LSI Industries Inc (LYTS) 2004 Q2 法說會逐字稿

Good afternoon, and welcome to LSI Industries’ conference call. Today’s host will be Mr. Robert Ready, CEO and President of LSI, and Mr. Ron Stowell, Chief Financial Officer.

During the discussion all participants will be muted. At the end of the presentation you will be allowed 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.

We’re going to change our format a little bit this afternoon. We’ve put out a rather lengthy press release, as I’m sure you’re all aware of. And this is kind of an attempt to keep our, to keep you folks and our shareholders a lot more up-to-date on what’s going on. And so you’ll probably see a continuation of a little bit more of a lengthy press release.

And what I plan to do, which is a little bit different than the norm, is just kind of give you really a quick overview and open up more time for question and answers. I think it’ll give you folks a little bit more time, and I feel that’s important that you get all of the questions out that you would like to.

As a quick recap, we were very pleased with the quarter. The overall directions of the last 16 months are really starting to pay-off for us. The economy has picked up some, business conditions are better. Our oil business is still rather flat, but we are seeing a lot more interest as far as some prototyping going on, definitely a review on some images for both graphics and lighting.

Our new Encore product line is really beginning to take hold because of the obvious energy savings that we built into the design of the product, and folks are becoming more and more aware of the energy costs, obviously, with the tremendous increases that we’ve seen in natural gas and certainly gasoline at the service station.

Our graphics business is doing very well, and from the standpoint that our consolidations are well entrenched and working very nicely. Our new piece of equipment that we purchased a few months ago was installed at SGI, or Houston. This is another digital printing pieces of equipment, actually a lot more sophisticated than the one that we have up in [North Canton] [ph]. But combining the facility, the manufacturing capability of North Canton and Houston has really made available some great opportunities. Hopefully, as the economy continues to get better we’ll see more interest in re-imaging, and our graphics business is really poised to take advantage of whatever opportunity is out there.

We’re spending more and more time now working on our narrow casting. As you will recall, we introduced that at our shareholders meeting and the press release as it related to that. This is a new communication network that we partnered with a company in Canada, and we are beginning to, obviously, make a number of sales calls. And we feel that there’s some great opportunity with that type of communication. We think it really complements our lighting and graphics as it relates to our large national retail market.

Just overall, we’re very pleased, we feel very good, especially about the next few quarters. You know, there’s still a lot of uncertainty out there. We’re still in an election year. We still have a war in Iraq. We still have a volatile Middle East. But things seemed to have settled down, and again, with all of the changes that we’ve made and the implementations that we have put in place over the last 16 months with the focus on our commercial and industrial sales force, that’s beginning to come, to show very nice results.

And last but not least the efforts that we continue to put in in the petroleum business, because that is a market that we will not give-up. And when things do improve there we will be in a great position once again to, hopefully, see some re-imaging coming around.

That’s kind of a quick recap. And, Michelle, if you would, Ron is on standby here. Ron is not going to go over the numbers. I’m sure you folks have certain questions because the numbers were pretty evident in the press release. So, Michelle, if you would, please, we’ll take the first question, and then we’ll go from there. Thank you.

Thank you, Mr. Ready. (Caller Instructions.)

And the first question comes from [Ian Flescher] [ph]. Go ahead, sir.

Good afternoon.

Good afternoon.

Hello, Ian.

Hello. With regards to your large retail program could you describe for your listeners the nature of the program and specifically how the acquisitions you’ve made over time have helped you with getting the contract?

Absolutely. Ian, the – I don’t give names out, as you all well know. But this program is a rollout program as far as new construction for the largest retailer in the world. And actually, that program hasn’t really kicked off yet. We’ve been building inventory at a rather heavy rate, as we will start to see these releases coming fast and furious beginning really next month we’ll start to see some of these come in place.

The acquisitions had such an important part in this program. But not just that, it really has brought us into the commercial industrial market at a much higher level than we could have and that we were in with just our outdoor lighting program, our package rather.

These companies that you were referring to are primarily interior companies. We couldn’t do it without them. We couldn’t be where we are today. The impact with the retail, the marketer that you’re talking about was absolute, without them we wouldn’t be here, with them today.

But it goes deeper than that. It really supplies a much better opportunity for the niche markets that we’re already involved in. That’s an expansion of that opportunity from their outdoor lighting to the combination package which we now call image of our graphics as well as our lighting for both indoor and outdoor. And certainly puts us in a position where we have the opportunity to support other large national retailers. It’s a very important part of our marketing strategy as it relates to our fast food industry.

It really is, those acquisitions really are a very important part of the future of this company. They are smaller companies, as we know. We’ve gone through the cultural changes. We’ve taken a very serious direction in the operations, specifically the two fluorescent companies that we’re speaking of. And the results of those are going to be, I think, very strong as we move into next year and looking at, hopefully, the strength of the economy. Seeing more commercial involvement. But extremely important, we wouldn’t be where we are today without them, and we’re very pleased that we have these companies in place. And we should see even stronger results as we improve their operations.

