LSI Industries Inc (LYTS) 2006 Q1 法說會逐字稿

Welcome to your LSI Industries 1st quarter earnings conference call. Today's moderator will be Bob Ready the CEO and Chairman of LSI Industries. During the conference call all participants will be muted. As a reminder, your conference call is being recorded and now without further delay, I will turn your conference over to Mr. Ready.

Good afternoon everybody, appreciate your time. Before I make my opening remarks, the format is going to be pretty much like we've done in that last couple of quarters, to kind of give you an overview and have some of the folks sitting with me, Scott Ready the President of the Lighting Group and David McCauley the President of the Graphics Group, Ron Stowell our Chief Financial Officer and Steve Rucker who is going to make a comment in reference to the recording and what folks can do to latch on to this a little later in the day and then we'll get into the heart of the program. Steve?

Good afternoon everyone and just as a reminder you can view hardcopy materials that are going to be referenced during the course of the conversation here today by visiting the LSI's website at www.lsi-industries.com and following today's presentation, at about 5:00 o'clock this evening, an archive copy of this broadcast will be on the website so that you can refer to that at that time.

Before I open up the discussion, I want to remind everybody of the typo that came out with our proxy and you'll hear it a couple of times today. We are very embarrassed and apologized, it got through all of us, but the annual shareholders meeting is Tuesday, November 15th. I believe the proxy said Thursday, November 15th. So for those who tie in with this, please if you can attend it is November 15th, which is Tuesday here at Corporate Headquarters. I think we'll end up with a slide on that too as a reminder.

To start off my opening remarks really kind of generally cover the overall condition of the Company and then I will wrap up with statements that are a little bit more direct.

We pretty well came within the area that we thought we would. We fell short really by $0.01 overall. Ron is going to get into the $0.02 adjustment as it related to the deferred comp plan. It really was a decent quarter considering some of the things that went on with some of the weather-related slow downs. Our factory in Houston was affected by three days actually, nothing catastrophic, but we were pretty darn close.

Today's comments that David and Scott are going to be making are going to get into more detail as it relates to the operations and to try to give you a little better feeling about what the future looks like.

Personally, I am really pleased with where we are in the whole operations of LSI. A tremendous amount of work has been done as we've discussed before on the internal part of the Company, the reorganization, the consolidation, the full brand of LSI being implemented as our main marketing thrust. We have some new, exciting products that are either just coming out, or ready to come out, and we have a major, major marketing direction that we are implementing and we will share that with you around energy conservation. And that really will be handled by both Scott and David.

But before we get into their presentation, as always, there have been some pretty standard questions that relate to the financials and I am going to have Ron Stowell our Chief Financial Officer kind of cover those items with you for a few minutes now and then we'll get into the discussion about the markets and the operations of the Lighting and Graphics Group.

I will start off with our standard Safe Harbor Statement. I apologize for having to read this, but our remarks today 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 which may cause our actual results to differ materially from those which we're going to talk about or which we may imply.   Those risks and uncertainties are discussed in our Forms 10-K and 10-Q that we filed with the Securities and Exchange Commission and also in our press releases. The important part here today is that we do not have any material nonpublic information that will be discussed today.

Hopefully by now for those that have been following us, this format of financial information will look familiar. I do that so you have a consistency of information you can refer to.

Our sales in the 1st quarter of $70,900,000 was up almost 4% and that came through as $49.4 million in the Lighting segment, up over 10% and the Graphics segment at $21.5 million, it was down almost 9%.

David is going to—This is Bob again. David is going to discuss that in more direction as far as the drop-off on that, but it is nothing that we didn't expect as a result of the completion of the CVS program.

I will intersperse the two graphs just so visually you can see where that is. This shows a quarter-to-quarter progression year-to-year that is increasing in each quarter with this year's 1st quarter, as I said before, up 4% from the prior year. Our biggest market--biggest single market is the petroleum convenience store. We have had some increases in sales to that market. We are up 11% to 17.6 million and that represents 25% of our total volume.

Gross margins, again that's up. We're up over 5% in the face of the 3% increase in sales, so we've got some leverage there. Gross margin at 18.7 million was up, as percentage of net sales, up to 26.4%. I am just waiting for the slides to cycle through here a little bit.

Operating income in the 1st quarter was $5.7 million and that 8.1% of sales. Lighting segment 3.6 million and Graphics segment was about 2.2 million. And I think the next graph shows the operating income—you'll see a seasonality in our 3rd quarter, I am obligated to point that out each and every quarter, that is the winter quarter and it is our lowest. But back to the 1st quarter, that green bar on the graph does show a progression of increases really from fiscal 2003 through 2006.

