LSI Industries Inc (LYTS) 2006 Q2 法說會逐字稿

Good afternoon and welcome to the second-quarter LSI Industries conference call. Today's host will be Mr. Bob Ready, Chairman and Chief Executive Officer of LSI. During the discussion, all participants will be muted. Now without further delay, I will turn the call over to Mr. Ready.

Thank you. I'm going to introduce -- well, let me first say thank you everybody for taking the time to attend this conference call. If I lose my voice, I apologize.

I would like to start off by introducing the LSI folks that are (inaudible) with us today. Scott Ready, the President of the lighting group; Ron Stowell, our Chief Financial Officer; Steve [Runker], who is in charge of or Vice President of our IT; and David McCauley, who is attending a conference down south, who is the President of our graphics group. I think Steve wants to make a comment or two in reference to what is going on, and then we will open up the presentation. Steve?

Yes, good afternoon, everyone. I (technical difficulty) is going to be accompanied by some visuals that will support the conversation, that you can view by visiting the LSI Industries website; that is, www.LSI-industries.com; and then click on the investor relations button at the lower left-hand side of the screen. There you'll see a button that will allow you to join the webcast and view the visuals that are accompanying today's presentation.

If you don't happen to be within convenient access of a computer at this time, no worries. You can view the presentation and actually listen to a replay of it later this evening. A copy of the slides, a downloadable copy of the slides will be available later this evening as well.

Thank you, Steve. If I could start off by making a couple of statements in reference to the second quarter. There is no question that the numbers were disappointing. Our discussion with you today is to give you a strong level of confidence that the management team here at LSI has in what is going on at LSI Industries.

It was obviously just a few months ago that the stock hit an all-time high, and that obviously with the report of the disappointment in the second quarter changed that very rapidly as we know.

I want to assure everybody that as we went into this quarter, looking at October and November, those months were pretty much right on plan. We felt confident, we felt somewhat comfortable that if December had continued in a strong direction that we would have been on the low side of the estimates.

But what really happened was -- and we going to get into a little bit more of a discussion about that, primarily with David -- is that some of the larger programs that we were working on and have been working on, that we had some kind of level of feeling that it was going to start in mid-Fall did not happen.

I want to be sure that everybody understands that this Company has not changed. Our stock, as I said, was an all-time high a few months ago, and the disappointment that happened in the second quarter is strictly a timing issue. We're going to explain a little bit more of that in each of the presentations, lighting and graphics, and also how it relates to our strong feelings as we move into the last half of the fiscal year, and really more importantly as we look into 2007.

With that, I am going to turn the discussion over to Ron Stowell, our Chief Financial Officer. He's going to hit a couple of the highlights that we know all you folks are interested in; and then we will move into David's direction as it relates to graphics; and then Scott. Ron?

Thank you, Bob. I will first start with our Safe Harbor statement. Our remarks today related to our expectations with regard to a number of activities in which the Company is engaged, reliance should not be placed on such forward-looking statements because they involve risks and uncertainties 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 are filed with the Securities and Exchange Commission and in recent press releases that we have issued. We do not have any material nonpublic information that will be discussed today.

I will start off with a slide that is in the usual format. It has our second-quarter net sales, which were 73.3 million. Broken down by 49.8 million in the Lighting Segment; 23.5 million in the Graphics Segment. Similar to our first quarter, we have got, if you will, a mix. The Lighting Segment was up a little over 6%; the Graphics Segment was down about 14%, netting to a 1% lower sales this year as compared to second-quarter last year.

Now that mix, if you will, will carry through to our gross profit and our profitability as we get into some slides later.

I will also mention that I have some slides here in this financial section that I do not intend to make any comments about. They are here primarily for reference; so when we get to those slides, there will be a little bit of a silence, as that information then will be available to either you on the call or those of you that pick up this presentation at a later date.

The first half net sales were 1% up, to 144.2 million. Just a little under $100 million in the Lighting Segment, and that is an 8% growth; and a little over $45 million in the Graphics Segment; it is off about 11.5%. This is the first of those slides then I will have no comments on, and as we move onto the next.

Here I will simply point out that in both the second quarter and the first half of this year, our sales for the petroleum convenience store market for both Lighting and Graphics combined was 26% of net sales.

