LSI Industries Inc (LYTS) 2004 Q3 法說會逐字稿

Good afternoon, and welcome to LSI Industries Third Quarter Earnings Conference Call. Today's host will be the President and CEO of LSI Industries, Mr. Bob Ready. [Operator Instructions]

Thank you, Michelle. Good afternoon, everybody. Ron Stowell is also with me, and like previous conference calls, I think that we're going to approach this one today to give a little bit of a background on the third quarter. Not going to spend a lot of time on it. Some of you have called in and we have talked in more detail about just the quarter in general, but I'd like to spend a little bit more time this afternoon looking forward, because I think that's the important thing that we're all looking forward to.

Overall, the third quarter was, as far as I'm concerned, a decent quarter. It was disappointing that the numbers that were out there by the analysts that we fell short on, but as many of you know that have followed us for a number of years, the third quarter is always the most questionable one. We certainly had a lot of outside pressures in addition to the weather, and the weather isn't an excuse, it's just a fact that we deal every January, February, March. And in some cases, this year, we, because of the wetness and the heavy snows in different parts of the country, we obviously found ourselves in a position where some of our business was put out, to a later date, not lost. Other issues came up on a reference to some of the pressures that really, really had a kind of a challenging time for us, was the conversion of the Cincinnati operation, which, as you all know, is the largest part of the LSI Industry package, into the J.D. Edwards One World. It literally started in the last week of January and moved into the first week of February. Literally, everything shut down for three or four days, which we did over a long weekend, and the conversion went very, very well. I use the example of an absolute complete heart transplant. Coming out of the conversion, we did find a much different effect on some of our scheduling processes, in just getting it up and running. We lost some potential business due to the fact that we couldn't give good scheduling promises and dates. I don't think there was a lot, but certainly as volume oriented as we are as a corporation, any lost order has an effect on the overall bottom line. And being Cincinnati, Cincinnati being the main thrust of our lighting package, it did have an effect on us, there's no question about that.

Our graphics business is, in general, was quite good and continues to be quite good. We spent a great deal of time in the January, February, March quarter doing a complete transition of our lighting program, of our lighting companies into the beginning of the consolidation, which will be fully finished by the first of July, working into our fiscal 2005 year. That is my drop dead date to have LSI Industries into a much more centralized and certainly a much more consolidated direction, combining our graphics into LSI Graphic Solutions and our lighting into LSI Lighting Solutions, the two main business segments that we shared with you in the past conference call. I am extremely pleased with where we are today in that direction.

We also spent a great deal of time getting ready to introduce for the first time ever what we call our Lighting Buyers Guide. This is a tremendous amount of work went into this-- into this process. What that really means is, in this kind of an industry, in this market, understanding that the four larger companies own a rather substantial size of the market, of the C&I part of our business. They've had similar type guides for a number of years. Also understanding that a number of the new agents that have come on board are some of the past-- were some of those agents of those large conglomerates who had that kind of a tool. What this really does for LSI, it takes all of our lighting products from all divisions and puts them between two covers, and it's a huge sales tool.

As I speak to you today, our entire sales team is out, into the market, working independently with each of our agents and the development of the marketing and sales efforts that will move forth as a result of that introduction of the buyers guide and a whole new catalogue, which really operates a direction towards markets rather than the individual companies, as we've had for so many years. We believe that that is going to have a huge effect on the continuation of the improvement of our C&I sales.

On the most guarded area, the petroleum industry -- very, very, very slow, as compared to early years, in the mid to late 90s. The situation in Iraq obviously has [inaudible] influence. We spent a great of time really shifting gears, as I have said before, and I think it's important to remember that when you have a company that is so structured in a niche marketing direction, as we have been for 28 years, and moving the company into these new directions, it's not an overnight accomplishment. We still have a lot of things to do, but we've obviously shifted the position of LSI's lighting future into a much broader, much larger market, while at the same time obviously totally committed to maintaining our market position in those special niche markets of petroleum, fast food, and automotive.

We have some very, very interesting potential. During this slower period of January, February, March, we have had a lot of dialogue with some larger companies in reference to some new programs, primarily related to some graphic opportunities. Certainly, from a lighting standpoint, and to some degree, a menu board opportunity. As you know, I'm not going to get into specifics by customer, but these are obviously customers that we've worked with in the past, that we have certainly a relationship and they have an awareness of what our capabilities are. These are very good indicators that they feel that the economy is beginning to turn around, and most important is that if you combine those individual opportunities that are really kind of a frosting on LSI's business, and with the fact that we've transferred or converted our companies into a more of a centralized direction, consolidated direction, with the lighting group, all of these issues now really put us in a position where we believe we have some very unique opportunities, and we're very, very optimistic about the future.