Okay, and with regard to narrow casting could you describe for us a specific example of how LSI provides this service to its customers, and what LSI Company strengths are involved?

Sure. This is a new program. It’s relatively small right now. We’re taking it very, very close in stride. We’ve actually focused as a beginning on the financial institutions, the banks, because we see a great opportunity there.

Narrow casting is different than what you might see in an airport or you’ll see these, as we refer to them as these ‘thin screens, LCD screens, or plasma screens.’ And basically, you see messages being delivered to the consumer. You see the kinds of conditions of the weather. We see the markets, and so forth. Those are usually tied in with CNN. We call those ‘broadcasting.’ It’s not, there’s a similarity in what we’re doing, but we have something that is really focused exactly to what the customers’ needs are. Whether it be a bank, whether it be a fast food chain, whether it be petroleum. It really is unique technology. The company that we partnered with is extremely sophisticated in their software.

We believe that narrow casting will complement our other products because when you’re looking at narrow casting you’re looking at the future of communications. There’s no question that the use of the ‘the TV type screen’ where their merchandising will be done based on movement, color, and all of the things that attract people to stop and listen, and look. And we just feel very, very good about the fact that we’ve entered into this opportunity with a company that really has something unique. We have the exclusive North American, actually the U.S., this is a Canadian company.

We feel, for example, that this type of technology will really keep us ahead of our competition. Think about the fact that if we’re involved with a bank who is really considering this narrow casting, this OnDemand ability to market their products, folks that are standing in line, for example, on the inside of the bank, folks that may be sitting in line on the outside going through the outside tellers, this is all an opportunity for the banks to show the types of services, keep their clients up-to-speed on what the going rates are that particular day.

And then you look at the whole concept of how it’s going to be used, and you have to ask yourself the question, ‘how does it really fit in with the lighting and the graphic elements?’ This is a new method of communications. It’s a new method of selling your services and products. And it really ties in well, we think, with our other products of lighting and graphics. It becomes a very unique opportunity from a market expansion.

And we are finding these large national retail segments of our economy, certainly consolidating, certainly cutting back on the numbers of people they’re requiring. Their vendors take more of an interest and a capability into the products and services that they’re offering. And we really feel that this kind of puts a ‘big bow,’ as they call it, around our package. Now the chapter is not finished on this. We still have a lot of work to do. We’ve been at it now for about seven or eight months. We’re taking it very, very carefully. We’re doing it exclusively on a one-on-one basis.

The thing that I’ve found the most interesting, and not only the excitement of the product or the service concept, but it’s the type of folks that we’re meeting. We’re meeting marketing folks, people that are really making decisions for the imaging and brand imaging of these large retail segments of our economy. You don’t get to meet those people very often just selling graphics and lighting. It’s quite a couple of levels above that, and it’s giving LSI an opportunity to show it’s total capabilities, not just to focus on the narrow casting.

So as a result of just the opportunity, the window, and the excitement of all technology, the type of technology that’s being introduced, the costs are coming down on the video screens, and the fact is that we have such great relationships with a large segment of this economy that it definitely becomes another opportunity to bring a new product of service into the concept that we call ‘imaging.’

Okay, great. Thank you.

Thank you.

The next question comes from Rick [Bunken] [ph], [inaudible] Management.

Good afternoon.

Hi, Rick.

Just a couple of questions. The margins clearly improved this quarter. In the past you were saying the marketplace especially I think on the lighting side was kind of getting very competitive, and price was one of the things that they were using. Was the margin accomplished this quarter with some price relief? Or I guess how did you get to over 10 percent or double digit operating income margins?

Well, Rick, the market is still very competitive. And I think it’ll always be competitive. We have had some opportunities to reduce some costs as you know. We’ve been working hard on that. With the uncertainty of really where the economy is going. And LSI has always had the focus on its balance sheet. It’s always worked towards the fact that we want to maintain a strong financial capability. And that goes whether the market is good or the market is bad.

And in this particular case over the months we’ve been working hard on reducing costs. And obviously, we are very volume related to that margin improvement. And because business is picking up, and because we’ve maintained a very lean and a very direct focus we’re staying within the parameters that we do well. These companies that we refer to are beginning to turn around, and so we’re beginning to see more opportunity there.

And the bottom line is that I think that we’re just running a lot better today than we were in years past, even enjoying the good times. And as I’ve said before, this usually happens when we enter into a tough period, when we come out the other end, we’re usually a better company.

Are these margins going to stay on a long-term basis? I can’t say that. Product mix has a lot to do with it. But you can be assured of the fact that the focus that LSI has is to continue to operate toward the direction of improving its margins. We really know that that is the trigger that really, obviously, enhances our shareholder equity, and we’re going to continue to work in that direction.

