Q4 2023 LSI Industries Inc Earnings Call
Participants
James A. Clark; CEO, President & Director; LSI Industries Inc.
James E. Galeese; Executive VP & CFO; LSI Industries Inc.
Aaron Michael Spychalla; Senior Research Analyst; Craig-Hallum Capital Group LLC, Research Division
George Gianarikas; Analyst; Canaccord Genuity Corp., Research Division
Richard E. Fearon; Founder and Managing Partner; Accretive Capital Partners, LLC
Sameer S. Joshi; Analyst; H.C. Wainwright & Co, LLC, Research Division
Presentation
Operator
Greetings, and welcome to LSI Industries Fiscal Fourth Quarter 2023 Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.
It is now my pleasure to introduce Jim Galeese, Chief Financial Officer. Thank you. You may begin.
James E. Galeese
Good morning, everyone, and thank you for joining. We issued a press release before the market opened this morning, detailing our fiscal '23 fourth quarter and full year results. In conjunction with this release, we also posted a conference call presentation in the Investor Relations portion of our corporate website at www.lsicorp.com.
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 as well as our most recent 10-K and 10-Q.
Today's call will begin with remarks summarizing our fiscal fourth quarter and full year results. At the conclusion of these prepared remarks, we will open the line for questions.
With that, I'll turn the call over to LSI President and Chief Executive Officer, Jim Clark.
James A. Clark
Thank you, Jim. Good morning, all, and thank you for joining us today. As you've likely seen by now, we had a solid fourth quarter and a very strong close for the year. This year's performance, along with the strong performance over the last few years, is thanks to the work and effort of 1,600 or so team members at LSI. It's also thanks to the efforts and confidence of our agents, our partners and the vast network and number of customers we serve.
Our customers, agents and partners trust LSI to be their partner of choice to deliver high-quality solutions that help their business grow. I could not be prouder of the contributions of so many in helping us achieve a real milestone in the history and journey of LSI.
Just about 4 years ago, we developed and published a goal of being a $500 million company with double-digit EBITDA performance in 2025. I'm happy to say that we have wholly met that goal as we finished the year just shy of $500 million and just over $52 million of EBITDA, and we did that a full 2 years earlier than our plan.
We finished this year in a very strong financial position as we generated over $46 million of free cash flow for the year and reduced our net debt to about $35 million. It's quite an accomplishment for a company that was struggling to hit $300 million in sales and $15 million of EBITDA just 4 years ago.
As many of you know, we published an updated plan back in March, which we call our Fast Forward plan. It outlines our road map to get to $800 million in sales and nearly $100 million in EBITDA performance in 2028. The plan isn't ambitious as our original plan to hit $500 million in sales. But this time, we'll be doing it with the advantage of a seasoned team of folks on our management team right through our sales team, manufacturing floor and operations team.
Much like our original plan, it calls for a balance of growth through organic activities and M&A. It continues to focus on our strategic initiative of zeroing in on high potential vertical markets, such as grocery, C-store, warehousing and manufacturing, automotive and sports courts, among others. And it allows us to deliver a variety of goods and services to those markets.
Those goods and services are differentiated. They are designed and developed to serve those vertical markets in a way that commodity and catalog offerings cannot and they provide value to our customers that help them run their businesses.
Over the past 5 years, we have regularly been introducing more than 20 new products each and every year. Last year, our spotlight product was the LSI REDiMount. The REDiMount allows our customers and our installers, the opportunity to install our award-winning canopy Lighting solutions more efficiently and with less time and cost to them.
In addition, it allows for vastly simplified installation service and upgrade process and it creates a long-term relationship with our customers in which everyone benefits.
This year, in 2024, we will continue that pace of development and innovation with the introduction of more than 20 new products again and with our flagship solution being a next-generation environmentally friendly, refrigerated Display Solution that uses no ozone-depleting chemicals.
This product will move away from man-made refrigerants into an organic gas refrigerant that has a 0 ozone-depleting footprint and virtually no global warming potential. We are in the process now of adding an additional manufacturing facility in Maine that will house this R-290 solution with the goal of taking orders in Q2 and delivering first generation products in Q3 of 2024.