Disappointment that the quarter didn't hit the expectations. That's probably more my fault, as far as looking at that guidance the way it did-- I'll be very frank and honest. I completely forgot about the conversion; shame on me, but I did, and I'll admit it. And I should have known that that would have had some kind of an impact on that quarter, and we're not blaming any one item, by all means. It was a combination of things. As we have indicated, if you look at the quarter compared to last year, you know, the percentages are huge, but that's obviously the quarter of a year ago was probably our toughest quarter in a long, long time, so it really isn't a fair comparison. But, understanding that the economic conditions a year ago were even tougher than they are now, and we haven't really come out of this, totally, from a manufacturing standpoint.

Some of the other pressures on us, as far as into the margin business, and of course, that's the big question. When you see an increase in sales of- from $44m approximately to $51m, and you see the margins come down a point or two, the big question is, what's going on? Why are the margins dropping? Well, there's a lot of reasons for that, based on the pressures of some of the costs we incurred, with the 404 conversion. We spent a great deal of money getting ready for that, and of course then the SEC relaxed that, as we all know, but, boy, we were right in the thick of things, trying to get ready to be in compliance by June of this year.

The other pressure, obviously, was the conversion of the J.D. Edwards One World and how all that fell into place, based on the economics.

Third, of course, was losing the opportunity to pick up a little bit of business, where we would have had a little bit better volume and we would have had some improved margins, as it would relate to the overall direction.

But these-- with all that said, that quarter has always been one that I just have never been able to really feel comfortable with, one way or the other, because of the unknowns, but I was-- I was pleased that we were able to start getting these things behind us, on the compliance program, on the J.D. Edwards now. All of those things have been properly put into the financial statements and Ron will go into that in more detail.

But the more important thing is the future and what we're looking at, and the outlook looks good. You know, it's, again, it's all balanced on how the economy goes and I know some of our competitors have shown some better results. Obviously, they are still stronger in that C&I business than we are. They didn't have to rely as much we've had to rely on the niche markets. Many of them are stronger in the residential area, and as we all know, new home starts have been extremely strong. So there's a whole mixed bag of things that affects them and don't affect others, and vice versa. I think the important thing is that the LSI strategy of graphics and lighting is very, very important to our future. The fact that we recognize-- that we recognized early enough that the C&I was another part of our requirement to expand and strengthen our company in order to improve the volume and eventually the margins will come, because of the methods that we've instilled into our production facilities. The fact that we are consolidating our companies, which is going to reduce overhead and to some extent, [burden] but it's going to give us a much more efficient strike force, as it relates to the growth of the potential of the markets that we're seeking. We've enjoyed a tremendous amount of interest in our new narrow-casting. No, we have not had a- the first real fish in the boat. We've got a lot of hooks in place, and that's going to take a little bit of time. But based on the confidence of the folks that are looking at our product and our methods, we feel very good that we're in a very interesting phase of our future.

So, overall, I'm happy. I really, truly am, that we are where we are today, as a result of all the structuring and all the changes that we've made and all the improvements that we're involved with.

There's one other item that I want to mention, and that is that part other squeeze on the margins in March, for example, where we effectively felt them the most was the situation on the steel price increases. We had steel in stock for certain types of products, and like all companies, we have, in some cases, work closely with the mills and we have the ability to get quick turnover, and some of that pricing hit us very quickly and very unexpectedly, and we had obligations and we stuck to those obligations, and that obviously had a pressure on the margin side as well. But on the other hand, recognizing that that happened quickly, we reacted quickly. We've initiated the price increase. Like most of us in this industry, you can't do it instantaneously. You've got to protect and cover some of your order entry that's in place, or hold for release, depending on where that order lies. So there's still going to be a little bit of pressure on that in the fourth quarter, but we're definitely working out of that, and wouldn't have anywhere near the impact that it did in the month of March, at the end of the third quarter.

So kind of everything is in place and LSI is looking forward to hopefully a continuation of an improvement in the economy and ultimately we will see the results of that in our standard, day to day business, and with some of these projects that we've been working on, now that the weather has improved and the opportunity to do some installation work and so forth will benefit us even more so. So with that, I would like to turn it over to Ron and let him make a couple of comments, and then we'll open it for Q&A.