Rick, we’ve also said all along that we are very volume resilient. Now, compared to the second quarter last year we were up 12 percent, compared to this year’s first quarter we were up about eight or nine, well, about nine percent. So as that volume comes up it would be our expectation that, you know, fixed costs recovered, and that we’re contributing more to our profits.

And what I hear is that the margins were driven by volume?

To some degree.

And some cost reduction? You’re getting no help on price, and was mix a help, or a hurt, or a neutral?

Yeah, I think you hit the nail on the head. It’s volume related. It’s the efficiencies of the operations. Over the years, over the past 16 months, as you remember, I’ve said that we’ve invested in tooling and equipment. In order to, obviously, take advantage of volume picked up to reduce costs. We live and breathe in a very price sensitive market. It’ll always be there. It’s just how we manage our business, and product mix, obviously, has a contribution based on where the volume fits.

And when our fluorescent business is picking up in volume, obviously, the involvement with this large retailer does have an affect based on some overhead and burden absorption as it relates to some of our fluorescent. With our oil business being off and flat we took the Cincinnati operations, and this is a good example of what I’m talking about, and we actually converted some of the facility into a higher volume fluorescent manufacturing facility.

Now you’ll ask the question, ‘well, if you’ve done that and the oil business comes back what are you going to do?’ The fact of the matter is that we’re still basically only working one shift. We do have some areas in the second shift. And our paint line because of the demand on our powder coat system for all of our products is in the third shift now, and I think you’re just going to see and hopefully we’ll see as our volume improves that we’ll see an improvement in our margins which has been our focus from day one.

Speaking of the large retailer that you’ve referred to, were there any startup costs, either in this quarter or expected in the next quarter related to that?

I think the biggest impact that we’ve had is building inventory in order to service this program once it starts to really – startup costs weren’t what you would call ‘unusual.’ Obviously, there was some product design, but there should be no impact one way or the other as it relates to the startup because of the way we’re – you know, we had products that were already somewhat designed for that capability. And so we really didn’t have – we put some heavy tooling in place, but that’s pretty well been charged off now. And I think we bought one big piece of equipment, but that’s going back maybe eight or nine months ago, if I recall. Ron is sitting here shaking his head ‘yes.’ And, of course, but that same equipment will be used for other products other than just that one particular account.

How much of the – first of all, the inventory, how much higher was the inventory year-over-year?

Oh, gosh!

For …

Well, I think since June it was up about 5m, 4.5m, 5m.

And most of that’s attributable to …

That’s not all of …

Not all of that is to this retailer. And, of course, the retailer we, you know, kind of filled the pipeline from raw all the way up through finished goods.

And we have other new products, if you recall, that we’ve introduced over the last year-and-a-half, and those have obviously affected inventory levels as we brought parts in in order to be able to ship on time.

Certainly, the situation up in New York where we have some other retail opportunities, I think everybody knows, I can mention this retailer because it’s been an ongoing program for Litron for years, the J.C. Penney account, and so there’s been inventory levels there based on some of the programs that we’re working with them.

You know, our inventories are maybe a little bit higher than I would like to see them. But on the other hand, we’re living in a world of service, and we will continue to operate at the highest level of service. I believe that service is one of the most key parts of doing business in the future. And when you look at our balance sheet and our financials I’m not concerned about our inventory overall as affecting the bottom line, but certainly, you know, you’d like to have your cash tied up in some other things. But we don’t have a cash problem either. So I think it’s just a good balance of where we are today.

And then, lastly, and I’ll get back in queue. You mentioned the New York Facility and Litron, a year ago there was a transition going on there. Are you comfortable you’ve overcome the startup issues related to the new manufacturing facility?

Let me say that we’re about 80 percent there.

Okay, when do we get to 100?

We’ve turned that operation over to our Corporate Vice President, Jim Seferra, who founded LSI with me 28 years ago. He’s the most capable, the most competent person there is out there in the industry. And with the organizational changes that have come about at Litron, Jim is up there basically every week for two or three days, and his commitment is to get that up and running certainly by the early Spring, mid Springtime.

Okay, thank you.

You’re welcome.

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

Good afternoon, Bob and Ron. How are you?

Hi, Andrew. How are you?

Doing well, doing well. First of all, I’d like to just kind of run through a housekeeping item or two. You are now reporting a new segment basis. And I’m wondering if we could get the operating profit or margin for lighting and graphics? And then I’ll move along from there.

Hi. The operating income, second quarter for lighting was 4.5m.

Okay.

2m for the graphics segment. Year-to-date basis, that’s 6.4m and 4., well rounding, 4.3m.

Okay. And I am just working on a couple of things. It looks like as if the graphics segment is tracking at a nine to 10 kind of a margin area based upon current levels of business.

