LSI Industries Inc (LYTS) 2005 Q2 法說會逐字稿

Good afternoon and welcome to the LSI second quarter earnings conference call. Today's hosts will be Mr. Bob Ready and Mr. David McCauley. During the discussion all participants will be muted. Now, without further delay, I will turn your call over to Mr. Ready.

Thank you. Let me make a little bit of a correction there. Good afternoon everybody. We're going to try a little bit of a different format this time. This is our first conference call in 2005. We had a very, very-- in my opinion, a very good quarter. We're very excited about the quarter and actually we're very excited about things to come.

Our format this -- at this time is going to be almost like kind of a round table conversation. We thought about our past conference calls; basically we cover all the same issues. I want to expose the two primary guys that are really going to be responsible for handling the future sales of LSI Industries. As you all know we broke this into two business segments, our Lighting Segment and our Graphics Segment. David McCauley is on with Scott Ready, the two Presidents, and Ron Stowell. So the format is really going to be a round table discussion. We think that we're going to give you a lot more information.

Hopefully we'll take a little bit more time than we have in the past but not take more time out of your schedule. We've got a lot to cover, we want you to know what's going on, we want you to have a good feel about what the future of the Company looks like, and with that I think what I'm going to do is I'm going to be the monitor, I'm going to work with these guys. I'm going to ask the same questions that I'm sure you guys would ask, or gals would ask. Ron Stowell is going to cover in his normal detail the financials and I think what we'll do is before we get into the presentation format I'm going to ask Ron to cover the financials in his normal way. So Ron I'll turn it over to you.

Thank you, Bob. I'll first go through our Safe Harbor statement. We'd indicate 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 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 we may imply. Those risks and uncertainties are discussed in the most recent press release and also in our forms 10-K and 10-Q that have been filed with the SEC. And finally we do not have any material nonpublic information to disclose today.

I will go through a number of the financial metrics. A couple of which are certainly in the press release, so I won't dwell upon those, but I'll give you some information that normally is asked of us on these calls. Sales for the quarter were 74.3 million. That broke down 46.9 million for Lighting, and that was about a 12.5% growth from the prior year, second quarter. Graphics had really nice growth at 27.4 million. That's 22% growth.

For the half, with the total being 142.6 million, the Lighting was 91.7 million, or almost an 18% growth. And the Graphics coming in at about 51 million was about a 12.5% growth. I will mention here at the top that we do have for this second quarter only, not for the first half, but for the second quarter, Wal-Mart stores was a 10% customer, representing 10% of our sales volume for the quarter. They were slightly under 10% and therefore not to be disclosed for the first half.

Ron, I might mention that that was anticipated, I think in prior calls we had discussed this major retailer, and that we were going to see a growth as the year progressed, and this was definitely anticipated as a direction. Now, obviously, probably in the next few months that will drop down a little bit, but the anticipation was that when we quoted this business that we really didn't want it to run more than about 8% of our volume. So that's not unusual for what we were anticipating for this period of time.

And really the average that we've incurred is certainly less than 10%.

Right.

From the start of the program.

It's just about right on forecast.

The operating income by segment, which was not in the press release, operating income total was 7.659 million, and that represented 10.3% of income-- of , I am sorry, 10.3% of net sales. Lighting Segment was 2.9 million operating income, 6.2% of net sales. And the Graphics Segment was 4-- almost 4.8 million and that's 17.4% of net sales. Now, certainly very strong performance in the Graphics Segment compared to prior year.

One thing that, you know, in addition to the strong sales growth in graphics, we had a favorable settlement on a bankruptcy claim from K-Mart. We've discussed that in the past. We received part of our-- the majority of our settlement in the form of stock, which was sold, and we had about a $370,000 gain. It was reported as a reduction of our operating expenses, so that's part of the operating income in the Graphics Segment. Just as an aside, you know, that's approximately $0.01 per share that came in from that favorable settlement.

In Lighting, the profitability is a little less than it had been in the prior year, second quarter. We've talked about the steel price increases that we have been incurring. Those prices continued through the second quarter. They have leveled off, and we're really not expecting any additional increases for, you know, the next couple of quarters. It could change, but based on the knowledge and information we have now, pricing of commodity steel seems to have leveled off and is holding. Now we've increased our sales prices to customers. We announced mid November, you know, maybe an average of 7% or so sales price increase. That has not really taken too much effect in the second quarter. That's for future orders and shipments. So steel prices have contributed to that profitability squeeze.

