LSI Industries Inc (LYTS) 2004 Q1 法說會逐字稿

Good afternoon. And welcome to LSI Industries' quarterly conference call. Today's speakers will be Mr. Bob Ready and Mr. Ron Stowell. During the discussion, all participants will be muted. At the end of the presentation, you will be announced to ask questions. As a reminder, this conference is being recorded. Now, without further delay, I will turn the conference over to Mr. Bob Ready.

Thank you, Michelle. Good afternoon, everybody. With me is Ron and I think today's approach will be similar to the past conference calls. I will give you a little bit of an overview of the quarter. And Ron will go over some financial, basic financials, and then I will alert Michelle and we will open it up for question and answer.

Overall, I think we're quite pleased with the first quarter. It has been a very challenging period of time. Business out there is still very, very tough. It is very, very competitive. But there are definite signs that things are starting to improve. Our oil business has some indications of some improvements. We are working on some specific projects with certain customers that are relating to some image conversions, or at least the development of a direction of an image improvement, or I should say conversion. As expected, with the economy somewhat still, certainly from a manufacturing direction, is somewhat soft, we're still experiencing that same softness throughout our business area, but with all the changes that we've made, and certainly with the changes we made on our commercial industrial direction and as we reported in our press release, the consolidation of our graphics businesses, all of those moves are definitely helping us not only maintain market share, which as most of you know is very, very important to me, but we are starting now to look at improving market share.

Our petroleum business was up about 5%. I don't consider that a blockbuster increase. It is just the fact that we have some companies starting to do a little bit of improvement, as far as their direction to their imaging, so a little bit of upgrading in their lighting and some of their graphics. But I personally feel that we will probably see a continuation of this type of level until we see certain things happen with some majors. Now, that could happen in a quarter or two. It may take another year. I just don't know. But overall, we're very confident.

Some of our new products are beginning to take more and more hold as far as prototyping is concerned. The Encore series, we've made some additional improvements and different options of that product to give us a broader base of retrofit, which as most of you know is a very important part of our game plan as it relates to our strategic plan.

Our fast food business, of course, is still pretty much steady as the way it has been. Again nothing blockbuster but just a continuation of business as usual, on a more general plane. Our menu board business is obviously much softer due to the major completion of the Burger King project. But there still are some signs out there that there are some other programs that may be coming, but as an important part of the menu strategy, we will talk a little bit about our announcement of our technical service program that we're going to really go into more detail at the shareholder's meeting, so I invite anybody that is on this line to come to Cincinnati and see LSI's newest direction and what we call this technical service or what we call narrow casting, and I will talk a little bit more about that, as I'm sure I will be asked questions.

The CNI business, obviously is still a very, very competitive business. We are beginning to see some signs from that standpoint of improving somewhat. I think that is primarily due to the new agents that we put on board about a year ago beginning to really develop our product line in their markets. Our internal fluorescent or interior fluorescent business has become quite strong compared to past months. And that again primarily, with some of the changes that we've made in the design of the products, and we've become more competitive in that product line, and we have some very, very straightforward approach to how we're competing in the marketplace. We literally put ourselves in a much more competitive position.

As I said, the graphics business has obviously been stronger, because of, and I honestly believe, because of the strategy of putting the companies together, we've had a nice program with the CVS Company, the drug chain company, that most of you aware of that image conversion that's been going on, it will continue to go on at a little bit smaller pace than we have had and experienced. But that's normal at this time of the year as we're moving into the holiday seasons, and in the holiday season, some of the internal conversion reimaging will slow down as these stores are getting ready to put their Christmas displays in and so forth. And the last thing they want is interruption of construction or retrofitting during the holiday season. So it is a normal seasonal pattern that we feel will be coming over the next four to six months.

The bottom line is, is that from my perspective, and looking at the operations of the company, we've done a lot of things to improve just the overall culture of the corporation. I feel very, very confident about where we're going. And the position that we put ourselves in to be more competitive and take more opportunity of the strengths of the product line, and the services that we're providing our large customer base.

We feel very good about the new products that we've introduced. There is becoming more and more interest in some of these. It takes a little while to get a brand new product out into the marketplace. There is prototyping that goes on and certainly a lot of sales effort, both from an architectural, as well as an end-user approach, but again, those products were literally put into place during the tougher time period, and right now, we're beginning to see those products have certainly an interest, certainly at the architectural level, as well as the consumer level.

I'm going to ask Ron to kind of talk a little bit about the fundamentals of the financial side, and then I will get more into the Q&A, as I'm sure you will have more questions of me as it relates to the different markets. And with that, I will turn it over to Ron.

And I will start with the normal Safe Harbor statement. Our remarks today will be related to our expectations with regard to a number of activities in which we're engaged. Reliance should not be placed on these forward-looking statements because there are risks and uncertainties. And those risks are described in our forms 10-K and 10-Q filed with the SEC. And we will not have any material nonpublic information to discuss today.

Let me first mention that most of you probably did see two press releases come out from us today. The second one, about noon Eastern time, and it had to do with the wire service correcting some column headings on page six, the table of the new segment data, they had gotten. Had to make an adjustment and did not correct it properly. So that second release, the numbers didn't change, just the column headings.