Our digital menu board division continues to gain interest in orders from an ever-expanding base of customers. 3 years back, we were fortunate to be awarded a $100 million project to install outdoor digital menu boards across the country for one of the world's largest quick-serve burger chains.
We have wholly completed that project with a very satisfied customer and we've made a significant name for ourselves as a quality supplier and partner that can manage not only the design and manufacturing of the solution, but also the project management, installation and post-sale support.
With that, we have a small but growing revenue -- recurring revenue associated with this ongoing remote content management and services, and we continue to differentiate ourselves as a company as a full solutions provider.
With an oversized award like this project, there has to be a lot of work done to fill the gap once things are complete. And I'm happy to say our sales and design team have done an outstanding job of doing just that by infilling ongoing activities of that $100 million order with a variety of customers from burgers to chicken, Chinese food to tacos.
We're very excited to continue to expand this solution, and we think in the long run, digital displays will find a place in other areas of our vertical marketing strategy.
Our Lighting division continues to innovate and expand its product and services offering. LSI has always been known for its industry-leading outdoor Lighting and advanced control solutions. But it's also always had a very robust indoor product Lighting offering. Our ability to deliver these solutions to the vertical markets we serve has continued to pay dividends for LSI, our customers and our investors.
We believe LSI has a lot of runway left. We have a team of folks that are ready to continue our growth in Lighting, digital and print displays, refrigerated solutions and our expanding base of project management and service solutions. We have a well thought out strategy and a plan to grow that is adaptable to changing market conditions and competitive forces. We feel confident in our ability to manage and seek out continued productivity and cost opportunities while managing price, margin and cash flow.
With that, I'll turn the call over to Jim Galeese, who will provide additional details on our fourth quarter and full year performance.
James E. Galeese
Thank you, Jim. A solid fourth quarter capped a successful year for LSI. In summary, fourth quarter operating income increased 43% year-over-year on sales of $124 million. The business generated $14 million of adjusted EBITDA in Q4, 33% above last year and continue to realize margin expansion with adjusted EBITDA margin of 11.4%, 310 basis points above last year.
Fourth quarter reported earnings per share were $0.28, with adjusted EPS at $0.30. This compares to $0.18 and $0.21, respectively, for the prior year quarter. Improved profitability combined with a lower fourth quarter effective tax rate drove the increase. The lower tax rate contributed $0.04 to reported EPS and $0.03 to adjusted EPS.
For the full fiscal year, sales increased to $497 million, representing 9% year-over-year growth. Adjusted net income increased 61% to $29 million. Adjusted earnings per share increased 55% to $0.99 per share. This represents the company's highest full year EPS in over 20 years.
Full year adjusted EBITDA increased to $52 million, with the adjusted EBITDA margin rate expanding 270 basis points to 10.4%, and all quarters showing considerable improvement over prior year.
Our significantly improved earnings and working capital efficiency generated full year free cash flow of $46 million. Cash generation was positive throughout the year culminating with fourth quarter cash flow of approximately $16 million.
Strong cash flow was applied to reduce the level of outstanding debt. We reduced debt by over 50% in the last 12 months to $35 million, lowering our ratio of net debt to trailing 12-month adjusted EBITDA to 0.7x. Lower debt was a capital allocation priority in fiscal '23 and provides the balance sheet flexibility to pursue both organic and inorganic growth initiatives as outlined in our updated 5-year strategic plan.
A regular cash dividend of $0.05 per share was declared, payable September 5 for shareholders of record on August 28.
Now a few comments on segment performance. Lighting growth continued in Q4 with sales increasing 5%, representing the ninth consecutive quarter of growth compared to the prior year period. Growth reflects ongoing healthy activity in our key vertical markets, particularly parking applications, warehousing and automotive.
For fiscal year '23, Lighting sales increased 17%, with double-digit growth achieved in both indoor and outdoor applications. Our assessment is that we are taking share and outperforming the market, a combination of our expanding position in key markets and the overall vitality of these priority verticals. The Lighting gross margin rate improved to 33% in the fourth quarter and the full year margin rate improved to 32%, 190 basis points above last year.