That’s correct.

And we’re sort of, kind of sort of flat. Well, we’re up a little bit relative to where we were last year.

What, sales volume?

Sales volume wise, six months year-to-date? Would you agree?

Six months is …

In the graphics?

Well, remember that Burger King program that was in there had an influence. Remember the menu board transition?

I do, indeed!

And, of course, you know, unfortunately it was a wonderful program but we didn’t have a repeat on that, and so that has some affect on that.

Right.

Sure. Well, what I’m getting at is if we did, let’s say, I think it was 20, we’re at about 44m so far this year, and last year we were at about 43m last year. And so we’re up a million, $2m, thereabouts. But the dramatic thing I’m noticing is that it appears the operating income is at about 4.2 compared to 2.3, almost a double. And on this graphics side I know we’ve got the new machinery and the digital printing, and you’ve done the …

I think, Andrew, the …

The consolidation. I’m just trying to get my arms around this. Is it mix, is it volume, are you doing things better on this graphics side? Because in the past this has been a super business when it was, when you had the Burger King going, and when this was a 12, 11, 13 type margin.

You’ve got to look at a combination of things.

Okay, help me out here.

All of us ran into a buzz saw here about 12, 14 months ago, with the economy. And certainly our niche markets were greatly affected. If you look at the graphics side of our business they were much more niche oriented, obviously, at that time. And we really started working on diversification. And it’s taken time to try to move these companies in a much more different direction but still maintaining our influence on the markets that they were all built around.

The consolidation of the three companies was a very instrumental part, and we knew it would be because of the fact that, obviously, when you consolidate and you were going to eliminate costs there’s certain positions that were eliminated. We’ve got some great folks, and some folks that stayed, and some folks that didn’t stay.

I think the bottom line is that you’re going to see a continuation – if the economy stays to somewhat the same level that it is, hopefully, it’ll get better, you’ll see an ongoing improvement in all areas, not just in the graphics side. But you’re going to see the movement of the lighting group to consolidate, you know, you introduce lighting, I mean, I'm sorry, LSI graphics solutions plus. And everybody knew that the plus was added on as the lighting side. And you will see very shortly the LSI lighting solutions plus, and plus stands for the graphics.

Again, the consolidation, the utilization of the assets of the manufacturing facilities, the ongoing improvement of cost reduction on all levels I think these all have an influence on what you’re going to see, and hopefully, those will be even a little bit better if our volume picks up. So I think that we’ve really focused on a much different culture.

And if you will recall, I mentioned the last time we were on conference is that my goal was to really change the overall history, if you want to call it that. We were so niche market oriented, and we were focused on the niche markets. We’ve done a great job. The company has survived well, made a lot of money, and positioned itself financially to now move into other stronger opportunities. And we’ve invested in the equipment, we’ve invested in the facilities through the acquisitions. And we’re just a lot tougher now, and I think a little bit smarter in how we’re running our business.

Okay, okay. Another, and this should be I think a pretty quick answer, guys. Is, you know, a number of us shareholders and people in looking at the company have been with you, Bob, for a number of years.

They have!

And I am wondering if today if the graphics is more volume dependent than the lighting, or visa-versa?

No, I think they’re both volume related.

But which is more?

Most companies are that are in our markets. I think that our shareholders and, hopefully, they're happy with some of the improvements that we’ve made in our dividend policy and our splits, our stock split. Again, we serve a different market than the tech side, for example.

We do have our seasonal situations, but I would hope that as a shareholder in this company and looking at the way that the management direction has been, it’s been steady, and certainly there’s some ups and downs. But we’ve always focused on improvement, and we’ve grown this company in 28 years from four employees to where we are today, and sales where we are today.

And we, recognizing that our dividend policy needed to be improved, we focused on that. I think we’re just a good U.S. manufacturer with a lot of opportunity. And as I said earlier, I feel very good if the economy stays somewhat where it is that you’ll see a continued improvement of LSI because we’ve become a better company.

Okay.

Andrew, you know, the image conversion programs, we’ve talked about the Burger King, and last year or the year before, you know, everybody enjoyed that volume. And we said, ‘well, it’s great while it’s here, what are we going to do when the program is gone?’ Last year’s volume with Burger King was a little less than half what it was two years ago. Here it was significantly lower than that because the program is essentially complete.

Yes, it’s probably a couple hundred, a few hundred more stores.

But what I think is really fantastic relative to what the numbers looked like in ’03 and even in ’02 is that the, you know, the margins are proceeding up nicely.

Well, you know, we ran into a brick wall, and I admitted it. I mean it happened overnight. We were planning for whatever we could. I’m on record for as long as we’ve been a public company, when I’ve been asked the question, ‘what’s our, where’s our vulnerability?’ And I’ve said, if I haven’t said it a thousand times I’ve said it, ‘it’s the Middle East.’ We were so focused and on those niche markets. They served us well. They will continue to serve us well.