Which leads me to just a comment on the segment change, the lighting segment and the graphics segment, which does fit how, with the organization change, with the LSI Graphic Solutions Plus, and with the concentration of our lighting business that we're working on, that it does fit how we manage the company. It fits how we report results and information to Bob and the executive management of LSI. And certainly, as Bob has described in some of the programs we're involved in, when those two segments kind of cross over and converge with lighting and graphics, being supplied to a customer, that image business is still very important to our overall direction.

So the press release has, for those of you that have models that may look at and track segment data, it is provided for your benefit to at least update your models for the three fiscal years ended in 2003, and I've got quarterly data in there for 2003, so that as we go forward, this year, you will already have that comparable data in your models. So that's a few comments about the segment data.

Another comment about the first quarter last year, you will note that we have reflected that accounting change related to the goodwill impairment and our transition year in the first quarter, that's per the requirements of FAS 142. And so that is in there. And showing that as a below the line, noncash, noncharge item. Everything above that is exactly the same. As reported last year.

With that, I will just kind of comment that from a segment standpoint, both segments were up about 5% from the prior year. Lighting at $36.2 million dollars. And the graphic segment at $22.9 million. I guess the rest of the financial data is there. I guess I prefer to comment on any questions that you may have. I know that one thing that does come out is the number of shares that we used to calculate our EPS. I will give that now. It was $15.974 million for the calculation of diluted earnings per share.

Okay. Thanks, Ron. Michelle, why don't you open it up to question and answer please. I think it would be a good time to do that.

Thank you, Mr. Ready. If anyone has a question at this time, please press zero one on your telephone. The first question comes from Mr. Ned Armstrong. Go ahead, Mr. Armstrong.

Yes, good morning, gentlemen.

Hi, Ned, how are you today?

I'm very well, thank you. Could you elaborate on just how some of the internal and cultural changes, what exactly they accomplished to help you improve the direction of your company?

Sure. I think it goes back a little bit as the things started to slow down in this economy, Ned and certainly with the situation with the war in Iraq. As most of you all know, we have been very, very strong throughout our whole period of 28 years, as a major niche market-oriented company and that's been very successful for us.

As I said in many past conference calls and many discussions with many of you, that probably the weakest link in LSI is directly related to how the condition of the Middle East would be, and how it would affect not only us, but our country as a related petroleum products and, of course, low and behold here we have the Iraq war, and we've had some obviously major, major changes as far as the oil industry. And we looked at the mergers of those companies, three or four years ago, it was great opportunities and they really started out that way, but when the war started, we began to see a whole different change in the attitude, as far as the oil industry is concerned from their retail segment of their gasoline and convenient food store operations.

That obviously gave us a very, very strong wakeup call that this could be a long-term, not knowing how long the war would be, and what other aspects would come as a fallout because of the war. And it was time for us, as we had these acquisitions now in place, and looking at the commercial/industrial market, which we've always been part of, and each year getting a little bit stronger, it made a lot of sense to me that this was a good time to start looking into the forward growth of the corporation, not just certain parts of the divisions, and putting ourselves in a little different cultural direction. We have been pretty much brand oriented in these acquisitions as it would relate to more of our C&I, commercial/industrial and we were more market oriented in the early years toward our niche markets. And I think it made sense, at least from my standpoint as we look at the uniqueness of LSI and the way we've combined graphics and lighting and now technology which we will talk about a little bit later, is that we really focused the cultural change into a much stronger market-oriented corporation rather than just name brand.

The C & I has a very strong influence on brand recognition from many companies who have been in business many, many years who have related certain special product lines to certain segments of the C&I market, and are recognized as such. As a newcomer into this industry, as LSI is, it made sense to me that with our uniqueness and the way we've approached our market, that we take the same approach that's been so successful for the corporation, and that related to more of a market-oriented company. It made a lot of sense to me to consolidate the graphics businesses, and as time goes on, and very shortly, we will have taken the strengths of our lighting acquisitions, and implement that into a more unique, stronger package.

The bottom line is, is that we're moving all of our major marketing assets, our agents, in our niche markets as well as our C&I agents, we're putting a stronger package together, both in graphics and lighting and at the same time we're actually hitting our national account market with a combination of graphics and lighting. So the cultural change has been one of just strictly a niche market-oriented company with a limited product offering. And really expanded that into a new direction that we think is not only going to be more competitive or allow us to be more competitive, but I think we're going to set some new trends on how business is done in the strategic markets that we serve.

And I think from a timing standpoint, with the market being as slow as it has been, this gives us an opportunity to educate our people, which we have done, we've made a major change in our customer service approach, that is all done. Actually I had a meeting with our customer service group this morning, kind of launching the new step into how we're going to develop an even stronger customer service approach to all our markets. The opportunity we have now to influence, not just our graphics products and our lighting products, but this new technology that we're going to introduce as it would relate to pulling all of our product lines and effectively becoming a stronger source for both products and services to the markets that we're already well-established in, and at the same time, with the changes that we've made, is to enter markets that we're not maybe as strong as we will be, because these are new opportunities.