Back to the kind of unique items, at least one is unique for this quarter, we had a total in new compensation charges in the 1st quarter of 691 thousand, that's the pre-tax expense number, and that equates to about $0.02 per share. That's the 1st quarter of fiscal '06. You'll note in 1st quarter '05, I have a zero there. We had no similar charges that we were required to book in that quarter last year.

Those two charges are, one related to stock option expense. We're the first group of companies coming through that are now required under the accounting statement of Phase 123R to record stock option expense on the books. In the past and for almost ten years we have reported that in footnote form in a disclosure pro forma method only. This quarter we $118 thousand of expense on an after tax basis that was about $74 thousand. That we would see continuing as the unvested stock options that we have would become vested over time and from a modeling standpoint, that does decrease a little bit over the next say three years plus and it would not increase unless, or until, the compensation committee would grant any additional stock options.

The second and largest, and the now, we can say will be not recurring again, is a non-cash charge related to our deferred compensation plan. You will recall that in the 4th quarter of last year, we found ourselves having to treat the accounting for this plan on a variable accounting basis, which means that this particular plan has all the investments made in LSI stock and it means that we would have to mark the value of those shares up to the current market value as of the end of the quarter. We amended the plan during the 1st quarter of fiscal '06 with an effective date of September 9th and that was the—really the earliest date that we were able to get that plan amended to get an accounting treatement that would now push us back to the desired accounting treatment called fixed accounting. And under that accounting treatment, we do not have to mark those shares to market. But we did have to do that of the September 9th effective date of this amendment. That resulted in a $573 thousand pretax charge. I think that was $348 thousand or something after tax. But when you add the two together, stock options and the deferred comp plan, it was about a little over a $0.02 per share charge. Both of those are non-cash charges. The deferred comp charge, the largest by far, is behind us. We are on fixed accounting now and we will not be required to mark those shares up to the market value of LSI stocks. So, I hope that's a good and full explanation for you.

We, again, in this quarter have a customer concentration. Net sales to Wal-Mart were about $7.5 million, or about 11% of our 1st quarter net sales. We do not have any—[thought] we'd have a large enough receivable from Wal-Mart, but neither the receivables from Wal-Mart nor any other customer exceeds 10% of our total receivables.

The effective tax rate, there was a lot of 37% up there; it's the same this year in the 1st quarter as it was last year. We'll see some variation in last year's tax rate as we go forward through the quarters this year.

The next slide shows what our earnings—net income were and earnings per share. Net income of 3,669,000 is up almost 11% and that's on the heels of a 3.8% sales increase so that leverage is coming through again. Earnings per share is at $0.18, which is a 5.9% increase. Again I will just refer to that, a couple slides back where we had a $0.02 additional compensation non-cash charges that we have booked this year, had no previous requirement to book those in last year in the 1st quarter, so the apples to apples comparison would have been $0.17 going up to, let's say $0.20, because of that charge.

I think the next should be a—show the shares that were used for diluted earnings per share calculation and its up a little under 2%. A lot of that has to do with the increase in share price which did two things, effected the 123R calculations that go into this as well as several stock options were exercised during the quarter.

Balance sheet data, this is where I get a chance to talk about the strength of LSI. We had a very strong balance sheet at June and the short answer here is we're stronger now in September. You'll see our cash balance has grown by about $3 million to $10.2 million. Receivables are down. They're down, but our days sales outstanding have improved. So there's a little bit better quality if you will of receivables. We're at 55 days at the end of September. Inventory is at $41.8 million increased. June was our, I think our 9th consecutive month of inventory decreases, so we've seen a little increase in the 1st quarter. Working capital remains strong and total assets are $175.8 million. You'll still see no debt. We had no debt during the quarter. Shareholders equity is pushing $140 million, that's up almost $2 million in the quarter. And so that's the strength of LSI that our customers see, that our employees see and that you, as investors, hopefully should be very happy about.

Capital expenditures, 1st quarter is not usually too big of a quarter for us. We had $877 thousand, it’s a little less than last year. And that's really tooling and I am sure there's some PCs in there but nothing real huge in terms of equipment at this point in the fiscal year.

Depreciation is 1,707,000. It is a little down from the prior year, but that I think, would be a good barometer for what we'll experience in the future quarters wit the exception of this--as we have larger capital expenditures that come through this year, that depreciation number would be expected to grow a little bit.

Next slide is cash flow from operating activities and there's a big turn, a big change there from the 1st quarter last year, which we used cash from operating activities of $800 thousand. This year we generated cash of $6.7 million and the biggest change there is some balance sheet changes in some of our accounts.