But I think what we’ve done now is we have taken the bull by the horn, and we’ve put ourselves in a much more diverse mode, the introduction of the narrow casting. Folks may say ‘well, you know, really what is that going to do for you?’ I’ve even had, I believe, somebody make the statement that ‘they were concerned that we were going to give-up the petroleum part for this.’ You know, my statement was, ‘absolutely not.’

We recognize what our capabilities are. We, you know, we’re relatively compared to some of our peers still a rather young company. But on the other hand, we’re a much more diverse company. And I think that, hopefully, as all of that planning, that investment, certainly the structure of our organization now is going to lean itself to be a, I hope, a much stronger company, surviving even the toughest times.

And, you know, I look at where we are today compared to where we were about two years ago, and it wasn’t a pretty sight with the stock. Certainly not a pretty sight when you lose, when your business drops 30 percent almost overnight. But I’ll throw that balance sheet out in front of you and say, ‘you know, we went through those rough waters, and we kept our people in place, and we kept our investments going, and we always take the opportunity for positioning ourselves.’ And I hope that our shareholders look at a company that knows how to work through the most difficult times and can show better results during the best times.

Okay, fair enough, guys. Thanks for the insight, and I’ll go back into queue, too.

Thank you.

The next question comes from Craig Tennison. Go ahead, sir.

Good afternoon.

Hi, Craig. How are you?

Hello, Craig.

Doing great. Congratulations on your solid quarter.

Thank you, sir. We’re very pleased, to say the least.

We are, too! Happy to see the acquisition pipeline appear to be firming here. Can you give us a feel for the type of deal that you’re seeking?

Well, not really is it we’re seeking. I think it’s important to note, Craig, that we’ve always had an open mind on an acquisition. My philosophy and my feelings about acquisitions are very straightforward. I love entrepreneurs, I love guys that have a passion that built their companies, I like smaller companies because usually in our position, and you know, we’ve come through a good learning curve with a couple of companies that we’ve bought. Rick mentioned about Litron, and that’s been one of our more tougher experiences. But, you know, we’ve learned from it. And I think we’ll be smarter in the next one and how we approach it.

But the acquisitions have always been on our radar. We’re always looking for the right company that would fit the graphics part. Possibly now putting ourselves in the position to look more territorial that being that our market opportunity. If you look at our companies they’re mostly from the Midwest, East, but your handprint going over this country shows that there’s certainly much, there’s a great opportunity on the West side of this country. And so we’re really starting to focus now on what really makes sense to bring a new product, a new product offering and, or market opportunity into the package of what LSI does.

Now, with that said, are we going to be in a better position to look at acquisitions? Yes, I think we are. Because the last thing I wanted to do during the tough times, I didn’t want to buy somebody else’s problems. And Lord knows we had ours. And I think that our philosophy was to keep our eyes open, look for a good company that may have gone through some tough times and now realizes that in the change of business climate in this country that they might be better off to be part of a larger company than trying to do it on their own.

So I think that that opportunity may open itself here as things get a little bit better and possibly we’ll have an opportunity to pick-up. And we’re looking on both sides of the fence, both graphics and lighting.

In particular on the lighting side are there ‘holes’ in the product portfolio that you’d like to fill through acquisition?

Well, I think I can answer that very easily. We’re focusing now more as a market opportunity than brand. If you look at the past of LSI, we’ve kept the names of those companies, that’s been traditionally the way the lighting industry works. Those are companies that have specific type of products that meet a specific need in the market. In a way they’re their own niche marketer.

I believe that LSI is in a little different position today because of our image business, and then we are really changing our culture to be a market opportunity type company rather than just looking at brand. Now, there are companies out there that could really enhance our package. We will eventually either acquire the right company and, or we will internally build that product line or add it to our product offering.

We have now, basically, the standard type product package, but there’s always the opportunity to enhance that with some nice little – it’s just like jewelry, you know, you’ve got a nice gold bracelet but a little diamond on the left and the right might make the bracelet a lot better. So we are definitely looking at where those opportunities be today.

Great. If I could shift gears then to your program with the country’s largest retailer. If we calibrate our model we’re looking at something in the neighborhood of $4m to $5m in revenue per quarter once this thing is up and running. First of all, do you think that’s in the ballpark? And second, is there seasonality to that business such that it wouldn’t be a steady, you know, $4m to $5m per quarter.

Yeah, I don’t know that I can give you an accurate answer on that. I think that in looking at what any major company will do is that there are all kinds of influences that change the opportunities, not in this particular case. I think the markets have been established, and we know the stores and so forth. But you will have different volume per quarter. Some quarters might be stronger than the other, and I think that just goes based on the ability of the marketer to just construct. I mean it’s a big, big world out there, and right now the climates are extremely tough, obviously, for all of us. We’ve experienced some rather unique winter positions, and this is our cyclical quarter which everybody knows.

