LSI Industries Inc (LYTS) 2005 Q1 法說會逐字稿

Good afternoon and welcome to the LSI Industries first-quarter 2005 earnings conference call. Today's host will be Mr. Bob Ready.

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 call is being recorded.

Now, without further delay, I will turn the conference call over to Mr. Bob Ready.

Thanks, Michelle. Good afternoon, everybody. I think what we will do is pretty much follow the same format that we have done in the past conference calls. I will give you an overview of the 2 business segments, our lighting and our graphics. And then Ron will go through some of the more standard points that you all are interested in. And then we will open it up for questions.

Starting with the graphics business segment, as you all are aware, a little over 1.5 years ago we started the consolidation process and really tying our three companies together -- that being Rhode Island; Houston; and North Canton, Ohio. And that move has really started to develop some very strong results for us.

There's no question now that the utilization of those three companies as our primary force in developing new opportunities is working, and working well. Our margins are up considerably on the graphics side. Considering the fact that our petroleum business is still somewhat flat -- we will address that momentarily. There is a glimmer of hope that things might be starting to show some improvement.

But the folks at the graphics group have really focused -- as a result of their primary market in the petroleum business being flat over the last couple of years -- in developing new relationships focused on stronger direction toward the national account markets, and really are now beginning to show some very, very strong results. And we are very, very optimistic about the continuation of that. All signs show that this will continue, certainly through the second quarter. We're still looking at the results of what the third quarter will be. But as we all know, a lot of that depends on the weather conditions, and just the overall economic season of January, February, and March.

Some of the programs that they are working on are extremely strong. The continuation -- or really, the major part of our involvement with a rollout program, with one of the large drug chains, pharmacy chains, is now really beginning to develop in a higher volume potential. That's what we believe will help strengthen certainly our second-quarter results.

Certainly, the emphasis that's going onto penetrating new markets, utilizing the high technology that we have developed in the printing process -- we talked about that in the past with our investment in some of our digital printing equipment. And this appears to be the right thing. We're in the right place at the right time. We feel very strongly about the opportunities that we have if the oil industry starts to rollout. And I will address that now as it relates to both lighting and graphics.

The largest convention -- the PEI and the National Convenient Food Chain convention was held last week in Las Vegas. As it was reported to me for the LSI attendees, it by far was the best show that we have had going on 3 years. There were a lot of positive comments. There were a lot more attendees. There was a very upbeat feeling that things may start to improve.

Now, we will take that, as we always have, with a grain of salt. We all know that that market has a tendency to talk a good game, but it takes forever to get the wheels in motion.

However, we do have a program that's both lighting and graphics for a major oil company, as we had indicated in our press release, that is beginning to do an image conversion. And as a result of that, we're hoping that other folks out there are going to take a look at that. And with the attitude, the positive attitude, that was experienced at the PEI, that this may be the beginning of opportunities to hopefully see a stronger petroleum opportunity in calendar 2005.

I know a lot of folks are going to ask me a lot of questions about that. I can't give you any more answers other than the fact that our folks came back with a much healthier attitude -- really pumped up, charged up -- that maybe this industry is going to start to revive itself. Time will tell.

From the lighting part of our business, as you are all aware of the fact that certainly the oil business is still considered overall to be flat. Now, this new conversion that we just spoke about with our graphics does have lighting with it. So it is really an LSI image program that is both made up of lighting and graphics. And this is really what we have been hoping to accomplish in the methods of our marketing strategy to bring more and more of that into the opportunity, and certainly, the reality. And we have accomplished that with one of the major oil companies.

And that program is now just beginning to roll out. It could be a 2-year program. It could be longer than that, depending on how many sites they really finalize in their decision-making process as far as re-imaging. The amount of sites that has been told to us that potentially are out there -- and I want to key that word, "potentially;" I don't want anybody reading into it that that's a given -- but we're talking anywhere between 10,000 and 13,000 stations. All different degrees, of course -- you all know the strategy, the ABC -- the A being the strongest and the largest site, versus the C being the smaller one. But again, these are the things that we've been hoping and looking for as we have been developing the direction of this company.

As we look at our commercial industrial business, there's no question of the fact that that business is very, very important now to the future of this company. It has come with a price. We know that the margins have been squeezed, and they are continually being squeezed because it's so competitive out there. But we have made an awful lot of changes in order to be much more competitive. And even with the price increases of steel and other materials -- which, of course, still is a pressure point as we move forward. We have not seen a real letup on the steel side. We have just announced a price increase that will go into effect around the middle of November, which is really following an industry direction. We were watching that very closely. And certainly the fact that these kinds of increases have come require a price increase. And we're hoping that this time, the price increase will hold.