Of course, Wal-Mart being such a large customer and the margins on that being a little less than the rest of our business, we have implemented the J. D. Edwards Operating System in our main Lighting facility here in Cincinnati. Depreciation on that software has kicked up quite a bit. We have alerted readers of our financial statements of that fact in the past. That was a couple hundred thousand dollars. And finally, we are experiencing lower volume, some unabsorbed manufacturing costs in our New York Lighting facility.

For the half, the income from operations-- operating income was 13 million, and that broke down to be 5.4 million for the Lighting Segment and 7.6 million for the Graphics Segment. Sales to the major market that we have, that is the petroleum convenience store market, increased in the second quarter over last year's second quarter. We're now running 31% of sales in the second quarter. That's over a 9% increase from last year. And then that's a combination both of graphics and lighting. For the half, however, it's a little different story. It's 27% of total net sales and it's about-- up about 1.5% from the prior year.

The gross margins-- what I think was indicated in the press release for the quarter, was 26.9%, 26-- 25% for the first half, and for some of the same reasons I described, the changes in the operating income, they've had the influence on the gross margin with the exception of that K-Mart favorable settlement. And, of course, net income we experienced a 20% growth in the second quarter to 4.792 million, for the half was 8.108 million, or 23% growth. You've heard us talk about in the past that we do have leverage when our volume goes up, actually for both the second quarter and the first half. Total net sales were up 16%. So with our net income up 20% and 23% respectively for the second quarter and first half, we're gaining some leverage on that increase of sales.

Those same percentages pretty much held through to earnings per share at the $0.24 for the second quarter, a 20% increase, and $0.41 per share or 24% increase for the half. You would have noticed on the press release this quarter that we've added the weighted average shares outstanding for all periods reported. That usually has been an information item that people have wanted and asked for, so hopefully that will get you even more timely information by putting it on the press release itself. And, of course, you noticed the rather nice increase in our quarterly cash dividend. The Board declared a $0.10 per share dividend to be paid in mid February. This puts us up to an indicated annual rate of $0.40 per share. That is a 39% increase from the previous indicated annual rate of 28.8 cents per share. Of course, during this fiscal year 2005, we've paid the first quarter dividend out at the 7.2 cents per share, and then with the indicated annual rate of $0.40, we would, at that rate, pay $0.10 out for the remaining three-quarters of this year.

Some balance sheet statistics that a number of you that maintain models are anxious to plug into your models, and I think we have hopefully all those numbers here for you. Our cash balance is 224,000. Of course, being in a net borrowing position, we don't build up a lot of cash on our balance sheet. We make efficient use of our cash by paying our revolving lines down just as quickly as we can. Net receivables was 43.982 million. The inventories came in at 49.903 million. That's essentially the same level of inventory as we had at the end of the first quarter, but it is up certainly from year end last year by about 2.3 million or so.

And we still maintain, you know, higher inventory levels for-- certainly for the Wal-Mart program and supporting that 10% of net sales in the second quarter. And we also have a couple of Graphics programs, one of which has been ongoing in the drugstore area and another one in the menu board area that is-- we started the build program in the second quarter but without any shipments, shipments started in January, so we've-- we're carrying inventory to support that rollout program. Actually, an enhancement of an existing menu board. Our net property and equipment is 52.987 million. Our debt has been reduced to under 10 million, 9.959 million, and our shareholders' equity was identified in the press release at 134.317 million. Capital expenditures for the quarter were 2.182 million. That's, you know, a little bit of software, but it's primarily tooling and equipment for our operations.

We would expect fiscal 2005 to be somewhere in the 5 million to $6 million range, and I would expect that this would include early spending on a facilities expansion in our Rhode Island Graphics facility. I think Dave McCauley will have some brief comments on that later. But we would expect perhaps to start that before the end of the fiscal year. Finally, well, I need to give you depreciation and amortization. And I have it for the first half. I do not have it for the second quarter. 3.520 million is the first half depreciation and amortization. That compares to 2.949 million from the prior year.

And then finally, the-- a number that perhaps you've waited for in the past to see in the 10-Q, our cash flow from operating activities for the second quarter was up to almost $7.1 million, which was a 7% increase. The first half we're at about $6.3 million cash flow from operating activities which is down a little bit from the prior year. So those are the financial numbers and metrics that I'd like to report to you this quarter.