I think we’re a little bit too early to really say that yet, Craig. I mean we really haven’t got into the, you know, real high volume shipping area yet, so give me another quarter and I think I might be able to answer that a little better than I can today.

In the past you’ve been able to sort of give us a sense for the revenue opportunity per store on the petroleum side.

Yes.

I’m wondering if you can give us a sense for the revenue opportunity per store with this large retailer?

No, I really can’t do that. That’s kind of information that I just can’t divulge. It’s obviously, it’s obviously quite, quite – it’s good. I guess that’s the way I could answer that.

Okay. And then if I were to switch gears into the narrow casting topic, probably the same type of response is forthcoming, but trying to quantify that revenue opportunity, and have you either sold or demonstrated any of that product line? And what would be the expected selling price of that product line?

Yeah, you know, and I don’t want to be illusive in this, but ‘yes,’ we have done a lot of research on that. We are now putting our business plan together based on volume estimates. That has already been submitted to me. I’ve challenged the folks involved with that, and so I’m not comfortable in saying what area it’ll be in.

I think the thing that’s important about the narrow casting is that there will be volume opportunity. We have not done prototyping yet but we have a process going now where we have folks that are ready to give us some locations. And actually, I think that we have locations and they’re doing the surveys right now. The company that we partnered with has been very successful in securing some business with some rather large companies both in the banking as well as in the casual, the fast food business, up in the Canadian market.

Again, this is new. We’ve really done more testing to see really what the opportunities are. I am totally convinced that this process is a part of the future and the way we will do business in this country. As a matter of fact, we are in the process of installing narrow casting throughout every LSI manufacturing operation. And the reason I’m doing that is that I believe so strongly in the process and what it will do.

You know, I’ve said this before, I’ll bet there are a lot of folks out there, and I’ve challenged, I’ve said, ‘if you take our 1,700, 1,800 employees I’ll bet you’re probably less than 25 percent of all of those employees really know what the corporation does.’ And I’ll bet that’s true for a lot of companies out there, and it’s not their fault, it’s not management’s fault. You’ve got a lot of folks out there in production lines, they do what they do, and they leave at the end of the day. You’ve got that kind of a work direction. And my insistence is that as LSI is moving more and more into future opportunities it’s critical that all of our people understand what this corporation is doing because each one of them spends money, their salaries, their quality of work.

And so narrow casting for LSI Industries is an opportunity to communicate more at better levels with our employees. We have the same challenges on healthcare costs, who uses prescription drugs versus generic drugs, most folks don’t understand a lot of that. Narrow casting is nothing more than taking a level of communications and putting it in front of people that are willing to stop and listen. And I think that we’re going to use narrow casting extensively as a communication tool with our employees. And if it’s right which we think it will be it’s going to improve LSI.

Well, the same goes true from a marketing standpoint. If we have an opportunity to package an image using narrow casting, graphics, and lighting to make our customer’s customer, the consumer a much better potential then we’ve done our job. And I think that it’s just a matter of somebody is going to do it, and you will see it. It’s coming up all around us. You know, and if we can manipulate a rover on the surface of Mars at the millions of miles away that we are, and in essence, that’s narrow casting.

And we are definitely feel strongly that more and more technology will influence the consumer in making buying decisions. And what better way than to have a package of lighting that affects security and merchandising, graphics that influence the consumers’ decision based on whatever trend that may be, and the method to bring it into play using narrow casting or OnDemand communications.

And we have a great marketing understanding of what these retailers are going through because we’ve been involved with it for so many years from both lighting and graphics, and we’ve put together companies that really, I think, open a great door of opportunity. Now, you know, that’s a lot of optimism. But I’ll tell you right now I’m not going to just stay trying to sell low margin fluorescent lights to retailers, we've got to expand that and we have to build our gross margins by having a much more diverse product offering and service offering. And that’s exactly the strategic direction of LSI Industries.

And then, on the sales rep side the performance seemed to be very good, and maybe that was one of the underlying stories of the quarter in that maybe several quarters ago you converted to several new sales reps and their performance seems to have been up to snuff. Can you give us a sense for any metric or any measure of their productivity? And also, just give me the final number of sales reps representing LSI product?

Oh, boy. The number of sales reps? I could tell you the number of agents. I’ll tell you what, the numbers that we have basically, understanding that agencies have numbers of people.

Sure.

I think we can tell you conservatively that we probably have about 400 people within the agency theme that represent the company overall throughout the U.S. That’s a pretty good guesstimate.

And you’re absolutely right, we have been going through the conversion of agents. I think we’re pretty well through that now. We have just made one in our own backyard. We had an opportunity to improve the strength of the agency right here in Cincinnati. And that went into effect just three weeks ago.