The gross margin for the second quarter was 18.8 million. This dropped from last year of a little over 20 million was again due to primarily the reduction in Graphics sales that has a higher margin. So we got a mix between our segments. Since as we view this softness in the Graphics sales to be a timing issue and that in the future, as Dave will talk about, sales will be stronger, we would expect the appropriate impact on our gross margin as we go forward.

Year to date, $37.5 million and 26% of net sales.

The operating income for the second quarter, 6.1 million in the Lighting Segment. The Lighting operating income of 3.9 million is up from the second-quarter last year. And the Graphics Segment of 2.2 million is down from the prior year. We net it out to be 8.3% of sales. You can see that here the Lighting margin as a percent of sales is 7.8%, which is an increase. The Graphics is a higher operating income than that, 9.4, but that is down from the prior year.

On the half we had 11.9 million in net operating income, and the same comments apply with respect to the directional trend of Lighting operating income of 7.5 million being up, and 4.4 million in the Graphics Segment being down. The next slide just graphically portrays that.

Moving on to the stock option expense, this is an expense that we are recording this year in fiscal '06 as required. But we were not [having] any requirement to report that in fiscal '05 or prior. So this quarter we had 137,000 of expense. For the half it was 255,000 of expense, which is a little less than a penny a share for the half. I will comment that we would expect this quarterly expense to be less than $100,000 in Q3 and Q4 of '06.

Net income for the quarter is $3.9 million or $0.19. We saw that in the press release. For the half, $7.6 million or 37%. Both of those are down from the prior year.

On the balance sheet data, first and overriding comment is this is our strongest balance sheet ever. We have strong cash. We've got more cash than we have had. This is cash in investments; we are putting that cash to use. So it is $12.7 million of cash in investments. We have got strong working capital at $72.3 million; and total assets of a little under 172 million.

We still have no debt, no debt during the quarter, no debt during the first half of the year actually. And strong and increasing shareholder's equity at about $142 million. While we have no debt drawn currently, our credit facility is $50 million; so we are very capable with this strong balance sheet of supporting our growth, supporting our capital expenditures, and acquisitions as we go forward.

Those capital expenditures in the quarter and the half are running a little bit less than the prior year, but they are supporting our growth needs and our expansion needs. We have indicated that we are addressing a very strong possibility of expanding our Graphics facility. We will be addressing that as the winter thaw comes on the East Coast.

Depreciation and amortization, running very consistent year-to-year, and it certainly is in excess of our capital expenditure level thereby producing a positive cash flow effect. Cash flow from operating activities year to date for the half is very strong at $12.2 million, almost double what we had in the fiscal '05 first half.

Cash dividends, we view this as an important part of shareholder return. We have a second-quarter cash dividend that will be paid in about a week and a half on February 14 -- Happy Valentine's Day -- at $0.12 a share, and we are very comfortable with this rate, which is a 20% increase from fiscal '05. We do not anticipate any change in this quarterly rate for the remainder of fiscal '06.

Visually you can see what our dividend payment would be estimated to be this year and the growth over prior years.

Finally, for my last slide, I would like to reaffirm what we had in our press release. That is for fiscal '06 guidance, net sales in the range of 265 million to 275 million. Earnings per share from $0.64 to $0.70 on a diluted EPS basis.

It's our feeling that as each business segment starts to take shape for the next year, that fiscal 2007 could very well be a year of substantial sales and earnings increases over fiscal 2006.

Thank you, Ron. I would like to make a comment about that specific direction. The Company is going to take a much more active position in giving better guidance so that we can utilize all the information that we have available to us, to help guide the market in the direction that the Company (technical difficulty).

As far as the overall guidance for the balance of 2006, I think it is so important for everybody to remember that our backlog is four to six weeks; and it's very, very difficult to really anticipate what a longer-term period would be and really what the results will be.

Due to the fact that the primary high-volume programs that we have been involved in developing for the last year or so have been on a slower pace, as far as getting started, and once we have a comfort level that those programs are really in full direction, we will give you better guidance in order to help you understand where the Company is going.