We entered fiscal '24 with a project quotation level steady at a high level and Q4 bookings were favorable with a book-to-bill ratio above 1. We are seeing some slowing in large projects, but small and medium project activity remains healthy. We continue to experience lengthening quote-to-order conversion periods, but these are holding steady. These are committed projects, but because of financing and budgetary purposes, final specs and product requirements are constantly being modified, delaying order release.
Pricing remains steady and material input costs vary by commodity, but overall input costs remain aligned with pricing. As expected, fourth quarter Display Solutions sales declined versus the prior year as the prior year quarter was a peak period for our large digital menu board order.
Full year Display Solutions sales increased 1%, but sales increased 13% when excluding the digital menu board order, reflecting the ongoing strength and investment in the grocery, refueling C-store and QSR market verticals. Full year Display operating income increased 43% and realized significant margin rate expansion with the gross margin rate improving 470 basis points and operating income improving to 11.6% of sales.
The mix of higher-value applications, along with improved program pricing, drove the rate expansion. We enter fiscal '24 with very active customer inquiry levels for branding and image initiatives, particularly in the refueling C-store and grocery space. In addition, we are experiencing very high interest in our new refrigerated-display case product scheduled for launch in Q3 of fiscal '24.
We will begin taking orders late in fiscal Q2 for shipment beginning in fiscal Q3.
In summary, it was a solid quarter and fiscal year for LSI. We enter fiscal '24 well positioned to build on this success. The market is steady at a healthy level and will support our commercial efforts with continued strong operational execution and effective margin management.
I will now return the call back to the moderator.
Question and Answer Session
Operator
(Operator Instructions) Our first question comes from the line of Aaron Spychalla with Craig-Hallum.
Aaron Michael Spychalla
First for me, I saw in the deck, you kind of talked about the second half of FY '24 being stronger than the first half. Can you just talk about some of the factors that go into that? And then just more broadly on the markets that you're in, seem to be a little more insulated from the macro and have had good CapEx trends.
Can you just talk a little bit about paybacks or return on investment or just other factors that customers are looking at when evaluating Lighting and Display versus other projects?
James A. Clark
Thanks for the question. Thanks for getting on the call. Yes, I mean, we're not shielded from anything any more or less than anybody else. But as we've talked before kind of in this form and others, we selected our strategies really based around vertical markets, and we want to be more to fewer as opposed to something to everyone.
And within those vertical markets we picked, we look for how we can add value to our customers' businesses and help them improve their overall function as a business. And then also how they would respond to any kind of external macro pressures and things like that. So the markets that we've picked are generally aligned with that. They're not immune, but they're more resistant, if you will.
So as you look at across our vertical markets like grocery or C-store or interestingly enough, automotive has just been on fire. We just thought that these are markets that will kind of move through the cycles of this in a longer term and -- but the customers will still invest and keep to their plans. And that's proven out to be a pretty solid strategy over the last 5 years or so.
In terms of strength in the second half and for us, I just mentioned it a few minutes ago, we're going to be introducing some newer products probably at the top of mind this year is the introduction of R-290 refrigerated solution. It's a 0 ozone, 0 global warming contributor. And it's a product we think is going to have a lot of demand and we have a lot of opportunity with it. So we see that as being a real growth driver in the second half.
And then lastly, I would say to that you're aware of the seasonality we have where these numbers right now reflect Q4 participation, we'll have the Q1 participation. But the winter months are from a seasonality perspective are usually a little bit lighter on us. It's got nothing to do with demand or interest or lost deals or anything. It's just the reality of doing exterior installations and such during winter months.
James E. Galeese
And Aaron, Jim Galeese here. The only thing I would add to that, Jim, covered it very thoroughly is we mentioned about the lengthening quote-to-order conversion rate that started sometime in Q3 and is continuing. So that will affect us from out the door more in the first half. That will be the norm and stabilized and hopefully, condensed a little bit by the second half of the year. So that will be more in a normal operating environment.
Aaron Michael Spychalla
Right. Right. That makes sense. And then just second on margins, great job, obviously, to date, and you talked about some of the runway that's left there. Can you just provide a little bit more detail on some of the key levers and just how margins might progress as we think about FY '24?