We certainly have approached a different mannerism in how we're working with our vendors. Much stronger direction as we work with fewer vendors that have a stronger capability of not only educating us on existing materials and products that they serve us with but new ideas new concepts they're working forward in the future so that as we develop new products we are working with key vendors who have a much stronger emphasis in product development, through materials, and new ideas, so that the new products that we introduce in the future are going to have a stronger, hopefully a stronger opportunity to grow.

And last but not least, it is the training of the next generation of management that basically we have a lot of new, young, exciting people, that are filling in new positions, as it relates to the growth of the company, and obviously, as I get older, and looking into the fact that understanding that I'm not going to live forever, it is my responsibility to now start developing the new culture of this corporation. Which is different than the old culture. It is truly a commitment to a much higher volume market potential. It truly is committed to a better utilization of all of our assets. And that is all the acquisitions that we've made. Combining the products and services, and doing a much better job of training and educating people who have grown up under a niche market-oriented culture that are now going to have a more general culture, understanding that we will never, ever, ever give up the market share or the commitment we have to the niche markets that brought us to the race.

I think when you take a number of companies as we've had, who we have believed in entrepreneurship as the main guideline, which has been good, but I have a feeling that entrepreneurship to some degree and certainly from our aspect where these companies are older now, been a part of the company longer, it is truly time to make all of those companies a unique part of how they're all going to work closer together, and better utilize our abilities to drive costs down, improve market share, and bring new people in place that will be carrying the future banner of this corporation for many years to come.

That is a mouthful. And it has been a challenge to do all of that in less than a year and a half. And I'm very proud to say, and very happy to say that we are ready for that. We've made that crossing. And most of these folks are all understanding what we're going to do and how we're going to do it. And we have a whole new attempt as it would relate to market penetration. Understanding the success of the niche-market approach, it to some degree can be applied in a similarity to a larger market opportunity, and that's focused on a stronger customer service capability, a much more personal orientation to the customer, and in other words, building back on the ethics and the approach that we have built this company on, and bringing that more into play into the corporation. And that's exactly the strategy of what what this corporation is going to be moving toward.

What I like about this strategy is the uniqueness of how we put products and services together to approach the large national environment, the changes in society, and certainly the way businesses are doing business today. They want more for less. They want better service. They want the ability for us or others or all to be able to reduce the amount of invoices that they have to go through. So we've literally packaged up a new way of doing business. And then come the shareholders' meeting we are going to tie the bow of technical capability around that and as we launch ourselves into calendar 2004, starting in January, what we have now is a new company moving forward with a strong basic history of good niche marketing. With now the opportunity to have a much more forceful position in a much broader market as we move into the next direction of growth.

So you are really going from a series of niche-oriented companies to a more integrated corporation that will attack the broad markets from several fronts tying together different product lines and solutions?

Yeah, and, Ned, that's not necessarily different than others but I think what is different for our industry and LSI, is that we brought together a market, a product opportunity that is unique to our industry. And you're absolutely right. That's exactly what we're going to do. But don't forget, we are not going to lose, and I think this is where mistakes have been made in the past with other companies, where they've looked at opportunities like this, and forgot what really brought them to the race. And we're not going to give up the market share in those niche markets.

If anything, the results of all of these changes that we're making will have a more of a positive impact into those markets because of cost reduction, improved quality control, more efficiencies in production areas, and that's another part of the cultural change, is that we're looking at a very, very direct way to drive costs down, utilizing the same facilities that we have in place. For example, more automation, in all probability, facing the challenges of the benefit packages for people, as we all know that is becoming a very challenging part of how we do business.

I think the bottom line, for LSI, anyway, it is a great opportunity to hopefully show our shareholders that even during the toughest times, we are the kind of company that doesn't sit around and wait for things to happen. We recognize the future. We think we do. We recognize the challenges. And we have stepped up to the plate and we put a lot of things in place so that when things do turn around, we are going to be in a better position. And I will use the graphics industry as a good example.

During this tough period, most of that graphics business is done with much smaller companies, entrepreneurs, independently owned. They have been in the unfortunate position where they haven't had a lot of volume come in, that's obviously reduced their income considerably. It's made it very difficult for them to invest in new technology, which doesn't stop just because the economy slows down, and we've taken that advantage, or that opportunity, by investing into equipment that we believe will bring costs down and so when the market turns around, when the larger part of the market starts looking at an improvement in their own imaging and their own products that they need, they want to get on board and get on board quick and turn things around and I think we positioned ourselves to take advantage of that opportunity.

So I think our study has been very, very much straightforward. Is taking a company, and not waiting for things to happen. Investing and making things happen. And I think you will see the results if the economy improves just a little bit, and if it doesn't, we should be able to hold our own, as we have shown, as we are beginning to show improvements, and I think that effect will be in the margin side as well.

Okay. Thank you.

Thank you.

The next question comes from Mr. Andrew Meister. Go ahead, sir.

Good afternoon, Bob, Ron. How are you?

Hi, Andy.

A couple of questions. Number one, we had discussion in the past about some of the things that have been happening. You alluded to that maybe, maybe, and we don't know when, I guess, the petroleum business could turn some. My sense was that on average, sort of the age of the image that's out there is, maybe five years old in aggregate and I'm wondering how long an image lasts. And then number two, I believe there was something that happened with Luke Oil, and then also, something happened with Circle K.