Cash dividends, we—our 1st quarter dividend was declared at $0.12 per share and that represents a 20% increase from the quarterly cash dividend that was paid last year. So on an indicated annual rate, that's $0.48 per share. Currently at pricing we've experienced during today, that's about a 2.6% yield using that $0.48 per share. The graph shows a four year progression of total per share cash dividends and at fiscal year end in September, we paid an additional special year end dividend of $0.10, so when I put that into the $0.12 per share, we're looking at about $0.56 per share estimated to paid this fiscal year. Strong increases and strong dividend payouts.

With that I'll turn it back to Bob.

That was a quick scenario about how things look like on the financial side. Obviously we're very proud of our balance sheet and those who have been part of the LSI program really understand that that's a part of our—really part of our commitment to the Company, is to keep that balance sheet strong.

Before I introduce Scott, whose going to talk to you a little bit about the Lighting side of our business, I would like to remind folks about just the real heartbeat of LSI. We have a lot of new shareholders, hopefully we're going to have some folks that pick up LSI stock for the first time tie in to this conference call, either now or later on in the day or sometime during the rest of the week, and I just want to cover a little bit of the background. For those who do know the background, this might be a little bit repetitive, but I really think it's important to remind everybody about how LSI has been developed and where our focus is and it relates to the large national economy.

We are very, very strong in the large national retail part of our economy. We had a tremendous year in 2005 and we had some huge increases and the increase that shows this quarter certainly doesn't look as outstanding as it did maybe last year and certainly through the year. But, I'm really excited about where we are today as a Company. We have a lot of irons in the fire. We're not going to get into the details or name accounts because of the fact that we've—our customers just don't like their names being brought into play until we're well into the program, and the numbers don't always say everything about the future of a Company. I am pleased with the quarter. Obviously we'd like to see more, but the fact of the matter is, is that it pretty well falls in line with where we thought we would be. What I am liking is just the way the Company is coming together and maturing and really focused on what the real strategic future of this Company is. And Scott and David are going to tell you a little bit about that. And overall, as I look into 2000—the remaining 2006 and beyond, with the way things seem to be going for us and with tremendous amount of interest in some programs out there and with the new product development out there that we've instituted and are now starting to announce, I am very, very confident that the Company is going to continue to grow and certainly work hard at improving its revenues. And as revenues grow, obviously the margins, we believe, are going to grow with it because we do have that leverage of high volume. And I am proud of the way things are starting to come together as it relates to the margin side. It's certainly still competitive out there, there's no question about that. There's a tremendous amount of pressure throughout, but we've been there and done that before and it's not something that I really loose a lot of sleep over.

So, I just want to give that vote of confidence to the two Presidents who are going to address you now as it relates to their own specific interests, but equally as important is the way these two guys are really working together to bring that uniqueness out to the marketplace. And again, for the new shareholders, we are a Lighting Company, we are a Graphics Company, but more importantly we are a corporation that really has a solution to re-imaging in both Lighting and Graphics as well as in, and David will address this in a little bit more, but the digital part of our business which we think has a tremendous future as we move on into the future.

And with this, I would like to introduce Scott Ready who is the President of LSI Lighting Solutions Group. Scott?

It's always exciting to really get into the fundamentals and talk about what drives our business. And David and I are going to kind of work together in this phase. I will talk a little bit about the Lighting side of it from a Lighting perspective, but we'll interchange throughout the conversation because it's really important, as Bob said, to understand that the uniqueness that LSI brings to the marketplace and the way we combine our strengths in Lighting and our strengths in Graphics and bring those thing to a—to a retail market as well as a number of other foundation markets, is the key to that consistent growth that we're looking for.

As a Lighting Group, we're very pleased with the results for the 1st quarter. For some of the new shareholders that may not be as familiar with what we did during the previous year, we've worked very hard to bring together the coordination and the operations of all of our different Lighting companies and operations. We've really converted from different Lighting companies now to Lighting operations that are working coherently in a coordinated fashion. The results that are being driven by that coordination are begging to show now in that 1st quarter of '06 and we're excited. We know that the Lighting Group has a very important role to help level out and help mitigate some of the large national account fluctuations that we see as LSI Industries. And our plan is to do this in a steady and consistent growth.

The numbers that you see on the screen now kind of show that 1st quarter result and show a consistent growth over the last three years in volume and now also showing an even stronger growth in the income side for the Lighting Group.

Scott and David, sorry to—remember that there might be some folks that don't have pictures in front of them.

Sure.

You might want to highlight some of that so the folks that don't have a slide in front of them understand.