The folks out there recognize it. Certainly, there is a push back, as there always is. But in our case, this is an area that we've said absolutely these increases are going to stick. And we're going to continue to push forward. And the hope is that they will stick, and this will start to relieve some of the pressure on the margin side.

Our biggest challenge, of course, is with some of the contracts that we've had. And we have adjusted on an account-by-account basis in order to get those prices back up to a level where the margins will improve.

At the same time, we have been pushing very hard on the burden side as far as our headcount and the efficiency of the manufacturing operations. We have done the best we can, and will continue to do so in the negotiations with our vendors to work on those price increases. But I don't think there's anybody out there that doesn't really -- in our business, anyway -- fully understands what has happened with the steel side of our business.

And is that going to slow down? I don't know. We live basically from week to week, I think, as most of us do. Our pricing now doesn't go out beyond 30 days. And this is the only way that we can control the pressures on the margins based on the increases that have been effectively put on us and the rest of the industry.

We have a very exciting rollout program, as most of you know. I'm very, very sensitive to mentioning companies' names. But we were approached a little over a year ago to develop a new product to supply to one of our larger fast food marketers. And that has been in the process now for a year. There were all kinds of indications that it was going to come.

Well, it has come. We have a purchase order now basically to do in excess of 6,000 stores, and not do it over a 2- or 3-year period. We're ramping up our production. And we're going to do a large amount very, very quickly over the next 6 months to 8 months, I would guess, based on the volume. Certainly, we're going into the winter months, and that will have some kind of an effect. But we're doing the installation, as well.

So it's a total turnkey project. And we're very proud of the fact that LSI was selected as the only participant in supplying this product and service to this specific customer. So, that is a purchase order in hand and the materials that are in process. And production will start the first week or so, the first 10 days of November, and the program will start rolling out shortly after that.

We continue to work on our narrowcasting program. I have been informed that that program is being slow to start, as we recognized it would. But as you can see, if you have been reading some of the things that are going on in our industry, there are other companies that are definitely looking at it. It is definitely a part of future. And we feel that -- in our goal, in our direction that we've taken, that we do have some wonderful opportunity. It's slow. But it is new technology. And it takes time to sell it, and certainly show the benefits of this new concept as it relates to the industries that we serve.

We're still looking at acquisitions. We feel that there are opportunities out there right now for certain companies that will definitely fit into our marketing strategy. We have finished, pretty much so, the consolidation, the re- imaging of our old company in the lighting group. The lighting companies now have come together.

As was previously announced, we now have two separate business segments, our graphics and our lighting. We have two presidents that report directly to me now. And they have total responsibility to continue on improving the efficiency and certainly the marketing approach as it relates to the two market segments that we serve and serve well.

Overall, I'm very optimistic about where we are today. It's been a long 2 years for everybody, including me. And to say the least, I certainly feel a lot more relieved as it relates to this quarter. This quarter was a good quarter. We can continue to do better, and we will strive to do so.

We have definitely a situation that is an ongoing situation that once we get that nailed down -- and that is the New York facility -- that has been a very, very strong challenge. We went through the inventory process last quarter. You are aware of that. That's all behind us.

And now with all the changes that have been made -- basically, the downsizing, the improvement in the operations, certainly the direction of our inventory -- all these things are parts of the puzzle now that have been put together. And now what we need is volume.

We now have our systems in place. We have our cost program in place. We have made the changes from the personnel standpoint -- that's done. The inventory that we addressed is done. And basically now, the whole objective is to get this company to the level where we can start building volume, and get order entry in place.

And that is the number one direction. That is the weakest point that we have at this time. And it is one that we're very serious about, and one that have taken a tremendous amount of action to improve the overall direction of our New York facility.

The impairment charge Ron will discuss a little bit in his direction, his part, which is what our small company down in Tennessee -- and there's a lot to be said about that as it relates to the fact that that company is becoming more and more a part of the operational product direction as far as wearing harnesses and -- when we bought that -- and the name of that company is Marcole.

It is a separate division. It doesn't fit into the lighting or the graphics. Therefore, it's on its own. It really is part of our manufacturing operation. And we acquired this company in order to facilitate a stronger capability in our wiring harness business.

At that time, we saw a beginning of an industry change where the white goods industry were buying most of their wiring harnesses in Mexico. We kind of caught that on the upswing, based on acquiring the company, because some of that was moving back to the U.S. And now we've seen a change of that same industry kind of moving back to China now.

But it is a company that is important to the LSI manufacturing operations. And we believe that with that charge, that's behind us now. And it will continue on to be very supportive in the manufacturing part of our business on the lighting side.