Right.

A sale of that company to a Canadian firm.

Correct.

If history is correct, that is also kind of a tired image as well.

You're absolutely right about the time element, Andy. That it is a five-year average image, we're into that maybe third year, 3 1/2 years, with some of these companies, maybe some a little bit longer. It is very difficult right now to read that market based on all the other pressures that are involved as it relates to their overall business plan. Remember this. That the retail side of the gasoline business is not their most dynamic part of their business. As a matter of fact, many of them will admit that they would rather not even be in that business. And you have seen a lot of changes.

The Luke Oil that you're referring to is an indication from a Russian direction, as it would relate to one of the companies up in the Northeast, that's been going on for a year or two. There are obviously, we think some important opportunities. We've been on top of that.

There are other concerns that we have as well, and that is the payout schedule, some of these new players coming in, as they're making some major acquisitions and we have to be cognizant of that, based on pricing as well as getting paid for it. But the program with Circle K, that's been one that's bounced around a lot of years, and just recently, I was in Chicago at the Petroleum Equipment Institute Show about two weeks ago, and you can definitely see some of the things that relate to that, some of the conversations I had with certain people, and again, those are areas that we feel that there are small signs that say things are going to start to improve.

I'm very hesitant to come out with a strong indication that those things are going to happen quickly. Because I just don't know. And I think that those of you who have followed LSI for a number of years, who have been very frustrated, as I have been, when programs like this, that are announced in the general media, the Luke Oil, -- it just slipped my mind -- Circle K and others. We've had tendencies to hear about things like that, and then we wait and we wait and we wait. And eventually, usually, it happens. But as most things go in this world we want it to happen today.

I'm looking at our oil business in a very, very straightforward approach. It is what it is. We're good at it. We will stay good at it. We will not give it up to anybody. We will continue on developing the right products for that market. We will maintain our rep organization that's a strong part of our sales effort. We will continue to call on those accounts. And we know from history that eventually, those things will turn into positive revenues.

I wish I could give you a very good calendar date and tell you that in three quarters, that's going to happen, I don't know. But in the meantime, understanding that we are good at that business, we're bringing new products into that industry, just remember, that some of the growth that you're seeing in our petroleum business is an expansion of new products, going into a much more limited market. There are interior fluorescent. Our downlighting line. These are products that we didn't have in the past that we have brought into play as we continue and working with our agents, to continue to work on that market.

Now, if a Luke Oil, if a Circle K, depending on who does what with it, those things are opportunities that we will definitely jump on with all efforts because we have maintained that market position. I look at that, Andy, now as the frosting on the cake. For so many years, it has been the cake and the frosting has come from other areas.

Okay.

But don't let, again, I caution everybody on the bases, I don't want anybody out there to think that we basically side stepped the oil business. That is a viable part of our strategic plan. We all know that once that oil company or a couple of oil companies decide to make a reimaging happen, it is volume and very volume-oriented. I think that this is where we will have an advantage over our competition is by the consolidation and pulling together of the product lines, is that we're going to expand the market opportunity that we didn't have a few years ago when we were doing some of those image changes. And that is the involvement of our interior lighting program. And certainly, the expertise in our in our graphics ability.

And then this new technical aspect that I keep alluding to, which is a new communication network, that we've developed, a partnering with a company that is in the software side of technology, and this is a new method of bringing technology plasma screens, advertising, communications, into markets that we already serve. It is a viable part of what is happening in our society, as you look at walk-through airports and you see these different plasma screens, and this is an extension of things to come in the technical world. And it was just two years ago, November, that I had announced to our shareholders at our annual meeting here in Cincinnati that over the next couple of year, my efforts were going to be placed into changing the perception of LSI as strictly a manufacturer of lighting and graphic products. To a company that has a perception of a technical service company with manufacturing capability of lighting graphic, and technical products.

We are on the step, the first step of that conversion. I believe it is an important part of our strategy. It gives us something that our competition doesn't have. It is another door opener to expose the corporation's capabilities to a huge market. And the major experience of this will be happening on the 13th of November when I'm going to bring that reality right into the image center, and literally put it on display, and use it in front of our shareholders. It is something that I can't give you forecasts on numbers yet. It is a new dimension, a new direction, a new addition to the LSI strategy of being a unique company, servicing the large retail segment of our economy. And we are slowly and day by day formulating a stronger presence of both product and services to hit that national account level in a much different dimension than the way we used to do it before.

We're going to try to bring profitability back into a very, very low-cost business with all the pressures that we all know that happen in the lighting industry and the large rollout programs. It is another dimension again, elevating our service ability and our capability to a market that is so used to just nothing more than price-sensitive products. We're going to bring a new dimension to that. And we think it has a lot of positive opportunity.

Okay. Good to hear. You moved through your explanation from C store and petroleum to image sort of and that leads to another question that I had, I've been told that in LSI Graphic Solutions Plus, that was one of the reasons why you were able to bring the CVS business --

Correct.

-- to the company, and one of the keys there was obviously the blended business, and going to market with a common voice, but one of the things I've been interested in is the technology side. And last quarter, you quoted David McCauley on what he thought was happening with the business, and that things were trending better and he was as optimistic as he had been for some time and later I had heard that he was almost ready to bring a proposal to you and the Board about new equipment. Where does that all stand?