We are in a position now that the influence of these new agents and if the economy continues to hold, understanding that these guys focus primarily on commercial industrial, and that has been pretty flat in this country. We’ve overbuilt an office space throughout the U.S. Our industrial world is changing before our eyes with more and more offshore. But the fact of the matter is that these folks are very, very involved with still a very large market, and we now feel that in certain parts of the country we definitely have some of the cream of the crop out there.

I think that that’s another part of our optimism for the future is that as these guys become better, understand LSI better, and understanding that our culture is different from their conglomerates, and they see the advantages of working with LSI, and bringing our product line in, that kind of brings full circle the overall direction of the corporation in that we have really taken focus on diversity, because even though we were in the commercial, industrial business we were still the smallest fish in the pond.

And I always look at market share, you know that, we’ve had these discussion before. The economy is one influence, market share is another. And if we give these guys the right products and the right tools with their people contacts and their education, their background, there’s no reason to feel that LSI is not going to become more and more of a contender in the [C&I] [ph] business which will influence our growth, influence our volume, and effectively influence our margins.

And finally, if I could just ask some housekeeping questions of you, Ron. Do you have the cash balance, accounts receivable, and a few other items?

Craig, I just happened to open to that page as you were …

Great!

Your last question. 265,000 in cash. Net receivables, 38.4m. Inventory, 45.8m. Was there something else?

Payables and short-term debt would be great?

Accounts payable, 13.1m. Short-term debt we just have about 100,000 that’s the current portion, and then the long-term portion is 11.4m.

And do you have cash flow from operations in the quarter as well as capex?

I have capex, which was about 2.5m year-to-date.

Okay, that’s helpful. Thank you so much.

Hey, you’re going to be here Friday, right?

I sure will!

I’ll see you tomorrow. We’ll see you!

Looking forward to it!

Right, excuse me, tomorrow is Thursday. Yeah, thanks, Craig.

Thank you.

The next question comes from Rick Bunken, [inaudible] [ph] Management. Go ahead, sir.

Got a couple of follow-ups for you.

Okay.

You’ve made a couple of references to a year ago having some menu board business. What – any prospects out there?

Yes, we’ve got a few more stores in the Burger King program. McDonald’s, and I’ll mention the names, have been pretty much holding tight here. The overall, the normal menu board system is, you know, basically slow. That’s another area where the narrow casting comes into play. And Rick, and his Team, the President of LSI Images, has really pioneered and worked with this technology because it does coexist, actually I think will influence in our fast food industry, a different attitude.

And I really read with interest and watch what’s going on with these different menu changes to get more and more into these healthier foods. I think there’s great opportunity out there to some extent. But there isn’t anything really major that’s going on right now to offset that kind of a program that we had with Burger King. And if it does happen you can bet your life that we’ll be right in the thick of things with it.

Second question, there was a shelf filed earlier?

Yes.

In the second quarter?

Right.

Any update on that?

Well, the only guidance, obviously, was with the ability to do that and with the optimism that we have, and certainly, hopefully, with the turnaround that we’re seeing it made a lot of sense that with that opportunity to be put in place we’ve got a lot of things going on in this company. And given the time of the year and the fact that it was an opportunity we thought it was the right thing to do. It puts us in a position as we’ve always said the Board has always been supportive and certainly creative in looking to the future, and this, as I’ve mentioned before, made a lot of sense. Now, you know, when, if, and so forth, that’s all in the future.

Okay.

The shelf was filed, you know, just before Thanksgiving. We filed an amendment a couple of weeks ago just to add a few little policy touches, and we’re still today in the SEC comment period. So it’s not effective.

Okay, thank you.

Thanks, Rick.

(Caller Instructions.)

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

Gentlemen, just a couple of follow-ups. First, reading over the press release and the prepared comments you talked about the Encore product, Bob.

Yeah.

And it says here and I quote, ‘it recently began shipping product to a major petroleum retailer.’ And I’m guessing you can’t tell us who that is, but I’m wondering if you could let us know what part of the country that’s going to?

Actually, as you know, I’d prefer not to mention company’s names. The Encore product line, as you recall, was designed during the early part of the slowdown in the economy. The Scottsdale product is successful, and it’s still a great product for us but it’s seven years old. And so we decided to take an additional direction and improving that product, and offering more options to that product, servicing more opportunities based on the dark sky influence that has come into our lives over the past five or six years. Certainly, meeting certain building requirements as far as permitting.

And we started doing some prototyping. The war started, and everything came to a halt. Well, we just kept focusing, and tweaking, and improving the Encore. And the first major oil company group that came out and was doing some survey work, and they were looking at their sites. And they said, ‘you know, we really feel that we need to do something.’