I think that kind of gives you an overall view. I can sit here today and for the first time in certainly a number of quarters feel a lot more confident about what's going on as it relates to LSI and its position in the marketplace. All the things that we have worked very hard to put in place are in place. I think the results are showing that.

With an improved volume input, which is really now in the sales department's hands of our New York operation -- once we bring that into reality, I can say very, very strongly that things are really working and working very well as it relates to the future of where we're going.

And so with that, I'm going to turn it over to Ron and let him kind of fill you in on some of the ABC's on the financial side. And he knows most of the questions that you will probably ask. We decided to address those right up front, and then turn it over to you folks.

Good afternoon, everybody. I first will indicate that today our remarks will be related to our expectations with regard to a number of activities in which the Company is engaged. Reliance should not be placed on 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 we may imply. The risks and uncertainties are discussed in the most recent press release that has been issued and in our forms 10-K and 10-Q as filed with the SEC. Today, we do not have any material nonpublic information that will be discussed.

With that formality aside, I will first talk about the -- add just a little bit to the impairment charge that Bob referred to. It was $186,000. This is our third annual test of goodwill impairment. And we have three reporting units to perform that test on -- Marcole, as Bob indicated, for this test is a stand- alone. And the goodwill for this test that we had from an outside appraisal firm performed the test was just barely -- and I mean, just barely -- fully impaired.

And as Bob said, it's an important part of our operation. There is no impairment of any other assets at Marcole or anything else. So that goodwill on our balance sheet went down by about $200,000 to $17.1 million total, which means that there is -- I think it's like $300,000 in the lighting segment, and the rest, 16.8 million or so, is goodwill related to the graphics segment.

As you saw, the first quarter net sales were up 16 percent to 68.3 million. Sales by segment -- some of you track that, so lighting segment was $44.8 million. And that was a 24 percent growth from the prior year first quarter. Graphics segment was 24.5 million, and that was a 3 percent growth from the prior year.

Operating income for lighting was 2.5 million. And operating income for the graphics segment was 2.8 million. I'm just making sure that rounds properly to the 5.3 million that we reported.

Bob mentioned the petroleum business being sort of flat, with that ray of hope in the image program with the major oil company. We were down about 8 percent from the prior year. And petroleum sales represented 23 percent of our total for the quarter.

You saw the leverage in our net income with sales up 16 percent. Net income of 3.3 million represented a 27 percent growth. I might add -- Bob, I'm not sure if you are aware of this, either. I looked -- our first quarter sales at 68.3 million -- that's a record for the first quarter.

No, I did know that. (multiple speakers)

We've had other quarters that were higher. But for the first quarter --

And I think what's remarkable about that is that the petroleum business is still off. And of course, we all think very strongly about that. That's a market that we will never give up. So if there are any of our competitors thinking that that's a weak point, it is not. Actually, we feel very strongly about it.

And our hope is that this program -- or some programs start to break open. And if that PEI was any sign that there is at least interest, that's a different day. We get some of that market back and some of that business back, it's going to be a whole different program out there.

For those of you that have models and track our shares that are used to calculate earnings per share, in the first quarter it was 19 million 993 (ph).

And as for a little bit of statistics on the balance sheet, and that is that -- cash on the balance sheet was 854,000; net receivables was 43.3 million; net inventory, 49.9 million; net fixed assets, 53.5 million; total debt was 15 million -- that may have been in the press release -- 15.0 million.

And finally, capital expenditures for the quarter was 972,000. And that's all primarily equipment. There's very little software, and there's certainly no building or anything going on with that amount of expenditures.

And our depreciation and amortization, which does not include the goodwill impairment, was 1 million 773 (ph). So it was not quite double what our CapEx was.

Hopefully, I have caught most of the statistics that you normally ask for. If I've missed anything, bring it up either on the call here or call me at another time.

You may want to address the direction the Company has taken in their Sarbanes 404 based on where we are and what we're doing before we open it up for Q&A.

Some of our institutions, in fact, have called about that. I think it's part of their due diligence on the investment.

We are well along our way on documenting our internal controls. I won't say we're done. We do have some more to go. And some of it's related to our systems implementation that we want to document after one of our subsidiaries implements that system later this year.

And of course we last year brought on an internal audit staff. And we have two folks engaged almost entirely at this point in the Sarbanes-Oxley internal control work. They're both today and this week out performing testing.

So we're in the testing phase in those subsidiaries in those cycles that we have documented. We should be on track for our auditors, Grant Thornton, to come in later this year to do their testing. And of course that's a learning process for us, for them, and frankly, for the PCAOB who frequently or occasionally puts out new requirements or guidelines that have a way of changing this project on us a little bit. But it is our intent to be fully ready for the report that we will make with our 6/30/05 Form 10-K.