With that, I would like to introduce David McCauley. You know, the weight is on David's shoulders. He was a hero last year; and with all the tremendous opportunities that they developed and the programs they rolled out. And of course there is probably nobody more disappointed on what happened in the second quarter than David, because the Graphics part of our business certainly had a major impact because of these programs that we were so successful when it came to conclusion. And with that, David, I would turn it over to you.

Thanks, Bob, and good afternoon to all the callers. Thank you for taking the time to call in. Bob, thanks for the added pressure; I needed that. No, not really.

Believe me, yes, I was disappointed and unexpectedly a few programs did not come through when they were to come through. But this is a normal process, to have these bumps. The other side of the normal process is to have the spikes.

The goal always is to have more spikes than bumps, which we have in the past, and to have those spikes be much bigger. So expect more spikes, some bumps. But again, larger spikes and more of them. That is the nature of the Graphics business, especially for the large companies like LSI has assembled here.

In the quarter, a slide here showing the decrease in the sales volume for the half and for the quarter. One major program that hit last year and did not repeat this year was a small convenience store chain, 200 stores. That was converted during the second quarter of last year, about a $3 million project.

To us it is a freak in the industry. Those type of situations where it is one-time, it is not really a customer. It is a one-time shop that they went in, cleaned up these convenience stores. And quite frankly, there is not additional business to be had from that customer.

Those happen once in a while, and that is the type of spike, additional spike, that really does help grow the revenue and drop nice margins to the bottom line.

Another small piece of business was the downturn in DVS; but we have some more positive news to talk about in the upcoming quarters that we will a little later on here in my presentation.

And a little disappointment in what we expected to be part of the Chevron program; we will talk more about that. But quite frankly, we expected the Chevron program to get more traction. We have been working on this program for almost a year now, quite frankly, a little over a year.

It is the graphic portion of it, is still in the tweaking stage. We have done various prototypes. We will show you a picture of one down the road here. Scott will talk about the lighting program that Chevron has, which is more advanced than the graphics program now.

The traction that didn't hit in the late fall, early winter is just a pent-up situation. It happens many times in all graphic programs. What we want, what they say will happen, and what reality is in terms of timing -- Ron said it earlier; I think Bob might've mentioned it -- I can't stress enough that we're simply dealing with a timing issue here.

We will move on (multiple speakers) -- go ahead, Bob.

(multiple speakers) to add in reference to that comment that -- and if you would like to go a little bit further into it -- that this is a rather large program that will go over a span of three to four years. Based on the industry information, there is close to 7,000 sites involved.

So we pretty well understand that in the movement of new designs and the directions that, even though the best forecasts that are available to us, in reality, true life, there is an awful lot of pieces to a new image. When you start thinking about the outdoor and the indoor; and you talk about combining two major companies like Texaco and Chevron, it is understandable that a program can be delayed.

But it is very difficult as a vendor, because most of that information is not necessarily available to us. So we can only hope that our scheduling, our planning, and all of the directions that we were involved with as a participant are within the structure of what they are looking for.

That is where -- and I know from a fact that that disappointment in rolling out primarily in the second quarter as a starting point fell short. So I thought I would reemphasize that, Dave. And if you want to (multiple speakers).

That leads me to want to spin off a little bit and remind the listeners, again, that the big are getting bigger. When you have Chevron and Texaco, a combination of over 7,000 sites.

It wasn't too long ago, if you think back, that CVS was slightly less than 3,000 stores. Now with the add-on of additional new builds, the Eckerd conversion, and the possibly to be Albertson conversion, their numbers are approaching 5,500, the largest.

We go back to Kmart and Sears. Those numbers are climbing in terms of combinations of mergers. The big just get larger and larger, and it plays into our portfolio of ideas to increase our size so that we can deal with those. It eliminates a lot of the competition coming up in the future.

Moving on, the next slide you see, it is familiar. You may have seen it last call. I have used it numerous times. LSI is again working hard on its acquisition candidates and alliances. In fact, Bob mentioned or one of the gentlemen did that I am at a conference now down in Florida. It is the largest conference. It is a summit of the signage and graphics companies. Quite frankly, we are here to look at possible candidates and to drill down further in what we know about these people.