Great. Thanks, Ron, very much, and I think that Ron has probably covered most of what you need. As always, we will be available to discuss any of this if you would like to give us a call sometime in the next day or two.

I'd like to take an opportunity now to introduce the two Presidents of the Lighting group and the Graphics group. I'm going to start with a young man that I've known for quite a number of years, his name is Scott Ready, and for those who may ask the question, yes, he is my son, and he has been part of the Company since he was 13, and I'm very, very happy to say in one way that he's reached the ripe old age of 42, which means that I'm getting a lot older. The other gentleman is a fellow by the name of David McCauley. I've known David for a number of years. We purchased David's business, Grady McCauley what 6, 7, 6 years --.

1997, June of '97.

Right. And David has done an exceptional job in developing the direction of our Graphics business, and appropriately and rightfully so he was appointed President of the Lighting-- of the Graphics group.

My comments before I turn it over to these two guys is that basically, as many of you know, the past few years it has been my hope and my intention to try to strengthen the assets of this Company as it relates to its marketing and sales approach. We've had these numbers of Companies that we've acquired or developed over the years, and basically we had an organizational chart that had all of those Presidents reporting directly to me. For the short term level that was the right thing to do to develop the cultural and the direction of the Corporation. However, it was always my intention and it was a direction that I was very, very straightforward on, and that was to start combining these Companies into a stronger asset base as it relates to our product offering, our service offering, and certainly the one plus one that you've heard me say many times, lighting plus graphics equal image. About a year and a half ago the first major step was taken with the Graphics group. David was appointed President and we rolled together the Houston, the Rhode Island, and the North Canton operation into one unit as we call LSI Graphics Solutions Plus.

It was a little bit more complicated on the Lighting side because of the fact that we have reps, we had a major rep changeover, we have more companies involved, certainly the development of the products in order to improve the package offering to the reps was a critical part. But understanding that we were committed to do that, it was just six months ago, approximately, July, that we made the big move and we consolidated these businesses into our Lighting business segment that we call LSI Lighting Solutions.

And the challenge and the direction that I've given to these two men is to take these Company-- these business segments and put a lot more emphasis into develop the ability for them to work together more than ever before so that we really establish a very unique marketing and sales approach to our major markets. And I'm very happy to say that we have reached that plateau, the foundation is in place, the commitment has been made, the directions have been taken, the organizations have been appointed, and we are now working toward that direction of improving the ability for us to package our products throughout our customer base, both commercial, industrial lighting, petroleum, niche automotive, fast-food and large national retail accounts.

And I'd like to take this opportunity now, and in future conference calls we're going to have these fellows really report to you really what's going on with this Company because they're in the thick of it every day, and I thought it would be appropriate for you to get to know them. You have known me for a number of years.

If anybody's got the idea in the back of their head am I retiring? The answer is no. At some point as I reach that ripe old age of whatever it's going to be, I'm part of this Company and have a great deal of respect for the direction that we are taking.

I think what I would like to do is I'm going to be the moderator. I'm going to ask some questions, and I'm going to sit back and let these guys talk to you the way they would sit down and talk about their business conditions and I'm going to anticipate some questions that you might ask and ask them and hopefully by the end of this conference call we've established a much better format to be much more informative and more helpful in you understanding the change of the direction of this Company, because it has changed. We for so long have been such a niche market oriented Company and depended so much on the oil companies. And we still do. It's a very important segment and we're going to continue to be strong. We're going to continue to invest because it's going to take a change for the better.

We have one major customer that you're aware of that we've been working on that, and Scott will report a little bit more about that. But it is a different world out there and it is a different marketing program with the consolidation of these oil companies. It's certainly made a difference in relation to how they're marketing in this country. And with that said we're not going to give up any market share, we're going to strengthen our position, we're going to continue to develop new products and we are going to be a major, major player on an ongoing basis to that industry. Because at some point we will see a resurgence, and new images will come, and images will go, but LSI is going to be the Company that has the strength financially, product development, service availability of anybody else in this country as it relates to that major niche market.

I'd like to have Scott, and when it's David's turn, talk a little bit about your background and then we'll get right into their discussion about their responsibilities as Presidents of these two real important groups.

Thank you. It's great to be on this side of the microphone for a change. I, like all of you, have listened to these conferences for many, many years and have participated in a variety of aspects within this organization. My background is primarily on the sales side and primarily coming from the niche market side of our business. But I spent the last year becoming much more familiar with the overall objectives of all markets involved and really excited to be able to participate in this format. It's very nice obviously to start out with such great news and to be part of the announcement of a good quarter and a good addition to our dividend policy.