That happens with every division, it's just not David. Everybody out there running in operations, is always looking for new equipment.

I want to know if he bought something or not.

I haven't bought it yet, David. We're looking at it. But with the technology flying around the way it is, and David is a very astute and very, very much on top of things, and looking at that equipment and where it will do its best, have its best impact on the company, is always under review not only by me, but our manufacturing folks, and it isn't that we're reluctant to do that, it is, as we look at new equipment, and what we are requiring is that more research is done, because there are a lot of different things out there, Andy, and before I commit to the kind of monies that this equipment is, I want to understand more about what the equipment does, and what the impact will have. And that's not taking anything away from David. What David is doing is educating Bob Ready into what all this means to us in a long-term level. Remembering that we've got many pressures for investment. The consolidation of our companies is only one area, as it relates to technology.

We're looking at expanding our ability to produce at a higher volume without investing in new facilities, or additional square footage. So tooling requirements on one side of the fence are as important as technology on the other side of the fence. So you got to find the proper balance based on being the, if you wish, the mother, and we've got all of these siblings looking for opportunity, and it all costs money. So in my position, in looking at the overall economics, I want to be sure that these investments are the right investments, and I will never fault any one of our divisional presidents for obviously coming to us and asking for more money as it would relate to technology. It is a timing issue. And it is an education issue for me.

Okay. But he has not changed his tone, as to the opportunities in the business and the way it's tracking.

No, he continues to lobby in almost everything he writes to us.

There are some other issues here based on timing. As most of you are aware of by now, we have been very fortunate to receive a rather large commitment from the largest retailer in the retail world, and it is significant. Significant. And that roll-out doesn't start until next year, February or March, as an overall. And looking at that, based on presence of need, we've made some major commitments on tooling and expansion from within the internal parts, not additional, but expansion of some of our efficiencies, and our production lines and our paint. There are certain things that really have to be done, there are other things that you would like to do, but may not necessarily have the ability to do it right now, that doesn't take the need or the interest away, it only becomes a timing issue based on what is available to them.

I will let somebody else go. I just have one thing for Ron. We can do this offline, I suppose. But it would be helpful for me in modeling purposes when you review the financials of the segments, you do do a nice job of the quarterly breakout for fiscal '03, it would be helpful to see what the quarters look like for fiscal '02. Just to sort of get a rate of change kind of thought process.

Andy, we'll do that offline, okay?

Okay. Great. Thanks, guys.

I had not prepared that, Andrew. As it is not something we're required to disclose going forward and time is also a critical reason.

Amen on that. With all the other pressures of all the other things. But that isn't something that we can't look at in the future, Andy, and work with you.

The next question comes from Rick from Columbia Management. Go ahead, sir.

Yeah, it's Rick Dotai [ph].

Hello, Rick.

Good afternoon. Just a couple of things. Historically, the graphics business has had better margins, and as that declined, I think first in this downturn, we've seen margins turn down, if that part of the business is coming back a little stronger, when should we see that start to show up in, say gross margin line? We're still looking at declines and pretty good declines year over year.

I think when the market shows improvement overall economically, that business that is out there is tough business, but we're getting it, and somebody else isn't.

So you're buying -- not buying, but you're getting down and dirty to --

Sure, because you're in a market now where it is a buyer's paradise, basically. Based on, they understand that the economics are there and it is to their advantage, just as we are working with our vendors as well. I think that the important thing is is that business is becoming available to us, and we're taking it and not somebody else taking it.

It is supply and demand and it is a situation out there where there isn't a lot of business that we can selectively pick, where the margins are better. We've been in that position in the '90s. And that was obviously very, very effective. And I think we're going through a period now that, just like anybody else, is that selective opportunities are very limited now, and we're going to live through it. And the most important thing, though, is that we are building more and more relationships with people that we didn't have before. And that's some of that business that we are now selecting because we want to build those relationships.

If you look at some of the longer-term commitments that you're making now, as it relates to pricing, how much are you diluting the future with those commitments, assuming business does get better in the future, but you've already locked in a lot of your production with is, I assume, less than optimal margin business.

Well, first of all, there aren't necessarily long-term programs at this point.

But what about that big retailer?

We are very confident. We know our costs. We've worked with our vendors and that is a program that is a great absorption as far as manufacturing overhead. And that retailer is a very important part of our strategy. It is kind of a, I would call it kind of an insurance plan that puts us in a position where not only are we going to have good volume in here to do that absorption, one of the things that is critical to working through this, is keeping our people on board.

We did lean up, as most companies did. And we really have worked hard to keep the best people in place. And when you run into a situation where you get where business continues to go down, then you have to recognize that some of those people are probably going to have to be let go. We have been in a position where that has not happened. We have kept our best. And we are now looking for people to bring on board.