With that said, though, I do want to talk about a new alliance that was announced today on 3M's public site in terms of an alliance we have in the digital signage market. In fact, I will quote something from a 3M representative; it is the David Reynolds-Gooch. He is the business unit manager of digital signage. David goes on to say that 3M and LSI are well positioned to play in, deploy, and manage digital signage networks that deliver strong business results for their customers.

I will talk further about that, Bob and group here, about four more slides down the road. It is a positioning situation I want to make sure our listeners understand.

As I mentioned earlier, I will show you some pictures of the Chevron site. This happens to be one of the prototypes of a few that we worked on. My screen is just changing; going to give this another try here. There we go.

This happens to be one of the sites. We have changed the shade of blue, positioned the logo. The lighting situations, even though we have pretty much the lighting resolved, we don't have all the graphics resolved. As soon as this program, again, gets better traction, we expect big things to happen.

Another one that we had a little disappointment in, a bump in the road in terms of timing again -- timing only -- was the 7-11 situation. Here's a couple pictures of some development of two recent stores. But as many of you know, there was a large tender offer. All the shares are now owned by the Japanese corporation and a complete change in their upper layer of management.

Does this postpone the program? Yes. Does this eliminate it? No; in fact we feel the drive from the feedback that we receive from their management, the drive is stronger than ever to clean these stores up, both inside and out. And LSI again is participating in the early stages of this 7-11 program.

Then lastly of the pictorials that I am showing you about current customers and prospects, our good customer CVS, who has completed their transition of or the remodeling of their Eckerd's program, was now back into new stores and sprucing up of their existing stores. Announced about a week ago that the Albertson transaction is moving forward. They expect to have 700 stores; and LSI expects to participate in the remodeling of these larger than normal stores, larger in square foot size, in a relatively fast pace once the kickoff.

We have not set a date. Or excuse me, CVS has not set a date for that kickoff. But we are in talks about what we will need, and what the look will be, and when that will be. So we will keep you posted when we know more information about that.

Okay, I would like to talk to the listeners today again and remind them again what makes this Graphics portion of the business tick and how LSI sees the market. I have a familiar slide here. I did a little twist on it, because it used to say products versus programs. I want to make sure that you understand programs is what drives the Graphics business.

We talked about large programs, Chevron for example. Once that gets its traction it will last three years probably. Maybe four years. Once it is completed, hopefully, there is something in the queue to take its place. Sometimes they overlap and that is when we get a very, very big spike. If there is not something in the queue, you get the bump that we witnessed here in the second quarter.

But again, we don't have products. We queue up these programs while we work on our acquisitions too. Our acquisitions, LSI's future graphic companies. It's important for everyone to know that we don't look for people that have the exact same customer base as us. They have a similar customer base with different names that offer somewhat different services, so that we can really leverage, when we put this -- when we LSI-size this new company, when we put it altogether, that we can offer more in a basket to a larger group of customers.

Along with that, I want to remind the listeners again that we watch for a lot of mergers. Single source supply, people that need that. Again, we're large enough to be a single source supply. The acquisition, the co branding that goes on in the market, we keep our eye on all the acquisitions, mergers, out there.

There have been a few. You think of the Kmart, Sears situation, the Macy's situation, SBC we mentioned, and -- or excuse me, SBC and AT&T, which we currently are working on prototypes on. And we watch for the new ones that springboard like Chipotle's did this morning, the new offering. When McDonald's rolls out a program like that, everyone knows that that is going to be a giant opportunity. So LSI is on the forefront of what can happen and what will happen.

Lastly, I would like to queue up a slide here that shows what is going on along with the 3M change that we talked about. The change in advertising, the change in where advertising is done. The slide shows like the first word, radio, and the second word there, television. It has a mark through them.

What that is, is saying the traditional point of entry, where the advertiser and the branding people try and catch you on radio and TV, are losing their source. There is so much free radio now with advertising free programming. Television, there's only a few opportunities for people to be captive and listen to the commercials, events like the Super Bowl or the Oscar awards.

But if you go to traditional radio and traditional TV as we knew it years ago, people are using the TiVo type method to skip the commercials. They're finding ways to get around that. So all the retailers, all the brand people have to capture at another location. That is more at the point of purchase. That is what the three letters stand there. The point of purchase in the store.

