes. I mean the answer is absolutely yes. I'll use EMI, just a conversation we were just having, I'll use it as an example. EMI has closed door refrigerated cases, but JSI has more of the, we'll call it, the technical capability to execute and improve those cases and understand their testing and their design side and our lead engineer and his team up at JSI, it becomes an immediate opportunity organically for EMI.

EMI enables us to do or EMI creates the opportunity. JSI's technology and engineering resources allow us to execute against it. So, we are very well and very much invested in trying to leverage a lot of those things. And as we've talked about consistently in our Fast Forward plan and in our execution, we look at growth in two ways. One is creating and acquiring more of the share of wallet in the customers in the segments we're in and the second is expanding or adding additional vertical markets.

And I think there's a segment of those vertical markets that are always in a kind of an ebb and flow. And I talked about automotive as an example. Automotive is kind of flat right now. We're there prepared. We have the products and we have the relationships and we have the relationships with the automobile manufacturers. We have the relationship with the large auto groups. We have the relationships with the large integrators that work on auto dealerships.

As that's slow, warehouse is slow, we turn our attention to different markets where we go in and experiment. Parking, as an example, after a couple of years of being slow, particularly coming out of the pandemic, parking is showing increased activity.

So, we look to move between some of those verticals. And by having a portfolio of them, we can move with the ebbs and flows and hope that they're kind of their sign waves are kind of opposed to each other. Well, one is down, another one is up. And so, within our portfolio, we have those additional vertical markets that we look to expand on and we look to kind of put more investment, more energy into while another vertical market is down.

[Operator]

At this time, we are showing no further questioners in the queue, and this does conclude our question-and-answer session. I would now like to turn the conference back over to Mr. Jim Clark for any closing remarks.

[James Clark, executive]

I really think we covered a lot in this call. So, I don't have any extensive comments here to close the call, except to say, I'm sure you can all see the activity, this was before this existed last month and a few months before. But there's a lot of activity in the C-store space. We're engaged in all of it.

There is a lot of synergies that have been created with EMI coming on board, both commercially and operationally. We talked about them, but I'm very excited about it. And I'm glad that we feel like we're coming to some resolution on grocery. And much that we've spoken about over the last year is kind of executing exactly in the timing that we've been kind of anticipating.

We do anticipate by year's end that there'll be great clarity of this one way or the other. And regardless of which way it goes, we feel like there's an opportunity for us. So, we're very excited about the outlook. We don't feel as though lighting is under any particular pressure. It's just a timing thing. We're very excited about Display Solutions. I think that we have some real good opportunity in front of us, and we're excited as a team to continue to execute and look for those opportunities and maximize it.

I just want to say to everybody that's on the call, thank you for your continued interest, your continued confidence and your continued support. And with that, we'll draw the call to a close. Thank you.

[Operator]

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.