I think the other important thing about this, and I have remarked to this as being really the, actually, and you as an investor may not like the answer to this, but for me as a CEO and looking at long-term growth, having the opportunity to become a major participant in the largest retailer in the world is a great education tool. And it is a great model for training our people on how to service the biggest and the best. And not too many companies have an opportunity to do that very often. And my strategy is, is that not only from a revenue and a profitability standpoint, but put ourselves in a position where we develop the kind of methods of doing business that in the long term will reduce costs. And costs are related to many different ways. It is not just material costs. It is not just labor and overhead. Your warranty, you've got all kinds of small costs that add up. That you can never price into a quotation.

What this has done for us is driven a strategy in place where we've taken this great opportunity, and we are very, very proud and happy to have this opportunity and start to develop a model for the future of this corporation. So that if we're smart enough, and we do a good job, and it applies well to the largest in the world, other companies always look at those companies and how did they do it, who did they do it with, and one of the things that for me is not only building our revenue but also strengthening the education and the understanding of how to do business at the highest level there is from a company of our standpoint. And so it has a two-fold effect as far as contribution.

In my opinion, it is a contribution of revenues and I think the margins are more than adequate. We all would like higher margins but the real world is when you deal with the kind of volume and the kind of companies that are out there that drive those costs down. We can either walk away from that, and try to find it in smaller businesses, who by the way aren't doing anything right now, because they don't have the wherewithal and the money to do it, or we can take that, work it to the best of our ability on the margins, and utilize the gains from that, not just from the bottom line but how we are going to educate and train our people, work better with our vendors to drive costs down, and improve the method of doing business. Because in my opinion, the future in this country is not going to be lots of high margins. I think we're in this for a longer period of time, I think you would agree to that, it is how these companies that get through it and work through smarter that are going to improve the bottom line. And I really believe that that's the way LSI is going to prove its margins.

That's the only program that we have that's 24 to 30 months out. he other programs are all much shorter in length of time and I think that is a sign that they're doing things to see what is going to happen, rather than commitment to long term as well.

Have you got any thoughts on -- I don't know if there is minimum commitments on their part, but does that make them -- what percent of your business will they be a year from now?

Probably less than 8%.

Okay.

That's a guess.

Okay. I mean one of the concerns, and I've talked to you offline on this, is that what they're good at is beating the hell out of their suppliers, and you've had some relationship with them in the past, but that's their professional supplier beater-uppers, and there is plenty of -- it is a partnership where typically they carry all of the clout.

But, anybody that is the size of any of these bigger companies, whether they're one, two, or three, that's how they operate best. And you either get on board with them or you walk away from that business. In today's economics, it made no sense to me at all to walk away from that business, knowing that we could go in and make a profit, and help absorb a lot of overhead, to keep a lot of good people that we've trained well, and had on board during the best times, and keep them employed, keep them happy as much as we can, so that things improve.

I don't worry about a company that is number one, and let me make this statement, this company may be strong in its ability to reduce costs, but it is a very fair company to work with. They're going to offer us a great education center to learn more in how to make our company better and stronger. And as a result of that, I think we're going to benefit much more than just on the margin side as we move into the future. It is my job as CEO to take this company and continue it in a direction that is going to have life and longevity and hopefully better profitability as we learn.

On the other side of the coin, it gave us an opportunity to sit down with our vendors and work out more realistic pricing because their volume is hurting, they're looking for business, and so it gave us a two-way opportunity to literally put in place a volume of business that right now, in this economy, is very much needed, not only for LSI, for any company out there. And they don't come along very often.

Right. Just turning the page, about a year ago, I think you guys started talking about some of the things that you were going to introduce in your C&I product line.

Right.

New products and seemed to think that you could differentiate yourselves with some of these new products. That, in addition to that, the Encore sort of focused on the petroleum markets.

Right.

Can you talk about anything that looks like a success at this point? A year later. Or what is out there that looks like it is contributing today?

Well, if you relate success to volume, that's a difficult challenge in the downturn economy. If you relate success to market control, or maintaining your market position, that is another part of the scenario. If you take our markets and you look at new product development, and we basically break it down to three segments, that's our outdoor, our indoor and our landscape, those are the three main segments as relate to our lighting, in all areas of that, we've developed some new products.

I think number one, it gives reps an opportunity to make calls on architects, designers, contractors and end users. Gives them something new to talk about. It sets a new image for LSI that even during the most difficult times we are coming in with new ideas. Can we relate that every product has turned into a grand slam homerun on revenues? Not in a downturned economy. But I can tell you this, that the new products we have brought out has placed LSI at a new level as it relates to the major market of the C&I.

In the old days the petroleum products really drove more of opportunity in the C&I business. Whatever we could sell to a service station or a convenient food store, we tried to sell to a dealership, or we tried to sell to a C&I opportunity and that's why our major growth was in the niche markets. Today is a different story. The products that are being developed are being developed for the C&I market and those are now finding their way into the petroleum. If you put a fluorescent fixture in a department store, in many ways it will be the same fluorescent fixture that you could put in a convenient food store. And where we've made the change in looking at how products are being built and from a production standpoint, we've literally turned the dog, petroleum niche markets into the tail. And I think that that chapter hasn't been written yet because we're only into it 16 to 18 month, as we put all of these pressures in place. And, we will see how it turns out.