I will just make the kind of standard comment on our safe harbor statement, that our remarks today are related to our expectations with regards to a number of activities in which the company is engaged. Reliance should not be placed upon such forward-looking statements because they involve risks and uncertainties that may cause our actual results to differ materially from those which we are going to talk about, or which they imply. Those risks and uncertainties are discussed in our press release and in our SEC filings. And today, we do not have any material non-public information to be discussed.

I will respond to any questions, specifically, on the numbers, if and when they come up, so Michelle, I think with that, we'll turn it over to questions.

[Operator Instructions] The first question comes from Ned Armstrong. Go ahead, sir.

Good afternoon, gents.

Hi, Ned.

Hello, Ned.

Couple of questions here. First, with regard to the missed opportunities that you alluded to in your press release, were those opportunities that you lost to other-- to competitors or were they opportunities that just got pushed back a quarter or two?

No, they probably were lost, Ned. In a situation where delivery and the requirements are so tight today, in this world that we live in, you get opportunities every day to be able to be a-- a request will come in for quotation, and of course one of the first comments is, ``when can you ship it?'' And we were in a period for almost two weeks that we couldn't even give good visibility as far as when we could ship, and basically we decided, the direction was, ``let's not try to make promises that we can't keep.'' We don't want to disrupt more of our service perception by making commitments that we knew, or weren't sure, that we could keep. So that business, in all probability, went to somebody else.

OK. Next question, and I understand you can't name customers, but if you could just describe the product type and nature of some of the opportunities that you alluded to in both the graphics and the commercial lighting segment, and particularly with regard to the commercial lighting segment, you know, what type of lighting it is, whether it be for retail establishments, outdoor facilities, what have you.

Well, on the opportunity, most of our opportunity really is in the graphics side, with some of the things that are going on in the marketplace. In one case, we have a rather exciting opportunity on the menu board side.

From the industrial/commercial, there are three major areas that we feel very, very good about. Number one, our reps now, all of our reps, are completely up to speed on the changes that LSI has made as it relates to the rep changes and obviously the training that's been going on.

Number two is the introduction of a lighting buyers guide. This is just a huge tool that the reps use every day, and it really gives them a very simple, single piece of literature, if you want to call it-- it looks like the size of a phone book. We've got a 480-page catalogue now of all LSI lighting products. And somebody asked me, how many does that include, and my best guess would be about 10,000, when you look at all the options and so forth. That piece of literature is a huge tool with the commercial/industrial reps, because it's a single point that they can go to as a reference, to make it easier to do business with their end user, our customer, the consumer.

And the third part is, we have some new product introductions that were just made at Light Fair, which happened in February. Light Fair is the single largest commercial/industrial lighting convention, held every year, usually one year on the West Coast, the next year on the East Coast. It gave us an opportunity to spend four days, and we had rep meetings of approximately 40 people per meeting, for four days, and that gave us a huge opportunity to really get into all the changes and all the directions we're going with the C&I. And I was very pleased to hear-- I did not personally go there, but I was very happy to hear that every meeting, we literally got a standing applause from the agents, that LSI now has arrived with the right tools and the right direction, as it relates to the C&I part of our business.

Now, as far as getting- obviously, the potential with one of our large regional, from a C&I standpoint, the large retailer that we've been very fortunate to be working on, that business is now beginning to really pick up, with the winter behind us. We had a few orders that were pushed out into the spring. Usually what happens, in that case, when you have a program of that magnitude, they're very, very good at giving us their estimated schedules of when they would like to have their store openings. But then, once that is given, then we know how to schedule our business, based on having that equipment arrive and for the contractor to install. When you have a winter similar to what we had in some parts of the country, the electrical contractor obviously has the option to change that, because if the building isn't far enough along for him to get in there, put his scaffolding up, and so forth, and that did happen, to some extent, during the January, February, March quarter.

So that business, obviously, is not lost. It's pushed out into this quarter, next quarter, and so forth, so that's an ongoing opportunity with the volume that we really desperately need in many aspects, of really driving the burden and the overhead through in our operations. We are so, so volume-related to the improvement of margins through the factory process, as you well know.

On the fast food side, I really can't get into the customer, but we do have, with all of the competitiveness that's going on in the fast food industry, primarily around better foods, better menus, I should say, for better food offerings, medically speaking, as we all know, the Atkins and the salads and all that stuff. Obviously the menu boards that are out there are pretty full, so there's opportunity with one of our marketer friends who are looking at an expansion of that, and fortunately LSI has been the select vendor to work and develop that opportunity, and that's one that I think will happen this year.