We're now six months into the Lighting Solutions Plus strategy, and it's really the combination and the coordination of the operations, the management, and the sales strategy that we are putting in place for the future of this Lighting business segment. We've got a lot of work still yet to do. We don't have quite as much accomplished yet on the Lighting side as we have on the Graphics side but very excited about the progress that we've made so far.

The last quarter saw the continued rollout of major lighting upgrade for one of the larger international oil companies. This upgrade consisted generally of outdoor lighting products from our new Encore product family. In this case we're upgrading existing Scottsdale products that we previously supplied because of the improved value in performance and energy reduction that that Encore product line creates for the customer.

It's really exciting because being part of the original Scottsdale rollout almost ten years ago, it's quite gratifying to know that this Company has been able to improve upon itself and do so in a fashion that nobody else can challenge us in this marketplace. Installation of these Encores will continue through this third quarter. I think it's significant to note that much of the revenue impact of this rollout program will be felt in this current third quarter due to the revenue recognition rules that we have in place. In addition we released a new version of the Encore called the Encore Top Access. Again, to the petroleum market, reinforcing the commitment that this Company has to its original niche markets.

This further enhances the product line with an easier to install and more flexible design that appeals to the segment of the market that is most sensitive to the increasing impact of tighter zoning and more restrictive lighting codes. It offers a tremendous margin improvement opportunity for us as well, as the design is an improvement over our previous products. In addition we've rolled out a brand-new catalog concept dedicated to the petroleum convenience store lighting market, and this is the first new catalog we've put out in the market for over six years. It combines for the first time the breadth of our indoor and our outdoor lighting products. This will be a significant marketing tool for the coming quarters, designed to support our penetration, a deeper penetration, into our core niche markets, Specifically the petroleum market, as a result of the interior lighting opportunities that it will bring.

This will be a significant marketing tool for the coming quarters, designed to support our penetration, a deeper penetration, into our core niche markets, specifically the petroleum market, as a result of the interior lighting opportunities that it will bring. Remaining consistent with our strategy to operate as a low-cost producer, many of you will recall if you look at the annual report and note the strategies and the foundations that were reinforced in that annual report, that we are going to continue to focus on that low-cost aspect. We continue to streamline our internal operations with enhanced customer service programs designed to simplify and improve our agent's ability to communicate with LSI.

We've got dedicated service teams now built around the new CNI rep agencies that we've pulled on board over the last 6 to 8 months to develop a one-call capability that reflects the strategy of combining product categories into a single product catalog offering. In addition, investments in new equipment, automated equipment, were made in New York, Dallas, and northern Kentucky facilities last quarter. These investments are already having a positive impact in efficiency of existing operations as well as expanding our overall production capabilities. They'll play a significant role in support of new product releases scheduled for the current quarter. These expected product releases will continue to support continued progress in penetrating the commercial industrial lighting market with products that carry a greater margin potential and expand our breadth of offering.

The market remains very competitive. As Ron alluded to earlier, pricing, margin squeeze through material cost increases are challenges that we constantly face every day. But we are happy to announce that the pricing that we have put in place seems to be holding, and is consistent with what the rest of the industry has also followed through with. The full impact of these price increases, again as Ron has mentioned, will be more likely in the quarters to come as many of the quotes that were developed throughout the fall were maintained through the end of the year. Price increases were also successfully implemented in our national account business. One of the other strong segments of the lighting side. The account that Wal-Mart-- excuse me that Ron did refer to, Wal-Mart this year as well as several others did accommodate LSI in our request for price increases. We'll continue to work with both segments of our business, the Graphics and Lighting, to combine our unique strategy to bring opportunities beyond the typical competitive day to day commodity lighting market.

The individual operations have also played important roles in the last six months in contributing to the success that LSI Industries has had as a unique supplier of lighting and graphics products, and I'm sure that many of the programs that David will refer to in his part of the presentation will include that reference. We have had, in the manufacturing side, major emphasis on supporting some of the graphics programs through lighting components or manufacturing capabilities on the metal side that contribute greatly to some of the results we see in the graphics side of the business. Our Lightron facility which I referenced earlier as a New York operation continues to make strides in establishing the fundamentals necessary for a more positive contribution in the future.

The cost controls that we have in place at our focus and investment in the capabilities of the facility are setting us up for generating more volume from the operation by engaging their products more thoroughly in all the different markets that we serve.