And what we did is they contacted us, and we actually did five different prototypes for them using five different options, with a Scottsdale, with an Encore, flat glass, drop lens, so forth and so on. And the one that they picked which we were delighted when we heard it because we would have been delighted no matter what, but the newest version to the Encore is the combination of this little fixture we call ‘the focus,’ that puts light on the pump island and reduces the energy on the rest of the site by close to 38, 40 percent. Depending on what lamp they have already in place. And that was the product they selected. And they are – it’s primarily in the Southwest, Midwest where we’ll see the first, the stores that are going in now.

Okay.

And it was a – I may be wrong on this, but I think we did something like 100 sites.

Okay.

And with a lot more opportunity to come. What I like about this is that now we have a number of sites out there that have this new system on them for other folks to see, as well.

Yeah.

That’s the hope that I’m beginning to feel is that some of the oil companies are really beginning to take a look now to see where they are. It’s been two or three years, you know, I mean time gets away really fast. And we’re hoping that there’ll be a lot more interest. And they sure as hell are making money, aren’t they?

Certainly, certainly. It’s interesting that you cite a seven to eight-year-old product life for the Scottsdale. I am wondering if you could kind of give us an update as to, you know, what your instincts are telling you the age of the nation’s service station images?

Oh, boy! If I could tell you that I could retire tomorrow. You know, it’s hard to say.

It’s got to be seven to eight years old, though, at this point?

Yeah, and some of them older than that, some of them younger than that. What’s interesting from my perspective, Andrew, is that we’ve had so much influence from a European nature. Remember when all of these were started most of them ended up, you know, as part of a European company. And so the European image is a lot different than the U.S. image. And I think that’s part of our situation on the flat side, and I personally feel it may not be too long before some of that starts to change back to the way the Americans live versus the way the Europeans live. That remains to be seen. That’s just my personal opinion.

Certainly, we are not going to see service stations disappear. I think these marketers will be trying more things, focusing on more competitive levels. You’ve got certainly the hyper market with the influence of all of the big retailers now, even the grocery chains that are looking at this type of business, so you're going to see some kind of an influence as it relates to that. That’s one look.

You will see the competitiveness, in my opinion, for the guys that are going to hang in there that aren’t necessarily in the hyper market. They’re going to have to compete for that consumer, and they’re going to have to come up with some new ideas and some new influences in order to get that consumer back to his site on the corner.

So I think we’re, I think it’s going to be an interesting ride for the next few years to really see how all of this works its way through the process. And, of course, the big influence is what is the supply going to be, and what’s the cost of a gallon of gasoline. And so there’s so many influences that can change that attitude to what that image will be, and we’re kind of along for the ride. But the important thing is that we will always take the road of establishing new ideas, putting new concepts together, putting the graphics with the lighting, coming up with the Encore, looking at technology.

All of these things become, I think, an interesting part of what that future image may be. We’re not just sitting around waiting for the market to turn around, we are there, and we will continue to be there, and we will provide these new markets, these new products and new services, so that when there is stuff going on we’ll be right there in the thick of things. And hopefully, be a hell a lot further ahead than our competitors.

Okay, thanks, Bob. And just one last quick one. We’ve tried to hit on the margin and the margin improvement, and the way things are tracking. And volume, efficiency, and mix have been cited. But in the last conference call, and I think maybe the last two or three you’ve talked about some things you’re doing on the supply side with vendors, and I’m wondering if we could get an update?

Well, that’s just ongoing. That’s a way of doing business. It’s obviously working with our vendors closer. It’s obviously working our vendors just like we are with our customers, and so it’s an, that’s an ongoing part of how we do business, not that we’re any better or any worse. Obviously, when you go through some tough times you all work harder in order to keep the volume as high as you can keep your people employed. And I think that all certainly adds to the opportunity.

But also, even though you work harder to get those margins working with your vendors the market becomes tougher, you know. I mean so, you know, you could be working as hard as you can to bring some costs down on the materials side with your vendor, but now the pie is much smaller and everybody is trying to stay alive so the prices come down. So, you know, it’s a dog chasing its tail and never catches it.

Okay, fair enough. Thanks, guys.

Thank you, Andrew.

Michelle, I think that may be it, unless anybody else has a question?

No, Mr. Ready, there are no further questions in the queue at this time.

Great. And I just want to close, to thank everybody for spending the hour with us. And as one of our attendees pointed out we do have a lot of shareholders that have hung in there with us. And we really appreciate that. Certainly, on the institution side, as well as the retail side.

And LSI is here, and we’re ready to go. And believe me when I tell you that if things stay steady in this economy we have great opportunity, maybe more so than we’ve ever had in our history. That chapter hasn’t been written yet, but the ducks seem to be all lined up. So with that, I’ll say thanks again, and have a good evening! Thank you, Michelle.

Thank you. And that concludes today’s conference.