Yes and if you have the opportunity, you certainly want to look at that later on the website. But for '06, the 1st quarter of '06, we've seen, as Ron had mentioned before, a 10% increase in the LSI revenue at the top line. And that is translating into stronger income because of the coordination and the efforts that we've put in the systems that we've got in place and the re-organization and refocus of all the employees that are part of the Lighting Group. Our contribution from the 1st quarter really begins to show what it can do to steady out those cumulative results for LSI Industries as we move into and away from certain select large national account opportunities, which David will talk about a little later.

I would like to take a minute and just kind of review the Lighting Group strategy for our primary fundamental strategies for those that may not be familiar with it.

Number one, we have some very, very important mixed markets that we've played a role in for the life of this Company and we continue to grow and maintain those market niches. We've actually developed ways to sustain some growth as Ron pointed out in the petroleum industry even though we have a relatively flat petroleum industry. Our growth in international business, specifically as it relates to the oil industry and the oil market, has been strong and that certainly contributed to the 1st quarter earnings.

Our unique advantage to—as a Lighting and Graphics technologies Company, as I've already alluded to, and how we use that on a complimentary products as well as a complimentary strategy, to not only secure opportunities in the marketplace but also to secure good quarter-to-quarter comparison for the Company as a whole. And last but not least, to coordinate all the Lighting companies into a much, much more expanded presence in the C&I market.

We have some systems enhancements that we worked on and developed over the last quarter that are beginning to kick in. And those are somewhat responsible for an increase in the—in the earnings in the margin for per sales dollar. Again, our coordination efforts are really paying off.

We're continuing to focus on our outdoor architectural lighting aspect. Now you may recall that we introduced a low-voltage line on towards the end of '05. This is just one example of a focus on higher margin products. Higher margin products that are geared towards specific segments of the commercial industrial marketplace and that can contribute at a greater fashion on a per dollar volume contribution than some of the other products that we have to sell and have to maintain in order to maintain our package capability.

We're actually engaged in a very aggressive advertising campaign. Those of you who can see the web, or have access to the web, will see one of our advertisements and the focus that we have on everything from architectural in ground lighting all the way through architectural site lighting.

I am happy to announce that the new AVL line that we did announce toward the end of last year did contribute through shipments in the 1st quarter. It is the beginning. I would not characterize it as significant by any stretch of the imagination, but I am happy to report that the line has been well received by our agents, well received by the market and we are in that phase of producing orders. And that's very exciting for us.

And this is definitely another step in significantly putting a new product line that we've never had before. It also is aimed at energy conservation. ALD, we really saw a chance for low voltage, and Scott will talk a little bit about that energy, but this is a product line that we've been waiting a long time for. Personally I am really happy to see it. The quality of the material is just outstanding. It is the type of product line that LSI is proud to have its brand name on.

It's exciting from a standpoint of what we can do in a market that already needs these types of products. It's also exciting because of the potential it offers as a platform for new technologies moving into the future. The use of, or I should say the applicability of the product to line voltage applications, low-voltage applications and without promising anything at this point, it does offer a great opportunity at this point as the entire industry moves closer and closer to a functional LED solution and some white light source.

As Ron pointed out, Wal-Mart as well as several other national account customers contributed at least in part to the quarter. David will touch on this a little bit as we talk about some of the—some of the program opportunities, but it is traditional for the retailers to slow down a little bit going into--coming out of the 1st quarter going into the 2nd quarter because of the retail season, the retail shopping season in the fall. The results that we've generated in the 1st quarter, knowing that in a cumulative effort in all of our operations are a good—a very good sign, because we expect that of course in the spring that many of those retail programs will become active again and that will be an exciting time for us.

Going to move on. Let's talk about something now that's really exciting for us because LSI has been, since the day we were founded, a Company that has provided and brought energy solutions to our customers. We didn't always market it as strongly with that particular thought in mind, but it was a critical element to how we designed lighting products, how we designed solutions and participated in that design process, that job design process. About ten years ago, again for those who may be new to the Company, LSI came into the marketplace, the petroleum marketplace with a product we called the Scottsdale. And the Scottsdale was the most successful product, lighting product, ever introduced based on its ability to immediately impact the energy consumption for the consumer. And the—the combination of fixtures and fixture types that we put in the marketplace in the last ten years have literally saved millions and millions and millions of dollars in energy for those customers.

The country, as we all know, is in a very, very difficult position right now and energy is a hot button and it’s a conversation that will continue. And we believe, frankly, has crossed the point that—that we've seen it vacillate on over the years to the point where it now will become a primary consideration as opposed to a secondary consideration. And LSI has been anticipating this through its product development and we're very excited to announce that marketing and sales, a strong marketing and sales effort, geared directly towards that opportunity. LSI, the logo that some of you may see on the website or those of you that don’t, we've created as I said, a sales and marketing program, a centerpiece of which is logo that talks about a smart energy solution. And we're going to go ahead and highlight through the year for those that stay tuned, those energy solutions that become part of our offering to the marketplace.