Good. Thanks, Ron. Michelle, we're open for questions, please.

(Operator Instructions) Andrew Meister, Stifel Nicolaus.

Good job on the quarter. Nice to see everything get back on track and come together.

Just mostly some strategy and some product questions here. But I have quite a few. So I will ask them as quickly as I can. One is on the oil business. Is this a re-image, or is this a potential retrofit with the Encore product?

Well, the Encore is definitely part of the product, Andrew. It is a re-image. It is a consolidation of two companies coming together and then coming up with a -- certainly, their new images as a combined two-company program. And as I said, it's 2 to 3 years possibly. And what's really nice about it is that it's a combination of graphics and lighting.

Okay. And the next question has to do with the price increases. We're hearing out there that it's going to be in the 5 to 10 percent range from an industry direction. And I'm wondering if you kind of see it sort of the same way. And then I'm also wondering is there going to be some catch-up time that it takes for some of the fixed-price contracts that you have to work their way sort of up to the market rate if they can get there?

I think the answer to that is yes for both. We watched the increases coming out. This time, we kind of held back a little bit to see what the bigger companies were going to do in order to be sure that whatever we did was the right thing to do. And we went on by product selection -- that being fluorescent HID, high-intensity discharge, poles, architectural landscape and so forth.

And the increases will vary by product type. We were very, very careful in doing a rollover on our costs to be sure that we were initiating the right increase to get our margins back and not charging too much that would hurt us on the business side.

I think it's a little early to tell. Most of the industry has put a price increase out going into effect by the 12th to the 15th of November as we have done.

The question on contracts -- obviously, our biggest concern is the contract. But I can assure you -- and this has been taken as a direction where we are going back to each contract that we have, and going through the price process in order to get our prices up. We cannot absorb these costs.

And so far -- there's a lot of pushing going on right now, as you can imagine. But so far, I am pleased with what's going on as it relates to some of these increases. And we have still got a couple more weeks to go that we're working on some additional accounts in order to be sure that we can get those costs back.

I think that our chances are very, very good. Certainly, there's going to be some tough negotiations with some accounts. But I think with some of the things that we've done on our efficiency side, too, is that it has given us an opportunity in looking at all aspects of our business, and actually looking at some product redesign, in order to make it better from a manufacturing -- it's not only quality improvement, but it truly is efficiency improvement, because of the tremendous hit that our industry has taken with these steel increases and to some degree, aluminum and wire. Those all have affected all of us.

So I feel very good about where we are. We would like to be able to get it all back. I can't sit here and tell you 100 percent that that's going to happen.

But if you look at where we are today, and you look at the increases that we have put out, we're showing definite improvement of the margin side. I think our biggest challenge is the New York operation. Once we get that into a profitable level, and the increases are absorbed, it's a different day for LSI than what we have experienced in the last 2 years.

So that's primarily Lightron (multiple speakers)

Yes, yes.

And the concept is to push more volume through that facility?

Yes, absolutely.

I mean, and my sense is it's sort of a high-volume fluorescent type production facility. But is there other volume that you can put through there?

Yes. All of that is yes. Obviously, Lightron was brought into the LSI package for its architectural-type product line, where our Kansas City operation, once called Midwest, was more on the commodities side.

As we see our Midwest facility becoming greater and greater as far as order entry as we're penetrating more of the C&I business through our new rep organization, some of the considerations are to increase production of some of those fixtures in New York now rather than trying to look for an expanded direction in Kansas City.

There's going to be a number of different directions taken to get that company into the position that we need it to so it doesn't become a drain but it actually becomes a contributor to where we have to be. One of the things that we had to do, and it's done, and that was to get the J.D. Edwards OneWorld into process or into place with New York. And we literally took our top desk people. And no matter what they were doing, we put them right up into New York for 2 or 3 weeks and maybe even longer in order to get them up and running. So we had a much better visibility of what the company was doing. That's been done.

I will ask one more and let someone else have a shot. On the restaurant side -- the quick service, fast food restaurant side, can you at length discuss what service or product you're providing for them? It doesn't sound like it's a brand-new menu board. It sounds like it's a re-engineering or a touch-up or addition to an existing menu board system that they have. So (multiple speakers)

Yes, it's an addition to. I think it's the recognition of the menu changes that we are experiencing now in the casual and in the quick-serve business.

And it's a recognition that -- and when we roll the program out, Andrew, we will be in a better position to say who it is. Right now, the program is in the production development stage. And the first scheduled manufacturing week is the week of -- and I don't know what day this falls on -- but it's the 9th of November when the production side starts to gear up.