James A. Clark
Well, you know that we're pretty good about planning. And I think our Fast Forward plan up on the web is a good indication of how we like to set our goals and objectives. We have a number of things we feel we can still do operationally from a procurement standpoint, from a manufacturing standpoint. But a lot of those things are gated by the ongoing kind of variations, input commodity pricing, some things are moving down. Some things are moving up. Labor is still a bit unsteady. I mean we've been doing very good with it, and we feel very good, but it's still just a bit unsteady. And it's not really within our company as much as externally.
And so some of the programs that we want to initiate, implement and continue to refine and implement are -- it's the timing is just not right because you're trying to do things while it's raining outside. So it's just better to -- for some of those things to wait when things become more stable, but we have the plans to implement that. And when I say that we have more runway. We have the plans to do those things.
And I think you can see from our margin performance and stuff, we're incrementally implementing those. But if the environment was a little bit more stable and again, I'm not just talking about internal, I'm talking about external partners and things like that, installation teams, permitting issues, things like that. We think there's another couple of turns of the wheel we can implement that just allow us to become more efficient and they'll be reflected in margin.
James E. Galeese
Aaron, one of the things we're very encouraged about our margin expansion has been -- it's been very balanced, not driven by one particular element. So volume certainly over the last year has been a contributor, higher quality applications, so higher quality mix certainly playing into that. Our ability to really -- and we spend a lot of time on this getting pricing right by program, representing the value of the solutions we're providing and the customer recognizing that. So we spend a lot of time on pricing. And then we're always keeping a sharp eye on costs, our material input costs, design savings, et cetera. So all those serve to contributing to the margin expansion we've driven now over the last couple of years.
Aaron Michael Spychalla
Right, right. And then just maybe last, really nice free cash flow generation and continuing to pay down the debt over the last 1.5 years. Can you just maybe give an update on kind of capital allocation priorities? You saw the mention of organic and inorganic. But just maybe some more color there.
James A. Clark
Yes. I don't think you're going to see any material changes in our capital models that we've used in the past. I think you have to give some way for inflation and the general -- from a total dollar standpoint, just the inflated cost of things that are going to be with us for some time. But beyond that, we don't see any radical changes to our past performance.
James E. Galeese
Our priority items. We see in the short intermediate term remaining the same. Correct.
Aaron Michael Spychalla
Okay. And then anything -- I mean, anything new on the M&A outlook as we kind of think about that opportunity with kind of the balance sheet you much improved?
James A. Clark
Yes. I mean it's always a tricky subject to talk about. I'll just -- I'll say what I've said in the past. We always have our oars in the water looking for opportunities. We think that -- we think the environment is a bit better right now. I mean I know there's a lot of thoughts on this, but we think the environment is a bit better right now. I think there's a lot of owners faced with -- our smaller businesses are faced with ongoing struggles or stabilization of their business and how much they want to continue to put in. I think that the change in cost of capital and such has slowed down some of these stratospheric multiples. And I like the tone of the conversations a lot better today than I did a year ago, and our activity level is strong.
But as you know, you've been following us for a while. We're very disciplined. We're disciplined buyers and the value has got to be there. Not just from a financial perspective, but how it fits into our strategy and then how it fits into our culture.
Operator
Our next question comes from the line of George Gianarikas with Canaccord Genuity.
George Gianarikas
Thanks for coming to our conference last week.
James A. Clark
George, and thank you. It was great to see you and it was a great conference too. We certainly had a full dance card through the whole thing, and I appreciate the invite.
George Gianarikas
That's great to hear. So maybe to start, just a couple of questions on the macroeconomic environment. You mentioned that these are -- you've seen some -- you expressed some consternation last quarter about -- so just small signs you are seeing in the marketplace that maybe things weren't exactly going swimmingly.
What has changed about the character of the issue that you've seen that you expressed some issues about last quarter and also address this quarter as well. Are there -- you expressed some issues with close rates, but is there a different -- the character of the customer that you're seeing issues with changing? Or is it sort of the same that you saw last quarter?
James A. Clark
Yes. First of all, it's -- I'll just sum it up in 1 word, which is timing. It's not interest. It's not quote activity, it's not project activity. All of those things remain on the same pace that we've had for the last couple of years, if you will.