Where 3M and LSI look to the future is not the traditional point of purchase that included paper signs or styrene signs that would stand on the end of a rack, or be posted on the window of your convenience store, but rather the signs that can change week to week, day to day, hour to hour, minute to minute if you need.

So in the video screens, that is where this new active digital -- the digital market that 3M has entered along with LSI -- that is where we see a lot of activity in the future. That is completely, as we mentioned before, a complete new market for us. We were never in the disposable, passive standard signage that were in their store. We were in the permanent signage. Now we have a new entry to help, again, enlarge our basket.

The last slide in my presentation today is a commitment that LSI is making for this most common -- or excuse me, the highest-end new entry to the market, in a Columbia Turbo produced by Fuji Sericol. This piece of digital printing equipment is three times faster than the unit that we purchased three years ago.

LSI now has three of these large digital prices. As far as I'm concerned we are the king of the industry in this flatbed printing digital market. We feel that the capacity is going to be -- and the need for this equipment is so strong in our future that we're making this commitment to move forward with it.

Bob, I will turn it back over to you for questions that you might have on something I said or something I missed.

Thank you, David. I think you gave it a real good in-depth view of what is going on. Let me ask you a question. I'm sure there are folks out there in the audience that are wondering, will this P.O.P. or this relationship between 3M and LSI, what does that really mean in revenues today?

Not to answer your question, but as I look at this, I think is an exciting opportunity for LSI Industries.

It is.

To be partnered with 3M and have this kind of an opportunity really brings us into a longer-term, futuristic opportunity. David, would you expand on that a little bit?

Sure I would. 3M, we have always been a great lover of their products. They have been the largest supplier of graphics products to LSI. They have been the king of the graphics industry. They understood the [billboard] market, they owned that for many years. The fleet identification, the store identification.

But now they did a very strategic study, and through their Six Sigma process, and decided to enter this market. They knew that the customer base, the end-users of the product, look to 3M for a direction in this.

Through their video transmission, through their satellite networks, through their Vicuiti product screens, 3M recognized that the graphic market, the traditional point of purchase graphic market I talked about earlier, could disappear. This was their chance, since they were not in that disposable market, but this was their chance to enter a market they were perfectly suited for.

And they had a good strong base of outlets through their graphic suppliers, and we happened to be the number one first entry into the market. They are encouraged about the end of the market, the changeover from radio, TV, and traditional sources. LSI recognized that early, and we were able to combine our talents and our strategic thinking on that, and put together a good plan here. So we are very encouraged about the future.

And I can’t think of a better partner to be looking into our future that relates to the very profitable business, our graphics business, and opening up the opportunities with the customer base that we have. There cannot be anything more exciting for us as it relates to that part of our business plan.

We're very, very excited, and look forward to taking it to our customers and prospects. Talking about those prospects, there has been many of prospects where we could not break through with graphic entry into their business. Not because we weren't good enough, but because there are other good suppliers out there.

But this is a new market. Again, we are an early entrant into this market. And it's our way to come through the back door to get them into this new product line, convince them that LSI again is stronger than their current base, and take that traditional business that we couldn't pick up before.

You know, David, when I look at this, and I look at it kind of in a direction that basically says, as we are building LSI, we have the old way, which I think we have done a very, very good job of developing our customer base. We have the new way, which is the products that we are building today, and involved with these new image programs.

And we have the potential to come, the future of having the relationship with a 3M and now entering a whole new market with products or projects capability that just nobody else has.

Are we going to see a lot of revenue in the next six months from this? No. I think it is more importantly is that we are in the real futuristic research and development stage of how a whole industry, how a whole economy is going to change. And we're putting the foundation in place today.

David, I think you agree with that, based on all of the strategies that you have put in place.

We couldn't have a better partner and at a better time for a better market. I agree.

It's exciting for us. The last comment that I have to make, David, is that just as kind of a reminder, the three programs that we talked about, the CVS, the 7-11, and Chevron, as well as the AT&T, and these are programs that we are very active in today.

There are a lot of other things going on out there that we really don't have any long-term future to look into. But what is exciting is that these programs are real. These programs are going to happen. And that LSI has been the Company of selection of choice in order to get and to build that development in those new images.