It is a new product. It was developed by LSI. It is an addition to. And it is an add-on. And it's both exterior and interior.

Okay, and then -- well, I guess this one is for Ron, and then I'm done, guys. What's the CapEx plan for the year?

We're likely to be in our normal range of 5 million plus to 6 million.

Cliff Walsh, Sidoti & Company.

Andrew asked most of my questions, but I've got a couple for you. I was hoping you could talk a little bit about kind of the general tone of the commercial/industrial lighting markets now. Do you think you're picking up market share? Are you seeing more opportunities out there, etc.?

It's very hard to measure how much market share. All I can do is indicate the acceptance, more and more so, of the LSI product line through our new agents, who are now very much up to speed, and the development of the marketing strategy as it relates to how we're going to penetrate those markets.

Obviously, the big 4 still have the lion's share of that business. But there is a place for LSI and its product offering that certainly has a tremendous opportunity in the national account market. That's becoming more evident as we're working toward that combined graphics and lighting. We're opening more and more doors. And the LSI name is becoming a stronger, recognizable name as it relates to the kind of package, whether it's both indoor and outdoor. And it still falls into that commercial market area. But it's really more identified as our national market with the bigger chains and so forth.

I think that it's going to take some time for us to really develop the market opportunity in the C&I. But the fact of the matter is that we've got product line. We've got a good rep organization. We have a marketing strategy. We're working on the consolidation of our companies to have a greater asset impact on the LSI brand as it goes into the key commercial/industrial market.

Certainly, we are the youngest company in this area, but we're treating it in the same mannerism as we did our petroleum business when we first started in 1976. And I think there are some very, very strong opportunities for LSI, specifically as it relates to the way we do business.

And I say that because the large national marketers out there have a little different tempo and it creates a little bit stronger pressure point on the reps -- I have addressed that before, looking more and more toward the independent agent.

And we think that our philosophy is right. We think that our capability is in place. Once the J.D. Edwards OneWorld conversion package is fully implemented on our lighting side, this brings us into a stronger customer service support program. We've taken our engineering group and initiated a stronger new product development and where we're getting a great deal of input from the newer independent agents that we've been developing over the last year.

And the strategy is sound. It's strong. And I think there's great opportunity out there for LSI.

Okay. Now in terms of the previous price increases they implemented -- I guess a couple of competitors have mentioned that they were not able to hang onto the full price increase that was announced. Did you have a similar problem there?

Well, yes and no. As you are well aware with your following, a lot of this business in the commercial and industrial is on a bid basis.

So where does that bid fall in? We're been, let's say, a little bit more selective on the basis of how we're going to approach this market. Our answer isn't necessarily just to follow what everybody else does. Our focus is really to bring into play a different strategy allowing the agent to make more money.

The pressure point has been not only on the manufacturer, but certainly on the agent, because the agent, unfortunately, is in the middle as it relates to the battle for market share. When you have got four larger companies that represent 50 percent of the volume -- and of course, he's the one that pays the heavier price than even the manufacturers.

Our approach is going to be a little bit stronger in the independent area. We're not necessarily after strong volume as much as we are a more profitable level.

We are busy. We're very busy. Our factories are doing quite well. And we are really approaching this a little bit differently, because we recognize that we've got to improve margins. And revenues, of course -- you can see the growth of the revenues has been pretty good.

I think the price increases are going to somewhat stick as they have in the past. But I think we will see some of that erosion come about based on the size of the order and on the basis of what the real competitive attitude is. So it's a little bit early to tell. But so far, we're holding our own.

Okay. Now in terms of the oil contract, obviously, the ultimate motivation was the merger itself. But any idea as to kind of what was the motivation behind the timing of this? Why wasn't it 6 months ago, or -- I'm just trying to get a sense of maybe are there a couple more in the works, any key factors that might drive some other companies to head this way?

This is strictly my guess as far as I can just use my history and wisdom of being in this for so long.

This program actually started over a year ago. And it's like most of those companies; it takes them an awful long time to really finalize what they're going to do. And certainly with the ups and downs in the oil business, with crude oil, as we all know, going where it is, the real emphasis is -- at least appears to me -- it's not as much outdoor now as it is indoor. And that's kind of been a flip-flop, if that's the right word to use, in the last year or so. And the sea (ph) store seems to be the more focused now.

And I think that one of the reasons that this particular company -- certainly the strategy was we're merging two companies into one, and therefore we need a new look.

I think equally as important is the fact that the strategy is that it's been years -- and now it's getting to be a little bit old out here. We introduced the Scottsdale product going on 8, 9 years ago. And it's hard to believe that that much time has gone by when we kind of revolutionized the canopy lighting and got all that excitement into the outdoor.