Hey, Scott, you might mention your thoughts, if you would, when you relate to New York, what is your feeling as it relates to the fact of all the time that we've spent in getting the Company back on the right track with things that are coming and opportunities? What do you think about Lightron's contribution to LSI in the future as it relates to the CNI market?

Well unfortunately I don't think our results really indicate the progress that we've made there, and they will shortly as we generate the right products out of the facility that can now support those products through the coordination and the organization of the facility. The cost control measures that are in place, the investment in machinery, and frankly the product offerings that are now going to be out of that facility. We did introduce in the last quarter a new and improved line of accent and down lighting. This was the first opportunity for LSI Industries to put its stamp on a product line coming out of that New York facility. It's a product line that has applications to every single market that we serve, including the niche markets.

I think that's really the tale that will be told, is the work that we have done very thoroughly and basing it on the fundamentals that need to be in place to allow that operation to grow beyond a regional supplier as it was when we purchased the company into an organization and a facility that can support our national programs.

Is it fair to say that with-- up until this point, that Lightron has definitely had a drain on our margin?

Absolutely.

And with the change of bringing it to a more national level it's going to help us grow the business?

Absolutely.

And those were the primary elements that I wanted to touch on, on the presentation. I know we are going to go into a format here. We do a little more question and answer. Don't know if we want to start that now or --.

Yes, well, let's finish up a little bit of the lighting, then we'll get to David. This program that we've rolled out for the large national petroleum account, I believe that not only did it involve lighting but to some degree we had the graphics as well, correct?

Absolutely. It's a great one plus one equals image story in this particular case because this particular retailer has got significant volume coming from the lighting and the graphics portion of our business and designed around completing more than a mere lighting upgrade or graphics upgrade. It's designed around creating an image improvement in this particular customer that reflects itself with their consumers immediately in the field.

Why don't you share with us a little bit of your feelings about each of the operations, maybe starting with Dallas then Kansas City. You've talked -- you have hit on New York, but I think it would be important to share with the folks some of the things that have been done in Dallas, with our landscape lighting and also maybe tie in to the other niche markets, our automotive and fast-food.

Absolutely. Kansas City, our midwest operation, and you'll notice that I'm using the reference to the locations as part of that cultural change that we've implemented internally to the organization while the brand names, the legal entities still exist, the focus is on LSI, the focus is on LSI foundations and LSI culture. And the Kansas City operation has been a tremendous success story for us as we look at the improvement and the increase in volume that we've been able to generate from that facility in the last year. The second quarter produced record volumes in support of all lighting markets out of that operation. We were able to, through the improvements in efficiency and coordination, ship more product out of the Kansas City operation than we ever have as it's been-- actually ever in its history, either before or with LSI.

And I think it's fair to say that for those folks who may not understand the product offering, that Kansas City and New York are really our major first attempts to develop an interior lighting line that we haven't had during the entire development of LSI as a Company from 1976 until that first acquisition that really put us in the interior market, and we were coming out with small companies trying to compete in large national markets, or big markets, that have been pretty much controlled by the 4 or 5 bigger companies. So it's been one of those very, very straightforward attacks, and it takes time, and I think, without putting words in your mouth, I think what you have said to me is that you're extremely pleased with the results that are beginning to be developed as a result of not only our investments but the product development and the consolidation of products and the billing and the new lighting catalog. Is that --

Absolutely.

What's critical to note as well is that the production that's coming out of that facility, and I can't emphasize this enough, because it's a key to the LSI strategy. That production is supporting not only multiple markets but also the ability to be successful with some of our Graphics programs, some of the products that are going into the menu board systems that Dave will talk about later are coming out of that facility. The success that we've had with the large national accounts, specifically Wal-Mart, is supported by that facility. So their capacities, their capabilities when they were acquired, are significantly changed and improved over the last several years. As you said, it takes time to make that change and we're really excited to start to see that come to fruition.

And we expect the same as we look at the New York operation, but obviously that started somewhat later in time than the Kansas City.

Dallas, I'll mention briefly, is about ready to release a new product for us in the current quarter. They have also performed very well in the second quarter, but they're releasing a new product line or scheduled to release a new product line in the decorative low-voltage aspect that is compact in size and it uses some of the newest manufacturing technology that we have in the market.

Again, a great product added to the architectural outdoor product line that will be a typically higher margin product than traditionally found in some of the interior products.