The disappointment is the timing. I just want to be sure that everybody understands that we tried extremely hard to give as much guidance on this timing issue as we can, but we cannot make a customer institute a program. It comes when he is ready to do it. Our best opportunities are, at best, very poor because the information is obviously very, very difficult to forecast.

That is what happened in December. That is what happened in the second quarter. December -- October, November, we were pretty much right on where we thought we should be. It is very, very difficult to try to forecast what the end result will be in shipments, because a lot of our products are shipped toward the end of the month and invoiced toward the end of the month.

As soon as we found out that we were going to be low on the Graphics side, because some of these projects didn't get going the way they were, and that we didn't have enough day-to-day to fill in, we made the announcement. Of course, it was very disappointing.

But on the other hand, I am excited about what is going on in the Graphics business. I am excited about the investments that we're making in new equipment.

Today was for me, personally, a culmination of excitement that we have a new partner now to bring us into a new potential as it relates to opening up more markets, servicing our existing customers with more exciting opportunities and programs for the future. That is what LSI is all about.

Again to support all of that, our balance sheet and our financial wherewithal puts us in a whole different category than most of our competition out there. So with that, we will end the Graphics part of our discussion and move on to Scott, who will now bring you up-to-date on the Lighting side. Scott?

Thank you. It is great to have everybody join us again for this quarterly conference call. One of the exciting things about, believe it or not, the second quarter, and it is not easy to see, and I'm going to take an attempt here through my discussion to really give our shareholders a good feeling for what we have accomplished, and how those results have affected our overall Corporation results in a very positive way, even through the second quarter, where our global results were a little shorter than we had hoped.

That is that, as we have worked, and those who have listened to some of these conference calls in the past, they're quite aware that we have been working very hard to bring together a collection of lighting companies that had been accumulated over the years and then have grown up as part of the LSI Industries family; and put them together in a coordinated approach to better serve our core niche markets.

And to give us the opportunity to expand our position in the broader C&I markets, and in doing so develop a growth opportunity that becomes very complementary to what we are doing on the Graphics side, and in some ways can help to mitigate some of the timing issues that do occur and are a normal and natural result of big program business.

This is really what makes LSI unique and this is what gives us the opportunity to provide growth on several different fronts. I want to remind everybody that in the last 12 months, we have pulled together those lighting companies into what we now call Lighting Solutions Plus.

We have also successfully transitioned those operations, with the exception of the smallest of the lighting companies. But all the primary lighting plants are now transitioned onto a new world-class ERP system. That alone is giving us a tremendous opportunity to coordinate everything from purchasing, to order processing, to invoicing, and create a much, much higher level of efficiency. This has been our plan all along.

We have reorganized and streamlined the management structure to also enhance our ability to develop new products, improve the customer service, increase overall operational efficiencies, and control costs in a very challenging environment, especially in the lighting business, where we're seeing rising costs still in everything from materials to transportation to energy and to healthcare.

But the beauty of what I am about to share with you, and I hope you will see in the numbers, is that our plan is working. And We're very satisfied, very excited about the degree to which it is working.

Within the Lighting Segment, we are happy to report, as Ron mentioned, an increase in sales. But more importantly, along with that increase in sales, certainly an exciting increase in our gross margin and our income and operations, which I will share with you in just a moment.

This is certainly the real indicator of success in the challenging market that we face. The pricing structures that we have maintained over the last quarter and the first two quarters, the efficiencies that we have driven into our operations, are now proving that we can grow in this business both on the top end as well as the bottom end.

Let me share with you where those increases are coming, because this is a very important part of the story, and especially as those investors and shareholders that have commonly known LSI as a strong, Petroleum Lighting Company, begin to understand that the percentage of petroleum contribution now is less and less of a factor as we move forward. And yet, remains a tremendous opportunity as the oil business evolves and cycles back into high areas of activity.

In the second quarter, we had a tremendously strong market sale activity from our automotive market. This may be surprising to some, given the very discouraging reports that we hear out of our U.S. domestic car manufacturers.