And I think now that here we are, 9 years later, when all of the bigger programs really got interesting, LSI experienced some wonderful sales, extremely strong margins in a product that was new and certainly exclusive for a time being. I think now where we are is that the market is taking a different approach.

And if I can just hang a little bit of my hat that I'm very reluctant, as most of you know, to put that so far out, because the oil industry is certainly a very unusual beast. It's hard to get your arms around. It's hard to understand some of the things that they're doing.

But if there's any indication that we've got a program of the size potential that this one is, and that the news media within the industry is picking up on it -- there's more and more discussion about the potential; that sends up a lot more opportunities or signals to some of the other companies. And if the strategy, or if the show -- the PEI show last week is any indication, it is definitely better than it has been for 3 years.

So our hope is to continue to work the market, keep promoting our new product development. And the replacement of the Scottsdale, as most of you know, is the new version, which we really can retrofit in the Encore line.

And actually, what happened, which was really exciting to me, is that this company had us do five prototype stores, each one different, with different outdoor fixtures. The indoor is the graphics guys. But from the outdoor standpoint, they asked us to do basically five standard programs. And they went out and made the decision on their own. And they came back, and every one of the people involved in making the decision selected the new product line called the Encore.

Now that's a product line that nobody else has. And it's an easy retrofit. And so the hope is -- the excitement is that if this is the beginning -- and I'm very cautious with this, because some of us in this audience today build their hopes up high -- I do the same thing -- that these programs are going to kick off, and kick off quickly. That's never been the indication. That's been the disappointment. That's been the frustration for all of us, when these programs start to come out, and then all of a sudden they don't really come to fruition.

This one is definitely in place. This one we're already starting to develop the installation. And by the way, we're doing the installation on that as well.

I think if everything comes together and the economy (multiple speakers) isn't affected too much one way or the other, that this could definitely be an opportunity to lead us into other opportunities, which you can bet -- that our sales department, our regional managers are definitely going to be showing other customers the benefits, the energy savings, the appearance of the new Encore line. The same thing goes true with our graphics business as it relates to the interior package that's going along with the exterior package.

So fingers are crossed, and we're just going to wait and see.

Okay, final question. With the shift seemingly headed more towards the convenience store rather than the outdoor lighting, that would bode pretty well for the narrowcasting product wouldn't it?

Absolutely. You're right on. And hopefully better margins, because our graphics business traditionally does show better margins, even in the oil market. But we're not going to turn away the lighting opportunity as well. We might just see a whole different approach, as we are relating to how to effectively look at this price increase on steel.

The area that has affected us strongly is the pole business, obviously, because these steel shafts have -- they're all steel. And so our approach has been very, very straight forward in trying to improve the efficiency of the product so that we can actually lower them instead of higher. And that way we can sell it at the same price or basically pass on that price increase, and hopefully get back to much more realistic margins.

It has taken a year or 2 to go through the process and redesigning fixtures, developing new fixtures, a new strategy. You don't do that overnight and you don't change an industry the size of the oil industry overnight. It takes time. The old saying is prove it to me. And we have been working hard on that.

The exciting thing for us is that there's no guarantee. But we are the leaders in that business. And we have done a lot to maintain, and I believe actually increase market share, because there are other companies that have a lot of interest in this and who have kind of given up on it because the volume has been obviously a lot lower than the potential was that we thought. As a result of that, LSI is that much further ahead in the game. If this market starts to open up, it's a different day for LSI.

Alex Ragill (ph).

Thank you very much. A couple of quick questions. Could you attempt to quantify the three opportunities you are discussing today with regard to the drugstore market, the quick service restaurant customer, and the oil company?

Yes, I can. But I'm not going to. And I say that with tongue in cheek. These companies have a very, very confidential private direction. Once the word gets out, and it will get out, then it relates right back to them. Let me put it in perspective.

We are dealing in millions of dollars. And the opportunity -- when you're looking at a service station opportunity -- are anywhere from 10,000 to 13,000 sites, no guarantee they are going to do them all. And as I said earlier, they vary by site. Certainly in the rollout program, we know exactly what that is. And I really cannot divulge that information today.

But we'll be able to give you more information in the next quarter, because the rollout really starts in this -- when I say next quarter, the end of the second quarter when we have our next discussion about this. It really will be able to be put into perspective. I am very excited about the numbers because the dollars are there. And the margins are very, very decent.

As far as the petroleum rollout, as we have experienced many times before, those things can start off with a real, real high direction. And then something can happen, and all of a sudden they pull their horns in. So I'm very careful when I try to explain what the potential is. The most important thing to me is -- the measurement is that for 2.5 to 3 years we've had no interest and now we do have interest.