I've got a good example of one today that is part of our traditional niche market, but I know that there is a lot of imagination out there and I know that there is a lot—a lot of conversation out there about LEDs and I can assure you that not only currently are we providing LED products, some of which David will address as he gets in his part of the presentation, but also we have some development projects and some mutual development projects which I'll reference later, around that technology.

Internally in addition—internally we are going to drive our own operations. We're going to have a focused effort to internally achieve the benefits and the cost savings that are offered by energy solutions. And so the smart energy solution is not only something that we drive outwardly into the marketplace, but we also drive internally to our employees and remind them of the effect they can have on our costs as they look at energy.

David I might add that white—

Sure David.

David McCauley here at North Canton. I might add that from the Graphics angle on the energy and that the solution--we're looking strongly at, as you know, the menu board. Creating menu boards of the future with energy efficient lighting combined with graphics technology, whether it be the print technology or digital technology, to really save the customers some true costs in energy and maintenance on those products along with replacement of neon, which LSI isn't a user or provider of much neon at all. But there is a disruptive technology in the LED arena that can replace this and from a Graphics laying area, we are willing and wanting to tackle that.

Another area is the conventional lighting use for highlighting on graphics products for finding ways to use this—use the LED technology to provide an adequate amount of light source on the product, again at a lower total cost.

And lastly, there are films, pressure sensitive films being incorporated into graphic products that talk about reflector technology in various colors that—like paint, do a lot of enhancement for lower wattage bulbs. So, those are just some of the areas that the Graphics arena is now looking at.

I will turn the mike back over to you.

I appreciate that. I also promised the listeners and our shareholders a quick example of a product that—it's just recently introduced around this concept of advanced energy solution and smart energy solutions.

We have released during the 1st quarter, we will not start shipping product related to this program until sometime in the 2nd quarter, but we've released a project called ART and its geared towards our automotive niche market. As you said—or as you may remember I said earlier on in the conversation that our focus will remain on maintaining our position and our leadership in these niche markets. And this is a good example of how we're going to do that. ART stands for Advanced Reflector Technology and it’s a project that was really born out of our desire with increasing material costs and—and great challenges from an energy consumption standpoint at the consumer and the customer level, to bring them a solution, bring them a package, a product, that would enhance their abilities. And enhance their abilities to market, enhance the effectiveness of the light fixture and take it into a new phase, where not only are they saving money as they did on the Scottsdale, their increasing their ability to market their product. So, I'm not going to go into a lot more detail, you never know who's listening on these, but needless to say that LSI is taking its leadership role in this market very seriously. We're very excited to announce a product that we believe will offer a tremendous amount of opportunity of a retrofit basis as well as a new construction basis and bring the customer a tremendously smart energy solution.

I'm going to add to that Scott. I think the answer for quick answers, everybody stay tuned. This is really something unique and something very, very new. We've worked on it for better than a year and a half and it couldn't come about at better time with the influence that we have on energy and bringing into the marketplace a real choice, and I use the word choice. There's a lot of light fixtures out there. There are a lot of us in the business. But we took this over a year and a half ago as an internal challenge to start engineering some new ideas as it relates to improved performance with the idea of trying to bring light fixtures down from a higher mounting height to a lower mounting height because of the cost of steel. Steel poles went up dramatically. We all went through that. So, this is one of the reasons that I'm excited about the future because all of this technology, all this research and development has been invested in, paid for and now we're gonna start to see some of these things turn into revenue dollars we hope.

Okay great. As a conclusion, I just want to remind everybody that—that as we transition over to the Graphics discussion a little bit, that from a Lighting focus, our results are going to come from an improved product offering, improved service levels that are coming as a result of the coordination of our operations and the system enhancements that we've been putting in. We're going to continue to use the traditional marketing strength we have in selected markets to grow those solutions—and grow those solutions utilizing Graphics Lighting technology and the one plus one equals three philosophy that LSI really brought to the marketplace over ten years ago. David, let's go ahead and launch into the Graphics side and talk about the complimentary nature of what we're doing together.

Okay. I'll change the slide here. Well, I guess you did. I'm backing up. Take your hands off the bow there if you please.

Good afternoon to the audience. Today what I want to do is talk about updates I have with being the following four points.

First quarter results, I want to talk to you more about the nature of the Graphics business as it relates to LSI, also about a future acquisition [Martin] said, and finally Scott and I will talk about a combination of Lighting, Graphics initiatives and products.