But we really attribute our marketing activity, our product direction, specifically the ART technology, the reflector technology that we have discussed in recent calls, with the ability to continue to raise our influence in the overall automotive retail market; and to do it as the market changes; and do it in such a way that we are responding to the new drivers of the automotive market.

We have some very important programs with the import automotive companies. We still do play a very important role with the domestic automotive companies. While their activities may slow somewhat in reflection of the challenges they face in the market, one cannot ignore the fact that the success, both in their product design and the image, that the imported or foreign automotive companies have had in this market, have been in no small part a result of the image they have created, both in their products, their other service levels, and their ability to attract the U.S. buyer to a very, very successful program.

We continue to see a lot of interest in enhancing that image. Whether it is a Nissan or a Toyota, LSI will be involved in those programs and has been involved in those programs.

Now the second-quarter results do not really even show what we can do when we throw that R&D weight behind new technology and product development. So the ART technology that we have recently announced has not significantly contributed to the second-quarter earnings at this point. We will expect more and more contribution from that product line as we move into the third and fourth quarter, and beyond into really fiscal '07.

The second point that I want to make is to talk about the growth in our commercial industrial market. LSI Industries, while not maybe readily recognized for it, has participated to some degree in the commercial industrial marketplace for many years. We have certainly relied a great deal on our market focus in the niches to grow and develop the overall company strength and size that you have seen.

However, the importance of the C&I market has never been too far from our strategy, and we have recognized that as we have grown a higher and higher percentage of the market share, within those core niche markets it would become difficult at some time to continue that strong growth pattern. The size and the coordination and the ability now to bring all of our lighting companies together and to develop the efficiencies and the performance parameters, as well as the new product development and utilizing our R&D, have now put us in a position that we are ready to take a much more aggressive direction to certain segments of the commercial industrial market.

So really what I want to emphasize here is that the commercial industrial market should not be viewed as a new direction for LSI. But it is a direction that we are focused on from a more aggressive standpoint than maybe in previous year, and it certainly is a market that has a tremendous amount of opportunity based on our current market share.

You know, Scott, I would like to add to that, I think when you look back over the 30 years that LSI has been in business and the fact that we have always been recognized as the guys that build the lighting products for the service station market, we will always be the guys that build the lighting products for the service station market. The market in the petroleum has changed, but I can tell you right now that it is a competitive commercial and industrial life out there. We know it, we recognize it, we've been part of it. And the fact of the matter is if we don't become a stronger part of that C&I business, our lighting business is going to stall.

There are a lot of driving factors that really build good lighting fixtures. And it is not just a niche market, but it's the total market. It's a 7 to $8 billion market. Yes, the margins are tighter. Yes, there is a greater competition level, but you know, in this society, in this economy, there is a place for any company that has got the ability and the drive that LSI has to penetrate those markets. I will forecast that as time moves on in the years to come that LSI will become a much more influential part of the lighting industry in the commercial industrial business. It is here to stay and it is a part of -- it will be a part of our growth opportunities.

It really fits what we are doing. Even though the margins are tighter, even though the challenges are tighter, the fact of the matter is that had we not made the move that we did when we did, not knowing about a 9-11, not knowing about an Iraq war, certainly not knowing about what was going to happen in the overall petroleum life, LSI would be a different company today, and I would be sad to say it would be a lot different as far as on the negative than on the positive.

I think one of the keys too is to recognize that none of these markets stay stagnant. All of these markets, whether it's our niche markets or the commercial -- greater commercial industrial marketplace are changing. LSI has an advantage. The size company we are, our ability to remain nimble, our ability to focus our efforts within certain narrow areas will allow us to take advantage of the changes that are occurring in those marketplaces; to, A, hold our position in the niches that we currently have, and to, B, gain market share in those areas of the commercial market as those markets change.

The new products direction that LSI is engaged in to a certain degree is bringing products online that have been in the market before. But to do it in such a way that product designs from LSI, being fresh product designs, and being done in a way that they can be not only competitive but more applicable to today's marketplace.

Energy is a huge, huge issue; and energy is a huge opportunity for a company like LSI that does not have currently a lot invested specifically in specific market segment products, to develop those market products using the newest technology and gearing them specifically to the market needs of today and tomorrow as opposed to the past.