I think that's a very interesting and very important point as it relates to our Lighting, is that we have primarily been an outdoor lighting company for all these years, and that margins are a little bit better in the outdoor and we make our own poles, as probably most of you are aware. And our venture into the interior market, which is really a very highly competitive low-margin business, it always has been, but now as we begin to stabilize that we are influencing that opportunitive growth with hopefully much higher margin business like in these new products where the architectural market -- where you've got to have the fluorescent and you have got to have the outdoor, but now expanding in the architectural which really mixes the margins.

Is that fair?

It's fair to say. I think that maybe in summation what we've seen is the success of our strategy continues to produce results and it's the proper balance and the proper mix of products that we're continuing to focus on, and we're going to continue to find our specific place in the commercial-industrial market that will generate the kind of returns and the kind of results we're looking for.

Good. Thank you very much. That was a good report. As a quick wrap-up on the Lighting side, if I might put my two cents in. As I sit here today and analyzing the direction of the strategic planning process, having Scott now with his background and his length of time with the Company, he's been around a long time.

He started with me when he was 13 years old, and he sure knows what's going on in the lighting industry. And he has been putting himself into position to do a much better job of pulling the organization together and strengthening the assets of our ability in the lighting product development as well as marketing and sales. He did not mention anything about acquisitions. I'm going to touch on in that my closing remarks. Thanks, Scott.

David. Let's give the folks a little bit of an idea what's going on in the Graphics business. A little bit more exciting, a little bit more profitable, but definitely a very important part of the LSI strategy, the one plus one equals three.

Sure will. And good afternoon to our audience.

Tell the folks a little bit about your background Dave.

I'll give you a little profile here. I'm in North Canton Ohio, been in this area all my life. Been in this industry all my adult life, 31 years now. Age wise, I fall right in there between Scott and Bob. I wish I was closer to --

That's a big range, David.

Weight wise, I'm right in the middle too, and height-wise, I'm in the middle. So I am in the middle here.

Easy, David, easy.

Okay. Now, I understand this graphics market, again I have been in it all my adult life. I understand the industry in my competition or our competition and feel very confident about it. I don't want to say it's all I know, but it's all I love, and so I enjoy my work here.

Getting back to some comments. As Ron told you earlier, we had quite the nice sales and profit picture increase compared to an equivalent period last year that was fairly strong in itself. We've had one large piece of business with a major drug chain. That customer was real strong in our first half, and should continue to be just as strong in the second half. And then for reference keep in mind that, and this is a positive, that last year in our second half this same customer pulled out the business, put it on hold, if you would, in that they were quickly involved in the middle of a major acquisition, and this drug chain completed that acquisition and the program came back strong starting in July of this year, and like I say, there's six good months ahead on that one.

David, that has definitely had an effect on our inventory levels, correct?

Oh, yeah. Yeah, we held and carried that inventory for awhile, and disposed of it all and we keep remaking in quarterly lot size. So that helps in terms of financing that and helps our balance sheet. Okay. Accomplishments.

Well during this first half we've also had a lot of large amount of progress in that we upgraded and managed changes at our LSI Adapt unit. Now, for the regular listeners, I'll refresh your memory, and for new listeners, give you the first time exposure. This Adapt unit is our engineering, installation, and implementation unit with eight locations throughout the United States. They're now headquartered in this office. We moved them from West Lake, Ohio, down here. These changes have had a positive impact on this first half, and we see again no reason not to expect anything different in the second half.

Moving on, another business unit, there's five business units, the Images unit. Again, bringing your memory back to regular listeners and updating the new listeners here, the Images group was previously described as our Menu Board Division. This was a unit that Bob got with a group of guys, about 10, 11 years ago, had an idea, grown within the Company internally, and now is a major contributor. In fact, at one point I think they took down the largest order LSI's seen in --.

its history.

$25 million range.

Right.

That was about 2.5 years ago. They are currently installing a large addition, large add-on, retrofit to those menu boards that they built maybe 2, 3 years ago at 7,000 locations for the major fast casual market. These are mostly produced in the first half, I'd say 85, 90% of the orders, in Cincinnati, Kentucky.

Now, it's not a Graphics program, per se, even though this division reports to North Canton, but due to the large metal fabrication that we do in Kentucky and build for this product in the electrical and lighting components required that end was done in Cincinnati. The install which is coordinated through Adapt, that I mentioned just a moment ago, is presently running along fine at about 300 units per week, and you can see by that rate in that we started at the first of the year, we'll be done by June 30th with that. The good news is the billings of this program will take place in the third and fourth quarter even though the manufacturing was mostly done in the first quarter.