First quarter results, I've got the slides here Scott. Okay, 1st quarter results were decent but comparing them to 1st quarter of last year they were down. Am I alarmed? Not—not really. In fact, this is truly to be expected in the Graphics world. We're built to handle large and massive programs and rollouts and the reality is that the timing from quarter to quarter, year to year brings about some real challenges and we have—we don't have a lot of control over that. We work constantly to help control these growths.

A good example would be, we mentioned CVS. Towards the beginning of 2004, that program was growing along real strong and then effectively came to a temporary standstill and that was because they had announced that they were acquiring the Eckerd's store acquisition. And for two months, unexpectedly then, that program lay dormant until they could get their hands around it and make their movement. And then it again, after that two month period, started to cycle strong. Another example might be your typical menu board upgrades. There's—there's no way to smooth—have smooth consistent programs there. When they happen, they happen and I guess you'd refer, rather than using the words smooth to more of a lumpy or choppy feel that you have within that industry, but it's very important to remember the fact that we're built to take there sways. Our balance sheet, our facilities, capabilities, workforce, are prepared for these peaks and valleys. And, in fact, we surely have more peaks, which is more important, have more peaks than we do valleys. And currently, we like the potential opportunities right in front of us and it's just a matter of time when these type of programs kick in.

I will leave you with one more example. About a year ago, K-Mart purchased Sears. And if you've been into a K-Mart of Sears lately, you have noticed very little change in that—that's been on the plate for a year. It could lie another year until there's some real activity there. So, just because there's news, doesn't mean there's immediate reaction.

Or it could change in three months.

Yes. You've got—and very much so Bob. When there's an acquisition and a re-branding of a name or a smaller chain of—an example last year, we had a smaller chain of convenience stores, 200 stores, wanted everything done in three months. That was a $3 million program over a very short period of time. It had a large inflection of both and operating income for that quarter as compared to the previous year that did not have that program.

David, is it fair to say, so that especially our newer shareholders that may not understand some of that, that the way we have developed and reorganized our Graphics business in consolidating it into our Graphics Solutions program, that now we've—we’ve set ourselves at another level, the next level. And really has opened up more opportunity than the way we were structured before? Is that a fair statement to make? Maybe you want to elaborate on it a little bit.

Yes. In fact, before there was so much independence between the companies, which I am going to describe later, and when I say the companies, the LSI Graphic companies. Now for slightly more than two years, the unification, the sharing of sales programs, the joint—or excuse me, the exact tie-in with the marketing programs, the sharing of manufacturing facilities, engineers, all that. It has become very unified. And our customers feel this. The name tells it in LSI Graphics Solutions Plus and it's really helped that bottom line in terms of margins. Not to—to lower the sales, but of course, you've seen that sharp increase. That 35% increase over last year, it would be nice to do that year after year after year. And it could be possible some years. But it can't be possible all years internally. And that's why we're going to be talking about external acquisitions also here a little later.

On the screen now, you see the words—some of you see the words, products versus programs and I want to—what I want to do here is explain that in the LSI Graphics world; we basically have no products to offer. We have no inventory. And if you come in the building in through visitation at one of the facilities, you would see inventory, but it is not ours. It is custom product built for the customer. Paid for by the customer. Awaiting shipment or assignment. So, we manufacture custom orders. We get—we have, again, no standard products. Different from the Lighting that has standard products and inventory on those products, in some cases.

Now, as we keep working diligently to put the Lighting Group to spec their products in the total image, in fact, we haven't been doing enough of that over the years. And last year was a good result and we expect more of that this year, to really truly give the customer that total image package by specking the products built by the Lighting Company along with the custom programs for the graphics. In all cases it's not possible, they may have a strong lighting Company that they're using now and are not about to disband, or put it the other way around. Graphics wise, they may have a—a current vendor that we service during the lighting—with the lighting contracts but they have no interest in a new graphics Company.

One thing we talk about, of course, is our active additional signage program that we've been chasing for a little over a year now. That's coming along strong. It's a new program that they currently don't have vendors for because it’s a new disruptive technology to many of them. And that gives us an opportunity to go in and sell a product that we have no incumbent to dethrone there. So, we're very excited about a bigger basket, taking that to the customer.

One more point there on that products versus programs. The good news, because of the way we built this—this Graphics Division, is chasing these programs. They offer a lot higher margins than just the competitors that have product only in the graphics arena.

Scott, were you going to—

Yes. Before you go off that subject, again I--I want to emphasize to the listeners and the shareholders out there that this is such a fundamental part of who we are. That it's really exciting and once you understand that direction, I think you have a much better feel and a much more clear understanding of how the expectations should be on a quarter to quarter performance basis.