And in general, by the way, those -- that activity rate has increased kind of quarter-over-quarter. What we're seeing is a lengthening in the process, if you will, the initial request for a quote the sit down in discussion. And then, if you will, the final decision that lengthening between the final quote and agreement on the project and the actual execution of the project has been lengthening.
It's stable right now, but at an extended kind of arm, if you will. And we just noted -- I just brought it up in the sense that from a timing perspective, things that we saw that might have closed in -- that we were planning on closing June 20. They're now closing July 18. Things that we thought traditionally, we're going to close on -- or through our systems indicated a close on May 12, didn't happen until June 26. We're not losing any projects. we're just seeing that once we get to that point where we're like, okay, we're ready to move forward. We've noticed just in some of our customer base that time between, okay, we're done, let me give you the purchase order has just lengthened a bit.
And I think there's lots of factors for it. I think there's lots of reasons for it. Most of them are external. They could be in new construction. There are things like final funding releases and things like that. As you know, all the banks have tightened up and when you're in a project like that. It's just taking a couple more checks and signatures for developers as such to get -- to keep the timing going.
When we're talking about remodels and things like that, we're looking at labor issues, either external subcontractors or even in some cases, internally, just the number of people to get all the paperwork and the process is done. So I just think it's fair. We've always been very transparent, and we just wanted to kind of mention it. I do not want to overplay it.
James E. Galeese
George, the secular trends in some of our key verticals remain very sound. If you look at refueling C-store, grocery, QSR, the level of inquiry we continue to receive with respect to branding, refresh, strengthening image remains extremely healthy. And that's driven by 2 things. We continue to look for more energy-efficient solutions with consideration of environmental factors, that's where R-290 plays into, but also the customer experience as things are -- their competitive environment and so forth. So these are sectors that have been performing very well. .
They've done very well financially, and so they continue to invest. So we see some of these secular trends in some -- in our key verticals remaining pretty healthy as to Jim's point, then it just comes down to timing.
George Gianarikas
Right. So no cancellations, just timing issues, so to speak.
James A. Clark
Yes.
James E. Galeese
And like we said, that kind of popped up in the spring and it hasn't lengthened anymore, but it's at an extended level right now. Because we track this stuff, right? We look -- and it's not perfect science or anything, but we have an expectation from initial inquiry to project development to final spec to order -- to actual order and then obviously through manufacturing and delivery.
And we've just seen -- and to be honest, too, I want to be candid here. It's not just an extension. It's kind of a little bit of an accordion. It's extended. We're in an extended phase and then things can compress on us. So...
George Gianarikas
Right. And how is the permitting environment? You expressed some issues with that. I think maybe last quarter, a quarter before that, are you getting permits on time?
James A. Clark
Yes. I think that, that is wholly stabilized. We're still at a very extended permitting time in Mexico. But that's just may be the new norm for years or months. But it's just -- now it's just the new norm down there. But domestically, the states in Canada, that has stabilized. And -- yes, it's less of an issue right now.
George Gianarikas
You gave some kind of qualitative guidance around fiscal '24, you discussed the previous question. I'm curious as to whether you can help us bridge '23 to '28. We should -- do you think '24 will be a growth year?
James A. Clark
I think we're 1 month into the year right now. So it's -- I don't know -- we have some limited visibility, but it is premature for me to kind of guess on '24 or forecast on '24. I will say that I expect that I can tell you in Lighting, I think that the signs remain positive within that limited window that we have, let's say, a 2-month window or such, I think that more timing related in the Display side.
And that has to do with construction schedules and that lengthening timing we talked about from quote to actual order. So I don't see any concern about our ability to continue to grow. I do see that timing-related issues could be off 30, 60 days.
And what I worry about in the public market side is that something that pushes 1 quarter that will pick up in the next quarter is overreacted at any given time. So that's -- that's 1 of the reasons why we kind of mentioned it. But I don't see anything -- I don't see anything that's going to keep us -- take us too far off track of where we're going.
James E. Galeese
We feel confident we'll continue to outperform the market, right? So to Jim's point, the market may end up being. And we also feel solid about maintaining the quality of our earnings as well.