Now, speaking of this Image group, that's located in Kentucky, we're in the process of revamping that group. We're about 50% of the way there, and what we're doing is reestablishing what we sell and who we sell to-- or, excuse me, who sells it. We are hoping our offering to these fast casual outlets to go way beyond what they produced in indoor and drive-through outdoor menu boards. This new offering is going to include total graphics, decorative fixturing, indoor, outdoor lighting, of course built by LSI, and narrow casting active digital displays and content. We developed-- we've also developed a new line of front-lit menu boards. Again, the graphics being built probably in North Canton, Houston, or Rhode Island, the lighting, of course, coming out of Cincinnati, or Midwest or Lightron, depending upon which line they participate in. And these front-lit menu boards are a current hot trend in the industry.

The fast casual that I mentioned which Bob many atimes has referred to as QSR, quick service restaurants, are trying to shake that image of serving fattening, quick microwave-type food. They're trying to shed that plastic look, so it's very much a natural fit for LSI Graphic Solutions and Lighting Solutions Plus. Our total sales force will tackle this fragmented industry and will sell that complete basket now that I talk about.

David, you might mention about our sales force on the Graphics side versus the Lighting side, the Lighting reps, and share with the folks how the Graphics goes to market and how we can control it so much better.

Okay. The Graphics sales force has no reps. It hasn't worked well. We've tried it in the past. And I'm not referring to LSI, I'm talking about the industry. Now keep in mind, different from the Lighting arena, we have no catalogs. Our products, our images are custom built, and we can get into these very large programs, so it takes, I'll call it somewhat of an expert working closely with our project management and implementation groups to follow this thing from cradle to grave. So that's the main difference there. We don't have products to sell. We have programs to sell in the Graphics arena.

If you sell a program, in the lighting business it's so easy, in this day and age, for somebody to change a fixture from one manufacturer to another. In the graphics business that can't happen when you start controlling it from the development through the installation process, correct?

Right, right. I'll have some comments a little later on here in the presentation also about how graphics differs in lighting but not from the sales aspect but more in the manufacturing.

Got about five minutes.

Hey, let me see. As Ron stated earlier we're building a new facility over there in Rhode Island. Should be available to us in the late winter of '06 completion. We're very excited about that and keep in mind this was a division that LSI purchased nearly six years ago and the sales volume has increased 5 times from the rate that it was established during purchase. Lastly, Houston and North Canton. Houston was LSI's first Graphics acquisition. I'm guessing, was it close to 1990, Bob?

'88, David.

'88, right. North Canton was the second. The third acquisition was the Retail Graphics Group which is in Woonsocket, Rhode Island. The fourth was Adapt. And of course we talked about Images, that was the up-start company in the early 90s.

But North Canton and Houston they're both having a lot of success now in both the petroleum and retail arenas. Together all 5 of these units are approaching 750,000 square feet of manufacturing base. Sales activity remains quite strong and our largest petroleum program right now that Scott was talking about is tracking slightly more than expected. Now, I'm proud to report that all 5 of these Graphic business units are working in a very harmonized fashion, and we expect this to increase and stay forever in the graphics sales of profit picture is looking pretty darn good.

David, say something -- tell the group how things are proceeding with Narrow Casting.

Okay. The Narrow Casting arena, and again for those of you that might be semi familiar and new to that, Narrow Casting is presenting the right message at the right place at the right time. And how that is done is it's done through active signage, versus passive signage. Most of you have always thought of us as a company that builds signs, if you would, passive, nonactive, nonmoving signs.

Back to Narrow Casting, that's active digital signage, it involves placement on to a monitor whether it be a plasma screen or an LCD, from a central location, North Canton Ohio, via satellite or broadband lines. What that is, is a disruptive technology at the point of purchase sale market where people will have clutter of signs on the end of gondolas in the end of aisles or in the aisles or hanging from the ceiling which is not the type of signs we do. We do the more permanent signs. The Narrow Casting will replace those temporary paper/cardboard plastic signs, and that is a giant opportunity for us. It's a new market that is close as our right hand is to our left. So we're very excited about that.

We have a lot of partners in big-name type companies in the NEC, Mitsubishi, Phillips, those type people that are helping with the screens, and the technology is moving fast and I'm sure as you go out to Best Buy or Wal-Mart, Borders Bookstores you'll see these plasma-type screens there and relate to what I am talking about. It's got a lot of growth potential.