And as far as volume is concerned, that's still- certainly still to be determined, based on the final designs, but again, it's another opportunity to see a major player in that market expand their offering and you know, what will happen with their competitors? That's always an interesting question, when we find certain opportunities that are new to the industry, and somebody takes a leadership role, and does that create an opportunity down the road? Our experience in the past has been yes. There's no way to put numbers on it and we're not attempting to do that. But it's the overall attitude and the feeling that's being created that is exciting to us, because these are the things that LSI has planned, positioned itself from not only a product development but a graphics opportunity, and an installation, with our acquisition of our engineering firm. So all of those things, really, obviously, put us in what we feel a very positive feeling for the future.

OK, great. I'll hop back in line.

OK.

[Operator Instructions] Mr. Ned Armstrong has another question. Go ahead, sir.

OK. I hope I'm not cutting anybody off. I apologize if I did, but Ron, these are just a couple of quick questions for you.

Yes, sir.

Do you have the operating income, by segment, by chance?

I do. We've got lighting segment, just for the quarter, Ned?

Yes.

For the quarter, was $630,000, and graphics was $848,000.

OK. And do you have the cash balance, as of quarter-end?

195.

195. And then the effective interest rate on your debt?

At quarter end, for about $11.4m at quarter end, was 1.63%, and I'll throw out that our number of shares outstanding for calculation of diluted earnings per share for the quarter was 20.107m. For the nine-month period, was 20.033m.

OK, thanks, Ron.

[Operator Instructions] There are no questions in the queue at this time.

My goodness, come on, guys. I don't think I've had a meeting with you folks without having more questions than what we've had. And I'll just chat a little bit, and if you have a question, please just let Michelle know.

As we sit here today and we're looking into the future, for a lot of things that we have done and plant improvement, I think that that's an area that we can dwell on a little bit more. We didn't talk about, but we've spent a great deal of time in the last year or so, really effectively changing the methods of some of our manufacturing operations. Our operation in Kansas City, for example, it's a very important part of our strategy, as we work toward the introduction of a stronger presence in the commercial/industrial. As you all know, Midwest, it's no longer referred as Midwest, it's referred as the Kansas City operation, but we'll do it for the sake of just keeping everybody in the loop -- the Midwest operation. We put a new operations guy in there, just about a year ago. And a lot of things are changing down there, as it relates to the efficiency of the operation and the ability to handle large volume production capabilities with our large national retail customer. The other opportunity, obviously, is that it's our hope and our belief that that particular product line, which is a crucial part of the package for any rep, it's more commodity than anything else, is now being put in a much stronger position to be a lot better in their efficiencies and production runs, and if April is any indication of what's to come, we've been extremely pleased. We don't have, obviously, the results of April, because it's not completed, but initially, from all indications, all of our operations have shown some very, very nice improvement and a lot of it has to do, of course, because the weather is a bit better and the fact that we talked about our new agents and the new catalogues and all of that. This is all indications of what's going on.

But we didn't sit around during the winter months, waiting to see how things were going to happen. We continued to invest into the efficiency. And there's another area that put some squeeze on the margins, and I've been criticized many times in the years behind-- in the past, about some of our overhead. But I've always been a believer in investing in people, and in preparation for what we believe to be a stronger future than what we've experienced in the last year so, is that we have built up our people. We have definitely added a number of people to our workforce and worked on the process of training during what was we knew a slower period. But, you know, if the economy is going to come back and there is going to be a higher competitiveness for people out there, I made the decision early on to get those folks on board and literally get them trained and make them much more effective for the opportunities of growth and volume. That obviously had some pressure on the margins during the third quarter, because a lot of that happened starting in late November and moving through December, then January, February, and March.

So all of those issues now are basically in place. And we've continued to look for people that, as I've said, quantity is not the answer, it's quality of people, and understanding that those folks that are still out there, looking for jobs, we're looking for them, based on where they might effectively be-- have a contribution to LSI. And I've worked that way for all the years that I've been doing this, and I think that when you have the feelings that we have, when you look at what we've done with our graphics business and the way those folks have operated and Houston has come along a tremendous amount. The folks up in North Canton, as always, are really-- are really a great leadership role for both Houston and Rhode Island. Rhode Island has done a great job, in their effectiveness with the CVS program.