If we were a product only Company, it's difficult to create huge increases in revenue or margin in large leaps like the way the Graphics Company can do on the graphic program basis. If we were a Graphics or a Program Company only, it would be difficult to sustain a consistent and steady growth pattern as we do on the Lighting side. And that's our goal on the Lighting side. So it's this unique combination and the unique complementary strategy that we apply not only at the customer level with products as David has described, but also in the overall strategy for the Company that offers a unique and a really exciting opportunity for our shareholders to see growth.

In fact it's important for the shareholders to remember, when we get these what I call 'massive opportunities', there's not a lot of other people that can compete and again, the margins are higher and you will see those extra peaks in income and we'll beat the mark when we get massive programs in most cases.

You know David; we have to watch our time here. Some of the folks are going to have to leave here shortly. And I want you to finish your presentation. But I think it's so important for everybody to remember that this is what makes LSI so interesting and historically, this is the way we're structured and I think the reason for more of this conversation is that we understand based on having a 1st quarter that's down a little bit on the Graphics side, and we don't want people to get nervous and say, "Oh my goodness, things are changing". In essence, what it is doing is doing what we do every day and that is establishing a reputation to take on a big program, role it out, get it done quick and—and successful and then start tackling another one. And when you look at the balance sheet and you look at the structure of the Company. That's really what we do and we do very, very well. And as Scott mentioned earlier, balancing it out by getting our lighting business into a much more structured level so that we can get a little bit even on these peaks and valleys that David's talking about on graphic programs. Now I think it's good that the new shareholders understand folks that invested their money into the Company, that this is the kind of Company that has that kind of capability, and to be honest with you, there really isn't anybody else out there that can do what we're doing.

So with that David, I'll let you finish up as quickly as you can.

Okay. I'm going to move on to the number one initiative that has been assigned, in fact Bob's got his stamp of approval on it in gold, is get that next acquisition. Graphics acquisition. So, we’re on the hunt. We have some traveling to do, we’ve got some people and sites to visit and interview and when we find the right one, we're ready to add that to our team. Our balance sheet is in excellent shape for this type of transaction and we're looking for a good quality Company that has some light and some compatible type products to make this basket much bigger and to leverage what Bob explained to you was already a good situation.

David, I would like to add to that. I don't want anybody to misconstrue the fact that we're not looking for an acquisition on the Lighting side. But we believe, I believe, that the best opportunity to really grow our business is in the Graphics side. Our Lighting package is pretty darn good now, through the acquisitions over the years, the product development, the introduction of new products; we have a pretty good package. We don't have it all. There are still opportunities out there and we’re going to pursue those. But if you really look at the formation of where some real good profitable growth can come from, the Graphics business obviously is the number one priority. Because there's nobody else out there, we have the size now, we have the firepower now, and it just makes sense that we can look at Graphics businesses at different parts of the country that make a bigger impact on the local area and/or on a marketing opportunity as far as a new type of graphics element that we may not be producing right now, or on a stronger marketing opportunity, there may be somebody out there that really specializes in the—let’s say the financial business, banks and so forth. So, if you really look at the logic of what we're doing with the strong balance sheet and acquisitions is a main criteria. Lighting is there, Graphics is there, the emphasis right now, as David said, I put the emphasis on the Graphics side because I think this is where we'll get the biggest bang for our buck when we find the right Company. So I wanted to reemphasize that David.

Okay. I'm going to skip a small portion here about the different facilities, but I will explain what's on the screen. That is a photograph on the screen for those of you who can view it, of the North Canton facilities, the Graphics Headquarters. You're looking at about 250 thousand square feet. We have close to 700 thousand square feet in the total Graphics manufacturing facilities. There's room for additions in North Canton on obviously Rhode Island and again along with an acquisition, when we start approaching that million square feet, that becomes again the premier leader of the graphics in the U.S.

Scott, let's move on here and show the audience a few pictures and tell them the story about some combination Lighting and Graphic products. In fact, we talk about is this a Lighting product or is it a Graphics product and as Bob Ready had told us earlier this week, he said, "You know guys, bottom line it's an LSI Industries product". They keep popping up whether they have LED technology, reflective technology, many, many sources.

Scott, do you want to address any particular photo? I will grab the first one and then we'll back up to the petroleum one.

Okay. Go right ahead.

The current photo on the screen happens to be a large 4 foot diameter clock. It's a two-sided clock. Before, these type of clocks would have reflective light hitting them on the front, hopefully drawing a lot of attention to the store. Now, they use both the reflective light on the front but have placed LEDs, twelve of them, along where the particular hours of the day would be viewed and it becomes kind of the late shift show piece of that particular store. Scott I will back up one for you here if you'll catch the petroleum site.