We introduced that to our shareholders just a little over a year ago at our shareholders' meeting and I think we all realize, and it's important that certainly the folks that follow us on the stock side, that Narrow Casting is a very important part of our strategic future. It's going to take a little bit more time but we're beginning now to get the seeds in the ground and actually starting to see some growth. And I know from my many discussions with you that's probably one of your most exciting opportunities that you see in the future of anything we've ever done.

For sure. Disruptive technologies, new markets for us that are just like rolling off the-- rolling off a log. It is so close. We understand all the pitfalls in the passive market, the active market is just word changes to us. We're ready to act on that.

As a wrap-up, Dave, if you would, please, share in a very short period what's your feelings about the future and the profit margins and so forth within the graphic markets that we serve.

Well, I feel very strong about the graphic markets we serve in that the trends change so fast, the new technology moves so fast, when you have MP3 and LCD plasma screens and satellite radio and Tivo, items that you can't keep up, cell phones on a daily basis, that the models can't even last a year before they're outdated, that's exciting. The brand extension inside a store, different lines, Starbucks type person would bring out, very active. The mergers, acquisitions, it's a game of 2's, we talk about the office supply industry. You get Office Max, Office Depot, and Staples after that. You can't think of another name. Hardware, you think of Home Depot, Lowe's, after that you can't think of another name. The clothiers, you've got May and Federated and they will combine.

And lastly someone like Blockbusters and Hollywood Video, it's hard to think of the third and fourth. The big are getting bigger. LSI has put together a battle ship here in terms of the graphic and image business. We can service those big people. We keep building the organization for that, so that trend is up, and we're at the right place at the right time, and I see a lot of good future ahead of us.

David, thanks for the wrap-up. I've got a couple more minutes because I know these folks usually only have about an hour with their schedules being so tight. I'd like to close this meeting by giving you my oversight and my feelings about where we are today.

I know that over the last couple of years there's certainly been a lot of frustration with the Company based on some of the changes and certainly the time it's taken us to get where we are. I think now after two years of a lot of sweat and a lot of blood, that LSI is finally on much firmer ground. We are definitely committed to our niche markets. Our automotive business and our quick serve and certainly our petroleum. That will be always a part of LSI's strategy.

The understanding in our lighting business that the commercial/industrial is owned-- basically 60% of the market is owned by 4 or 5 bigger companies. The timing of our economic slowdown and certainly the 9/11 had a big effect. Certainly as a result of the slowdown in the oil business. It challenged LSI Industries beyond anybody's understanding and I'm talking at my level from my experience of 42 years in business. We have taken a very direct approach. We've been very careful. We've made good decisions. Our balance sheet is as strong as it was when our stock was running at $20 a share. And I think the most important message that we have today is that 2005 is the beginning of a whole new direction for LSI Industries.

Having our consolidation of all of our operations into the Lighting and the Graphics with two key guys who can spend a tremendous amount of time putting the effort in place to be sure that these operations are going to work succinctly and certainly be much more profit oriented. The challenge is great. There's no question that business today with the global influence tests all of us. But if you look at the strategy, you look at the foundation, you look at the balance sheet, I think that LSI has a tremendous opportunity.

I will caution, as I always do at this time of the year, our third quarter is our biggest challenge. It sure hasn't started off very well weather-wise. Right now we haven't seen any kind of a slowdown, so I'm not preparing anybody for anything other than an awareness that the third quarter is our most challenging quarter. We do have this program that David certainly alluded to with the rollout that will continue on no matter whether the weather is good or bad. It's a product that's easily installed. Some of it goes outside, some of it goes inside. From a Lighting standpoint, the opportunity for both indoor and outdoor is still the same, but certainly when you're building a project the weather has a lot to do with it.

But I think it's so important that we have brought this Company into a new era. And I want to share with you from this day forward and exposing you more and more to the guys that are right into it every day, that have a definite plan direction, and are formulating the strategy for the new direction of LSI. My goal will continue to be, it is the same goal before. You will be seeing more of us in the financial world as we start moving more and more into a much more awareness for you. These round table discussions we'll improve upon and have more comments for you so that hopefully from quarter to quarter you can see the direction of the Company and the formation of our strategy. So with that I want to thank everybody for their attendance and look forward to talking to you 3 months from now with hopefully good results. So with that, have a good day. Thanks for your time.