You take the same approach that we've done there with our lighting group, and we are definitely going to be driving costs down in some areas and adding costs in others, but the obvious plan is to improve the quality, improve the efficiencies, and therefore improve the productivity of all the LSI products across the board, in all operations, and that's been our focus, and I think that if the economy continues, we're going to see the results, and hopefully we'll start to see some of those improved margins. We still are dealing with the steel situation. That is still a very liquid situation. You know, you hear different comments about, ``well, it's, you know, the scraps deal is better'' and so forth, but there's still a lot of moving around by the steel mills, basically trying to get higher increases and so forth, and we've had like three increases in the last 60 to 90-- or actually, 60 to 70 days. And you know, it's very difficult to be able to project and give a quotation for an order that may-- the customer may want in six or seven weeks out, and not the next day, and be able to really understand what the margins are going to be, until this industry straightens itself out.

The one thing we're not going to do is we're not going to lose market share. We're not going to let somebody come in because of that uncertainty and try to buy that business away from us, especially where we have done so many things and we have so many other issues-- or so many other, excuse, opportunities, that we know are in place, and I'm talking about some of our graphics business. They don't have to contend with the steel crisis that lighting group does, and therefore we've got a balance there that gives us an opportunity to look at two sides of the fence, rather than it effectively just on one side, being the lighting side.

So that effort, in the manufacturing part of our business, has been absolute. And you combine that with the new product development, with the new catalogue, with the new reps, with the new opportunities of some of the large, national segment of our business, with some new menu board opportunities, those are all really good issues for the future of LSI. Still, the unknown is the petroleum industry, and we still keep putting all the pressure and all the effort, in order to be sure that we're in everybody's face, every week, so that LSI is- -continues its leadership role, as it relates to that niche market.

And with that, Michelle, if nobody else has any other questions, I want to thank everybody for attending today's meeting and look forward to talking to you at some time in the future.

Mr. Ready, we do have a question from Ned Armstrong.

OK, great.

Hey, Bob, I just wanted to circle back to the graphics opportunities

Yeah.

I know you alluded to one, the message boards, and two, just strong interest in general, driven by your new focus and reorganization. But are there just a couple more projects on the boards that you can be a little bit more descriptive of, without giving away who the customer might be?

You know, I'd love to be able to do that, Ned, but I think the overall attitude is, is that where the interest is coming to our graphics business is, number one, we did the consolidation of the three companies almost about a year ago. So that has really taken seed, because now the opportunity to deal with a much larger graphics vendor than the smaller ones that are out there, I think, gives our customer a greater confidence level in our ability to supply them.

The other main thing about our graphics business is that even during the toughest times, because we're so strong, we have such a strong balance sheet, and we have such a low debt ratio, that as you all know, we've made major investments in equipment, and in the digital equipment, to be specific, in the new technology that's been coming through the industry, and I think that has a lot to do with the confidence of our customers, that we have the capability of doing things that a lot of our competitors just can't do. And while this industry was so tough and business was so competitive and the pressure was so strong, LSI and this is an attitude that I've had, as you know, knowing me as well as you do, that I always look forward and that's my commitment on a strong balance sheet, that there's always some better times to invest than others, and when the overall industry is down and competitiveness is keen, the vendors that build a lot of this equipment and so forth are feeling it, and because we're so strong on our balance sheet, we have the money and the capital to invest in that. And as a result, the marketing objectives and the consolidation have been a very, very main part of the strategy of our marketing because of the obvious position, that we have stuff that others don't have.

And to get into specifics with certain customers, it's really difficult to do that, only because in today's world, many of these customers just don't want their names used, and we respect that, and the other is that I don't want my competition that's listening to this conference call, or will be tonight, to give them an indication where some of that business may be.

OK.

Respectfully-- respectfully is that we're excited that the market is there for us and that there is interest in what I call ``the frosting on the cake.''

OK, yeah, I didn't want you to give away any customers' names. I just thought it would be helpful for a couple of examples, but if you think your competitors will figure out who it is, then I can understand.

Well, it's like anything else, you know, things aren't back to what we call ``normal'' of the 90s, as you well know, and any opportunity for somebody, and I'd be doing the same thing, and I do, is trying to indicate where things are and we try to minimize that.

I think what we'll do is, in the future, as some of these things start to evolve, and the programs have started, the whole industry -- I'm talking about the industry we serve, will know who it is, and at that time, we can share with you how those programs are going.

OK, fair enough. Thanks very much, guys.

Thanks for your input, Ned.

OK.

There are no further questions in the queue at this time.

OK, well, thanks, everybody. Looking forward to a good, strong quarter, in the fourth quarter and looking forward to kicking off 2005 with a new corporation call LSI Industries, as a consolidated group, and I'm sure at some point in time we'll be talking to each other. Thanks for the support and the understanding and that's all I have to say. Have a good day. Thanks, Michelle.

Thank you. And that concludes today's conference.