I'm very confident that on the basis of our growth potential, we are going to drive costs down. There is no question that we are going to drive costs down as our volume improves. Those volume improvements will have an effect on our cost improvements on those niche markets, that we didn't have that ability to, just two years ago. So it is a very interesting period of time for us. But all the things that we've done, we believe have taken this company into a new dimension, and will put us into a much more competitive level.

And I will say this. And I believe this with everything that I have, when we were selected to become a major player in that large-volume opportunity, it sent me a signal very clear that we now can compete in any kind of a market because let me tell you, when that bid came out, it was at the real heart of the downturned economy and there isn't a company in this country that has the capability that didn't want that business. We're not the biggest. But we did walk out with the number one prize. And we will make money at it. And that gave me a confidence level that says, we are now ready to start working into a new market potential that will give us greater opportunity.

Now, if we want to talk margins, I've got to look at an economy that is going to give us an opportunity to be more selective on where our capacity is operating. Right now, the last thing I want to do is completely tear our capacity. We got rid of second and third shifts. And now, we're having to build those back up again. That comes with a cost. But on the other hand, we're in a position where we have that kind of volume, and I think it is a great opportunity right now for us to participate with that. And I think they're going to be improved results.

I don't know when everything is going to start getting better in this country. I guess if I did, then I probably wouldn't be doing what I'm doing right now. I think that we have an opportunity, and I think we positioned our company to take care of that opportunity. The chapter will be written, quarter to quarter, see how we fare.

Okay. Thanks.

The next question comes from Mr. Ned Armstrong. Go ahead, sir.

Yes, regarding the technology announcement that you alluded to earlier.

Yes.

You talked about plasma screen TVs.

Plasma screens, yes, sir.

Now, will you be actually making plasma screens or will be you be providing the surrounding lighting to help illuminate them.

No you're right, it is not illumination it is a communication network. Let me tell you what it is about. It is not technology that is new to the industry. What is new is the software system that we've been given the exclusive rights in the U.S. market from a Canadian company that we believe has some of the most unusual and the best of what's out, available in there.

As you look throughout the future of this country, we see more and more of this type of design of product and we're not going to build those, we will source those. There are some parts of the product that we can build and that was another part of the relationship that we developed with this company, is our manufacturing capability. But what we have is something that we believe nobody else really has.

When I was at the PEI at McCormick place in Chicago last week or two weekends ago, a lot of this technology has been out there but a lot of it has failed miserably and that is the inability of these companies that were producing this or selling this to really have the wear-with-all in market penetration to really bring this to light. What we have now is something that I just haven't seen anywhere else.

And we have such high interest. What we did, is instead of trying to do this with everybody, I took the top part of our management team, we all have contacts, we all have relationships, Ron has relationships with banks, I have relationships with some of the bigger oil companies, as well as some of our other bigger customer base. And what I did is instead of trying to take this product offering, this service product offering, and run with it all over the country, we selectively picked certain customers related to each of our markets. Retail, petroleum, fast food, automotive, banks, as an example. And we went to those folks, which there are probably about a dozen, that we hand picked, and we wanted to test market and see what their attitude was. Because we know from discussions that many of these bigger companies had been exposed to this kind of concept, using an external, an internal plasma screen, it could be at the fast food store, it could be as you walk into a department in a department store, it is in the airports used by some of the airlines, all of this technology, but this is different in the ability that we have to really service large volume parts of -- I will take Burger King as an example.

This software system, if utilized by Burger King throughout their 8,000 stores, now, don't anybody put numbers to this, I'm giving you an example, is that this is a system that simultaneously can be controlled from one central point that, for example, if this was in the middle of December, and they had a program of hot chocolate and a crescent roll or something for breakfast, in Minneapolis, and it was 10 below zero. And at the same time, in Florida, it was 80 degrees, and they had a program with juice and a roll or whatever it was, this can all be selectively controlled from one point and literally positioned in any store in the United States. It gives the marketer a huge control on their menus, on these different programs that these different folks offer at different times of the year. It is a true control system that really allows them to control their menu offerings, their pricing, it takes the individual human element out, where if you go into a fast food store today, the pricing is changed on the board by somebody in the store. It is not done mechanically or computer, as an overall rule. And this is technology that is really, really coming. And this will be the future of how communications. One of the things that I see of value is you've got nine facilities like LSI does, you've got 1,500 or 1,600 employees and how do you communicate to all those employees what your strategic logic is in moving forward, especially going through a cultural change? I am implementing this program in our own facilities.

You will see it when you come to the shareholders meeting. It is already in our lobby. And it gives me the opportunity to educate all of my employees by centrally locating, let's say in the cafeterias around the LSI operations, an ongoing communication network that informs our employees about what we do as a corporation, what SGI did in Houston, what Grady Mccally and so forth. And I think that what we have here is the beginning of a new link. What makes sense to LSI is that we have such huge market penetration in some of the biggest markets in the world, we have a lot of people contacts, we have a good product offering in services, and now we are bringing technology into that based on another method of doing business, and putting a bigger arm around that opportunity.

It truly is communications. And we are now involved test marketing -- I should say we are testing it based on selling the idea to some of our key customers. We haven't sold the first one yet. We just started this a few weeks ago. I'm very proud to say that in two instances, just three weeks ago? When the banks were here?

Three or four.