George Gianarikas
That's a great segue to my last question. With regard to the M&A environment, how much does earnings accretion matter to you when you look at targets?
James A. Clark
Well, I will tell you that, I mean I think we have a demonstrated management team with the ability to kind of work with something that is dilutive and create value, but we would also certainly like to kind of focus on things that are accretive right from the beginning.
I think that it would be anything that we would do that we would consider that might be initially dilutive, you can be assured we have a plan that will make it accretive at some point and not take too long. If we did something accretive, we want to make sure we're not paying too much of a premium that washes away that accretion. So what I would tell you is what disciplined investors were choosy and I just mentioned it with Aaron's question, we don't look just at the financial metrics. We look at how it fits into our strategy. There's no sense having orphans to our strategy.
And then lastly or maybe not lastly, but just as importantly, we look at culture. We don't want to kind of take a square peg no matter what its performance is and try to force it into our round hole, if you will.
So all of those factors help make our decisions, but I would just underline with saying we're disciplined and -- but I am encouraged by the environment right now. I think there's more in front of us, maybe based on our results, maybe based on the general market or maybe based on a combination of all of those things.
Operator
Our next question comes from the line of Sameer Joshi with H.C. Wainwright.
Sameer S. Joshi
Just a couple on the orders. The EV battery manufacturing facility order -- have you disclosed the scope in dollar terms of that opportunity going forward?
James A. Clark
We haven't. What I would like to say is it's a single digit, it doesn't represent any double-digit improvement in our quarter or anything. We're excited about it, and we wanted to share that news. But these type of projects, we roll in and roll out of on a constant basis.
I think that I know that there's been a number of questions over the last year or so, like projects like our large digital menu board order, it's a $100 million project that hits you all at once. Well, while we were executing against the delivery of that project, we are also executing around backfilling that. And so when you have a big spike like that, like a big order like that, our attention outside of delivering on that immediately turns to, okay, how do we maintain this elevated level.
The EV project, that EV project doesn't rise to that same level, but it was a project we wanted to make note of, not only because of the composition of the project but because it's within what we consider our Ohio region, we like this whole concept of Ohio for Ohio, buying locally.
But that buying locally, by the way, also extends to Texas and extends to Utah and the West Coast, wherever we have a facility, we're trying to make sure we're visible in the community and we want to participate in a way that allows our employees to see their work in a local facility, but also for those customers to see the pride of the people that are in that area. So that's why we highlighted it. We were excited about it. It's a sizable project.
And to be completely frank, we're working on Phase 2 of that right now. So maybe there will be something else we have. But it doesn't rise to the level where it created any big anomaly in the quarter or anything. It's just another one of those larger projects we get.
Sameer S. Joshi
Understood. And on the Display side, there is a capacity expansion that is being planned or already underway. Is there any significant CapEx involved in that? Or is it just a few couple of million dollars.
James A. Clark
Yes. It is a couple of million dollars, and it's kind of within our plan, plus or minus $1 million or so. Nothing -- again, I think the first -- one of the first questions we got was around our capital plan and it remains consistent with our prior year's adjusted for inflationary costs and things like that.
But yes, it's already included and it's not significant. We have been -- in our prior years, we've been staging up for this. So there has been incremental investments we've made that we're now just consolidating into 1 facility -- new facility.
Sameer S. Joshi
Understood. And then just you mentioned a few things in terms of delay -- lead time delays. How does that impact your OpEx and working capital requirements. Another way to ask the question is, do you see any impact on operating profits because of these delays?
James A. Clark
No. They don't rise to the level where they disrupt a quarter significantly, but there could be mid-single-digit adjustments on a quarter-by-quarter basis. But I think if you took any 2 quarters together, they would normalize.
Sameer S. Joshi
Okay. And so we should expect operating leverage year-over-year. In other words, operating expense as a percent of revenue will be -- should be expected to be lower in the...
James A. Clark
Yes. Well, that is one of the levers we pull, right, is that -- and so yes, I mean, I think there's still a lot of those efficiencies and there's still a lot of the timing things that we can do to create that opportunity. And that's just our ongoing job to execute against them.