And in the meantime, we have taken this Company and focused in a lot of different areas to make up that business and to keep our balance sheet strong and continue to motivate our people. It's been a very demoralizing time overall, based on what we have been through. The market certainly has been demoralized. It's been frustrated. Our shareholders -- coming up not too far along to address our shareholders at our annual shareholders meeting in November.

But right now I can sit here at a lot more comfortable level and feel that we are definitely going in the right direction now. I know that doesn't answer your question specifically. But based on my comments that I feel very good about certainly the next quarter or two should give you a feeling that the numbers are quite strong.

Based upon what you've discussed today, do you think your graphic - - your sales within your graphics business can get back to fiscal '02 levels in the next 12 months?

I have to go back and remember what '02 was like. That is such a long time ago. I think our graphics business and our lighting business is subject to today's competitive levels that we did not experience necessarily in '02.

But to answer your question, based on the investments we have made in our equipment and certainly the interest we have now with a lot more companies, it's very volume-oriented. As most of you are aware, LSI is a very volume-oriented Company. And if we can continue to build our volume, certainly the margins are going to improve. So I guess the answer is yes, we can get there.

Keep in mind, Alex, that was a year we were very strong in a program that we did identify at that point -- a Burger King (multiple speakers) menu board program. And that was a very large nut to replace.

That's a good point. But the revenues, even though our graphics business didn't show necessarily double -- and it didn't; 3 percent increase this quarter. But it did certainly show much better operating income.

Richard D'Auteuil.

I have a number of questions. On the price increase the industries out there was 5 to 10 percent. Is that consistent with what you disclosed to the market?

Yes it is Rick; anywhere in between. Based on the product line, some 5, some 6, some 8, some 10.

In I think the last conference call it seemed that – and I don't know how you worded it -- but it seemed like you were protecting the reps on price and taking it on and absorbing the hit. How about on the rep side? Is that being passed through?

I don't know -- if I made that statement, I don't know that I was being correct. I think what we said in the last conference call is that because of the way the industry was taking the lead on this, and they were protecting orders that were placed if I remember through June 30 for example, yes, we were doing the same thing.

Which means holding the price at what the rep was already working on and may have submitted to us, Rick.

They may have been, Rick -- that some of the prices were in the hold for release file, that the reps themselves were able to get the customer to accept the order earlier than maybe they would have. So in essence, we were not really necessarily doing that to protect the agent. The agent became part of that protection. But we were following the industry lead because if we didn't, the reps could have changed those orders from us to somebody else. And we would've had an even greater catastrophic problem based on volume reduction.

The announced increase that went out to your customers -- what timeframe was that in?

We sent a letter of acknowledgment out when the first increases were announced, telling the industry we were going to follow suit with an increase. But we didn't let them know what that was yet, because we didn't have all of the input from all four of the bigger companies. And I didn't want to jump into that fray until I knew what everybody was going to do.

When that information became available, then we made the same similar announcements. And that went into effect basically November 12 or 13, or right in that timeframe. So in essence, the letter actually went out maybe about a week and half ago announcing what those increases were. 2 to 3 weeks ago, when the first increases came out, we acknowledged to the industry that we were following suit with an increase, but we would let them know what that would be after our review.

To what extent are you seeing or do you expect to see gains being played around beating the increase?

I think that goes on every day of our lives. To really look at this, it's a little early to tell because the protection on the prices are in effect until around the 12th to the 15th. Certainly from a quotation standpoint, we're not quoting anything beyond the point based on what the protection level was. And again, we're not even extending pricing beyond 30 days because we don't know whether we're going to get hit with another steel increase or whatever. So we are a lot smarter today.

Nobody really could have predicted the way the steel prices went and how quickly they went up and how often they went up. That was -- I think caught everybody by surprise. And so we are still in that kind of limbo stage as the rest of us are and we're watching it on a day-to-day basis. And our quotation group is on a day-to-day basis, based on where prices are. And we're doing rollover costs so that we have better understanding what those increases actually mean. And whether we accept an order or bid on an order all depends on where we feel those costs are going to be and what our margins are going to be.

On the drugstore customer, is that -- I understand -- I think we know who that is. But is that a 1200 store opportunity?

Yes, I think so. I think you do know who it is. But I am not at liberty to mention names, as you know. That program right now is beginning to roll out. And we're going to continue to see that very strong rollout. It was the development of the image and actually doing some prototype testing to be sure it is what they wanted. And then subsequently, the program started to queue up. And we are now really into it in a rather strong manner.

What is the timeframe that is anticipated to rollout on?