Sure. I am sure many of our listeners have seen BPs. They're all over the county and it's just a great example of a program where lighting and graphics and technology are all coming together and providing a range of products that include the very basic and as well as the very technical and in this particular case, the LED band on the canopy was part of the leading edge whereas some very old—old technology, graphics on the dispensers were part of the package as well.

Okay. Before we go into the next slide, Scott and I have formed three different teams composed of Lighting and Graphics people. The first team is the sales and marketing team and we've put a lot of pressure, a lot emphasis, defined well what we want them to tackle to sell this total image. And so when we get any customer or more importantly prospect on the hit list that can use both products, we come up with a very systematic, very dynamic, very directed plan to go after those customers. The other two teams, one is an R&D team that experiments both with Graphics and Lighting products that actually build these products and the last team is an engineering team that engineers customer requirements and sometimes there customer requirements return in the products. But we're leveraging the employees that we have and in many cases getting double duty out of them and it's working well.

The last sign that you see on the screen here is again, a total graphics with a highlight right down the middle with LED lighting again. This LED lighting is opening a lot of new opportunities in Graphics, not to mention alone the Lighting arena. So, we’re very excited with those programs.

With that said, I will forward it to the last slide and thank everyone for their time and hope that everyone remembers that there's opportunity everywhere and we're very excited about our future.

I am going to wrap up folks. I know it's getting on the hour and I really appreciate the—your time and spending an hour with us today to get a little bit of an overview of the quarter and what we think is going on in the future.

My comments are going to be very short and it's very, very simple to say that we have this Company really trimmed out now to move forward. It's been a long couple of years. We've put a lot of effort on the internal side. Certainly a lot of effort on the marketing and sales side. We are marketing LSI Industry as a corporation that has a solution for Lighting and Graphics and now certainly on the digital sides based on technology.

I think you're comfort level as investors in the Company, as I speak for myself as an investor, is that this Company really is financially strong to take on any of these opportunities that we see. We are definitely building our Graphics business into becoming a very, very strong—having a very strong capability to take on any large national potential program. Do we have certain constraints? Certainly. But that puts us in a position to be a little bit more selective too based on where our profitability will be.

From a Lighting standpoint, it's been a real battle, and it's been a tremendous battle based on what has happened in the petroleum. And I'm talking specifically the service station. But as I was listening today with interest, with some of the announcements on some of the profitability of the oil companies, all I can say is. "Wow". And where that money's going to go, certainly we don't know, but hopefully some of it will be earmarked for the retail side because as things start to even out—then they'll get more in the competitive area, try to get customers back based on wherever this pricing certainly ends up from the cost of per gallon of gasoline.

I think, as again, from a comfort level, as you look at, just the way our strategy is, just the way we operate, is that we go from one big program to another big program or two to two or whatever it may be, and we look for that balance. We look for that—that ability to even things out. Is it going to be quarter to quarter to quarter to quarter and 35% increases? Heavens no. That's not logical. It's not reality. Even if it was, we couldn't handle it.

I look at our Company with the same interest that I always have and that is, as the CEO of the Company, it is my responsibility to be sure that this Company is on strong foundation, that's our balance sheet, has got a real firm objective as it looks forward to growth and we've done that with the consolidation and formation of the two divisions and new product research and development with a tremendous effort on energy. And I look at that with interest. I'm sure most of you who follow the market, and I looked at this with great interest, when—when the President of Wal-Mart came out publicly and basically said, "We are a Company. We're the largest one in the world basically and we have an obligation to do more to reduce energy", and—and I'm not surprised by that comment, because Wal-Mart has taken a leadership role in a number of directions to do that. But what I like about that is that for the first time that I can see, or that I remember, is that somebody of that size came right out and said, "This is what we're gonna do". It will be interesting to see what other big corporations, retail centers and so forth follow with that direction.

We're in the right place at the right time with the right products with the right strategy and the right balance sheet to take those objectives and make them work.

So with that I want to say, I'm happy and I really feel good about where we're going in the future. Our stock has done well and for that we appreciate all our new investors and our institutions who have taken an interest in LSI and continue to take that interest and we look forward to talking to you again at the shareholders meeting. Remember, Tuesday, November 15th. Our proxy said Thursday, November 15th and I said to Ron this morning, I said, "Well, maybe we'll have two annual shareholders days". But I hope everybody picked up on that and look forward to having as many here on Tuesday at 10:00 o'clock at Corporate Headquarters in Blue Ash, Ohio on November 15th.

With that, thank you everybody for you attention and we're completed.