And I think this year, if you look at 2024 on a whole, you can see that kind of incremental steps up. Sometimes we're taking 2 steps forward and a half step back and sometimes we're taking a half step forward. So -- but if you look at it on an aggregated basis, you can see that continued improvement.
James E. Galeese
Sameer, I'll just add that there are some variable costs in operating expense, so they do flex. So if there is a bit of softness somewhere, things like agency commissions go down because you don't pay it. So there is -- we'll be able to manage our OpEx in line with our operating margin expectations.
Sameer S. Joshi
Understood. And then the distribution of -- or rather contribution from the Lighting versus Display. I think this quarter, you had around 57.7% of revenues from Lighting. Is that trend -- is that proportion expected in the next few quarters? And if so, does it imply a better gross margin going forward?
James A. Clark
No, I think that -- and I'm not making any blanket statements here, but in general, Lighting has more of a sensitivity to the seasonality we talked about than Display Solutions does. I think that you'll always see it kind of hovering in this 50-50, 40-60 range. It's not going to go outside of those markers.
If you think about it in terms of a football field, we're going to play between the 40s all the time, Lighting and Display Solutions.
Sameer S. Joshi
And gross margin implications?
James A. Clark
In what regards you mean...
Sameer S. Joshi
Because I think your Lighting segment gross margins are 33% plus and Display are lower...
James A. Clark
Yes, much different business profile. If you -- I think that in order to get an apples-to-apples comparison, you look at the top line revenue and you look at the bottom line -- yes, the operating margin. The stuff that happens in the middle is really a reflection of the differences between the 2 businesses, one being more capital intensive than the other.
James E. Galeese
One has a higher gross margin rate than the other, but the other may have a lower OpEx, Sameer, as you know. So they wash out as you know, at the bottom operating margin, they're pretty close.
Sameer S. Joshi
Yes. Yes. And we have discussed this in the past.
James A. Clark
Just to further that one other -- just one other comment. I don't think you're ever going to see the gross margins kind of equal (inaudible). It's just not they're fundamentally different businesses, and it's just a different structure. So I think it's really important to look at that top line and op income. That's your true measure.
Sameer S. Joshi
Understood. And then just last one. How big is this refrigerated display for the R-290, how big is that opportunity that you're looking at right now?
James A. Clark
Well, I mean, I think it still fits within the whole refrigerated -- portable refrigerated display market. It's just that we think that it's a leading edge, if you will, technology and it could create a lot of opportunity for us to take additional share. .
The market is bigger than we buy a magnitude bigger than we serve.
James E. Galeese
And the mobile refrigerated display market continues to grow.
James A. Clark
Grow. Right. So our thing is always about we have to earn every project we take. And once we get that, we get a tremendous amount of customer loyalty, and we do -- we hold it in very high regard to make sure we hold on to that. The stickiness we have with our customers is demonstrated through our continued performance in our customer list.
But we have to go out and -- the market is much bigger than us right now, and we need to go out and fight for every new opportunity there is. And once we get those opportunities, we do, do a pretty good job of holding on to them. But nobody is going to be -- the opportunity is not going to be beating down our door. We still need to go out and earn every dollar.
Operator
Our next question comes from the line of Rick Fearon with Accretive Capital Partners.
Richard E. Fearon
Congrats on another fantastic quarter. A nice job backfilling on the menu board business. Just a couple of questions regarding M&A. You have already come up. And my only question is a little more specific about the acquisition philosophy, Jim, mostly regarding your sort of buy versus build considerations, maybe specific to some product extensions like security? Or as you get into the new refrigerants right now, I mean this is -- the success, yes, REDiMount, the opportunity -- the R-290 seems to represent. It's just exciting what you're doing internally and good acquisitions are hard to find. So it would be interesting to hear what you're seeing on the M&A side versus how much growth you think you guys will accomplish organically?
James A. Clark
Well, Rick, and thanks for joining the call, and thanks for the comments. First of all, if you look at the Fast Forward plan and you look at our prior plan, our 2025 plan, both of those have a component of organic growth and M&A. And between 2019 and 2020 -- in the end of this 2023, we led with organic growth and M&A was a piece of that.