I can't answer that with any validity, Rick. But I know that it's obviously as quickly as we can, based on markets. And they are assigning the markets. I wish I had David online. I'm going to guesstimate this, but please don't hold it -- I am going to say that's a good 6 to 8 months still to go.

This fiscal year though?

Yes, I think so. I hope I am right in that statement. I'm sorry I cannot give you a really accurate answer, because I honestly don't know how much is going on and where this -- based on the ramp up. It isn't production as much as it is installation, Rick, because we're doing installation as well.

Turning the page to the petroleum opportunity you have spoken of. I know you can't speak specifically about that particular company. But in the past, you have spoken about what an A site means for a normal conversion, a B site, a C site. Maybe if you can just remind us of what kind of revenue opportunity per site for a normal A, B and C kind of site are.

This particular customer -- I think we are still going through the analysis of what that means. But basically, it depends on -- see, you have got two different companies who did some conversion let's say on the outdoor lighting, and others didn't. So that has to be determined by the surveys that are being done.

And if it is true to history, and I am not suggesting that in this particular case history totally applies, but the numbers we have used in the past -- the A site, which basically pumps in excess of 200 to 300 gallons of fuel, you would see somewhere in the area of a lighting program of about $10,000 to $12,000.

And that may be a little bit low, depending on the condition of the canopy and size of the canopy. And certainly the graphics business, again, depending on the expense of this or that could be a very strong $10,000, $15,000, $20,000, $30,000. It's a little early yet, because the surveys are being done, for me to really get more accurate on that.

I think the most important thing is that for us, it is the first program in 3 years that has a certainly sizable potential, because the numbers are so strong. Even, again, and I hate to do this but I know these are the questions that you ask, is that -- and I will give you my best guess -- is that if you take 10,000 sites and it just was $3000 a site, that is a lot of money. And then it goes from there, whether it is south or north of that $3000 bet.

But when we're doing the installation and we're supplying product, if they do 500, that's a different number obviously. But the thing about it is for us is that we are not counting on that per se, as far as forecasts, as much as we are the fact it's the beginning of hopefully a new day where we're going to start to see some of this come back.

What was the 11/9 date you referred to?

That was the beginning of the rollout for the -- excuse me, the quick serve program, the addition to the menu system.

So this does not have a start date, then?

Yes. No, we are in it right now, Rick. We are in the early stages now. We're building product, surveys are being done. We're building -- that's one of the reasons some of our inventories are up. This program is in place. It is still little bit early to really be able to nail down what that number will be until we get a higher idea what the percentages are of where those A, B and Cs will go.

They have locked in on a prototype? That's not still in flux.

No, that's done. We know what they are doing as it relates to the type that they want. And that's obviously a direction we are very pleased with because they selected -- and they had a choice. They could have picked any one of the 5 different products that we offer in the petroleum lighting side now. And they picked the newest one.

They liked the Encore; they liked the idea of the energy reduction. They saw the payback opportunities based on energy reduction. They liked the looks of it. They liked the fact it was well designed for retrofit, because you've got to see -- and this is where these numbers are a little bit like Jell-O. We don't know exactly whether they're going to take a site, for example, that might've been retrofitted 3 years ago by A company and developed a retrofit for -- that was a Scottsdale, we will say, and put the Encore in place of that.

I think those decisions are being made week by week based on the marketing folks as it relates to the territories that they're going to do the conversion with. It's very, very unique compared to the past. And I think that as we gain more experience on how they're going to approach the market compared to the way they used to, and I'm talking about our customer, then we'll have a lot better ability to answer some of these questions that your answering -- that I can't answer with full authority today.

There are no further questions at this time.

Well, I want to thank everybody for your time. And certainly there are good questions here. And I think overall, as I can just wrap up and tell you that from the standpoint of where we are today and certainly looking back and the disappointments and certainly the frustrations, but a lot of things that we were sharing with you in past quarters about what we were doing and you were beginning to -- you were certainly were looking for results. As many of you have said to me one-on-one, we want results.

Hopefully this quarter is the beginning to show you that the results are coming back. Obviously, there is a lot of -- there's still a lot of unknown out there. But we are addressing it. We have much better direction in place in order to handle this. And I feel really good about it. And we'll just see the next chapter is the quarter we're in. And the quarter right now, it's early. It's -- the month of October is not even over yet. But we're very happy with the order entry.

And certainly, we're very excited about the programs that are going to start or have already started. So that gives us a tremendous amount of inspiration to look forward in a much more positive manner. With that, I want to thank everybody. And Michelle, that concludes our first quarter conference call.

Thank you Mr. Ready. Good afternoon everyone.