Three or four weeks ago when we first introduced it to the banks, we have two of them coming in Thursday, that are coming back now with more people from corporate headquarters, they want to know more about it. We are beginning to create an interest. That's how you develop a new product offering. And we are really excited about this because it is another new dimension in a downturned economy, that gives us an opportunity hopefully to build revenues and provide a higher level of service in addition to our product offering to our customer base.

Thank you.

Thank you.

The next question comes from Mr. Brian Tilton [ph]. Go ahead, sir.

Good afternoon, Bob and Ron. I was just wondering, Ron, if you could run through the operating income on a segment basis?

I do have that. Lighting segment, last year --

Or not, just this -- I think we have -- do we have last year?

No. Yes, you do, I'm sorry. That is in the revised data. This year, lighting segment was about $1.9 million. And the graphics segment was about $2.3 million. Totaling $4.2 million.

Okay. And then could you just run down the current assets and current liabilities? Line items?

Hang on, Brian. He is going through his ream of paper he's got on my desk.

All right.

Well, I will get pretty specific here. Cash, $174,000. Net receivables, $40.548 million. Inventories, $41.368 million. And then total current assets, I think is in our press release, $87.651 million. So we've got about $5.5 million of other current assets.

And then on the liabilities?

Current maturities of debt, $85,000. Accounts payable, $12.945 million. And the rest are accrued expenses.

Okay. Could you just give any guidance on margins for the new segments, looking at the historical fiscal figures that you gave? They kind of vary from it looks like 5.3% to 9%. Could you give any help on going forward with a more normalized --

Brian, as you know, we do not make our projections of the business going forward.

I'm sorry, I meant on a segment basis, could you provide any guidance there?

No. We do not give guidance whether it is in total or by the segments. And obviously, there are going to be subject to the volumes that these segment businesses have, Brian. Rick asked a question earlier about margins going forward, are we going to get them back, and the economy is going to dictate how tight our margins are to some degree. Certainly, our volume, as we get a little -- we made volume resilient. As we get volume, we typically do have more profitability. And that will be true in both of our segments.

Okay. Thank you.

There are no further questions at this time.

Okay, Michelle, I will close. I want to thank everybody for taking the time to participate in our conference call. And I'm very excited about the future of the company. I'm very excited about some of these new things that we've developed.

I think the only thing that I can leave you with is a little food for thought, as you look back over the history of LSI, and certainly many of you who have been very patient and very supportive of the company, is understand exactly how we operate. And I think it is really important that as we sit here today, and looking at the past, and understanding where we've come from, and now changing of the direction, as far as it relates to our cultural ideas, and developing some of the most important things that I believe are in the right interest of the growth of the company, and will help on the profitability side, have been implemented.

This has been a very difficult period of time. We've said this before. It doesn't go without say we've all experienced it and felt the pain. But one thing about LSI, and we've been through it before, in years past, is that we never sit around and wait for these things to get better. We've always taken a position to make things happen. This is the important part of our future, is that we have positioned ourselves with product development, for improved product efficiencies, based on production. We've worked on our cost side. We have become a smarter company on how we allocate our expenses and control our expenses. We've moved into a new market dimension, bringing technology into play, tying it in with our existing product line.

We haven't gone off in wild areas, staying away from what we do best and have done well for many, many years. And I think the consistency, the financial strength, the commitment that we've made to our employees and to our shareholders, maintaining a very strong company, and going through the ups and downs of our economy, I think stay true to what this stock is all worth. Our commitment to our dividend policy. Which we think was a commitment on the basis of our shareholders seeing a company that is committed to a return on investment in the stock side.

And certainly last but not least, as we look into the future, we believe that we now have probably a stronger company, as it relates to the products, the services, and the opportunities, than we've ever had before. We will see how that goes. I believe we are, and I'm the one here that is pulling the directions of the company. And the most exciting part of all of this is that I'm still working with the same dedicated, committed, loyal and very experienced people. We didn't lose those folks during a tough time. Many companies have. So when we come out the other end, we've got a strong base to build off of and that's been the strong strategy of LSI from the day we started in business just 28 years ago this November, is when I founded this company.

So with that, I would like to end this conversation. As always, we're happy to talk to anybody and work with anybody that needs more direction. I want to thank the folks, you folks, especially, for your support, and your working relationship with LSI. Ron, if you have nothing else to say, I will wish everybody a good day.

I would like to invite you all to come to our shareholders meeting. I think that some of you folks that have a very good position with our company, it's time for you guys to come down and see us. Because I think you will find it to be very interesting. It will give you an opportunity to see some of the things that we've changed. So I welcome you, and invite you to the shareholders meeting. I think it is going to be a great meeting and I look forward to seeing you. I hope you can make it.

I promise you that if you make the commitment to come, I will give you as much time as you want of me, and Ron, while are you here, and see how the operation is run, meet some of our upper management. We're totally committed to you, our shareholders and investors, and it would be a great opportunity for you to take a day and visit with us, and meet some of the other folks. I talk to you all the time and I open it up for to you meet some of our other folks as well. With that, I will say have a great day, thanks again. And, Michelle, that concludes our meeting.

Thank you, Mr. Ready. That completes today's conference.