In our 2028 Fast Forward plan, we still have organic growth as the majority contributor with M&A as a minority contributor. They're close, but for sake of discussion and alignment in the business. We want to -- the real discipline and the real execution comes around organic growth, and we want to make sure that we're balanced in that.
In terms of the make versus buy and that type of thing, it varies by market, right? In the security, we definitely want to be in the security business. I don't see us making security equipment. There's plenty of very well-organized, well-run equipment manufacturers in the security side. I'm not -- we're not interested in acquiring a security equipment manufacturer, but we are interested in being able to deliver value in that market, maybe through our metal fabrication and some of our capabilities.
James E. Galeese
Access to market.
James A. Clark
Access to market is another one. And then really, we talk about it a lot, but our ADAPT group, which is our project management group just allows us to offer more goods and services to our customer base, which increases our value to that customer. So when we look at something like security, we see it as an extension in the goods and services we offer, but we don't necessarily have to make it as much as we have to own the design, the integration and the installation and delivery of it.
Now when you go somewhere else, we'll talk about -- I'm just going to use this as an example. It's not anything that we actively are engaged with or anything. And it doesn't necessarily reflect anything we're going, but I'll just use it as an example, let's say we were getting into checkout counters or something like that, that would probably be closer to a make equation because in that segment, we do a lot -- we already do a lot of the things that are required for making checkout counters.
We already have a lot of the technology and the capabilities and we source similar materials and things like that. So that might be more of a, hey, look at this acquisition can get us a start, but we can add a lot of value because of our already strong internal capabilities. So that's kind of how we look at it make versus buy, and it changes depending on what that M&A target might be.
Richard E. Fearon
That's great color, Jim. And just kind of raised the question in my mind. When you talk about other extensions like checkout counters. I think of security as kind of -- there's sort of 2 benefits, right, with getting into that business is you -- certainly your background, your experience, but you're selling presumably a little bit of a higher-margin product, but then you have the recurring revenue stream, which with it -- you're -- correct me if I'm wrong, but might be sort of that recurring communication with customers, leading to other opportunities down the road.
But is there a recurring revenue component to checkout counters? Or is that -- does that sort of fall into the sort of like refrigerant category where you'd be obviously able to do some service and stuff like that, but not really a consistent revenue stream.
James A. Clark
Yes. I mean I think that you just did a great kind of connection there. I think the checkout counter is belt-driven or fixed fall more in kind of the refrigerated and non-refrigerated display type of market, right? There might be some service to it, but there's really not any recurring revenue. However, you look at the security market, and our initial view on that is a strong lean towards surveillance. But when you look at intrusion and hold up and things like that, there is a well-established recurring revenue model associated with that.
And it's not -- listen, this -- there's no way we're going to go from 0 to meaningful contribution in the security market in the next 6 months or something. But on a longer-term basis, recurring revenue is something that we want to continue to put a focus on not only for the business and the income stream and the convenience of the customer.
But from a commercial standpoint, it tends to create stickiness and a kind of a closer proximity to the customer, you're in contact with them more often, you're seeing things that are happening within their business and you're able to act as a good partner and in many times, offer a solution or assistance.
And so we are very focused on expanding our recurring revenue model. The digital menu boards are a good example of it. It's a good start. And we continue to look for ways that we can make that happen. But no matter what happens there, it's not going to be something that happens overnight, and it's not going to be a triple-digit contributor to revenue or income quickly. We're going to have to -- it's going to be pick and shovel work, but we're in the process of doing it. And we want to make sure that it all fits within our vertical market strategy.
Operator
There are no further questions in the queue. I'd like to hand the call back to management for closing comments.
James A. Clark
Yes. I just want to say thank you again for all of those who take the time to get on the call or follow us after. Our story has consistently been about execution. And what I always refer to as a high Say:Do ratio. Our plan -- our Fast Forward plan that extends out to 2028 is published on our website. It's there and available for investors, but it's also there and available for our suppliers, our employees, our partners and our customers.
And I think it's just a document that tells you -- that shows you the road map and what we're planning to do. And it just remains consistent and connected with our philosophy around execution and a high Say:Do ratio. So with that, I would just say thank you for the continued following of LSI investment and consideration, and we'll look forward to talking to you in the next quarter. Take care.
Operator
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.