The sales increase, finally. My final point on the sales increase for the second quarter is that it has been done essentially in spite of a softening petroleum market Lighting Segment. This is a very, very important point. As we have talked about numbers, Chevron, 7,000 stations; the entire market industry represents 165,000 stations still. So as large as Chevron is, still a small part of the overall market segment.

But what's critical to understand is that the performance that we're seeing from a volume as well as an income increase in growth for LSI in the second quarter did not come from the petroleum industry. It did not come from Petroleum Lighting. It came from our strategy to develop some of these other markets in a stronger fashion.

However, the petroleum market will be there and will play a significant role in the future, again, at 165,000 stations that will need periodic update, will need periodic product improvement, to respond to energy concerns, to respond to imaging and marketing concerns.

Chevron is a perfect example of that. As David had mentioned, the Lighting and the Graphics have been working hand-in-hand on the Chevron program for over a year. The Lighting being a little simpler, a little more basic if you will, and frankly something that decisions could be made on a little bit quicker.

[Chose] us, or I should say that LSI is happy to announce as we have, that LSI has been chosen as the exclusive lighting supplier to the Lighting Segment of the Chevron upgrade program. We certainly expect that to have positive, positive contribution as we move through the remainder of '06 into, even more significantly, into '07.

You know, Scott, I might add that it is really interesting to note that we have a tendency to focus on just specific customers. For obvious reasons; if there is a program whether it be Chevron or whoever, that is obviously on our radar screen.

But I think we have had a tendency to lose sight that there are 165,000 service stations out there. And we have -- we were very fortunate back in the mid-'90s to convert a lot of those sites with the introduction of the Scottsdale. Scottsdale product was revolutionary. LSI developed it; nobody else did. And it was based on energy conservation.

What is interesting to note is that Chevron has made the decision to put its lighting eggs in our basket, because of the Company that we are, and the fact that Chevron has such a huge market share in California. With the energy pressure that is going in California, I can tell you right now that as a country, eventually that whole pressure is going to be throughout the United States.

LSI knows that, and has known that for quite a while, and is definitely focused on product improvement to match those needs and those customers that own those 165,000 sites. When are they going to come? We don't know.

But the fact of the matter is that opportunity has been developed. One quarter doesn't develop the real image of a company like LSI, when we have that kind of opportunity that we have.

I want to make that point, because I know Scott is going to say something a little bit more about our involvement with energy reduction as a main part of our marketing tool.

I am glad you prompted me in that direction. Because one of the things that is really significant and, frankly, very gratifying about our role with Chevron right now is that I am sure many of you remember what we did in the marketplace with the Scottsdale. And really literally 10 years ago.

And how we were able to lead the market in an energy drive, from an energy standpoint, driving energy consumption down, yet providing these facilities with a tremendous improvement in image. Of the 165,000 stations that are out there, a great many of those stations currently have Scottsdales in them.

The Encore package, which was developed on the basis of the Scottsdale and which is really the follow-up and the next generation to that product, is the product that is being selected in the Chevron package.

So really, you can see here how dramatically that opportunity presents itself to us, as we look at not only upgrading Chevron but, frankly, upgrading from an opportunity standpoint many, many facilities out there across the United States that currently have Scottsdales and will easily retrofit into our new Encore system.

Scott and Bob, I would like to add one thing about that 165,000 sites from a Graphics perspective. If you look at the pumps at those sites which would, if you average six per site, you're approaching 1 million pumps.

With our new technology, in the point-of-purchase that I talked about, with active digital it would be our hope that each one of those pumps could have a display, a video display with changeable messages at the point-of-purchase there.

It is not out of the realm. It is something we work on and foresee in our future as an LSI package. I will turn it back over to you, Scott.

Thanks, David. What does this all mean? Well from a Lighting perspective in the second quarter, it meant nearly a 35% increase in our income from operations over the same quarter last year; and nearly a 40% increase in the same year-to-date period as compared to last fiscal year.

Again, I want to remind our shareholders that we are so excited about these results because it is being done, again, without really any growth contribution currently from the Petroleum Lighting group.

But the horizon is bright. We are excited about where we're going. We are excited about not only what we have accomplished in the niche markets and the opportunity that stays in front of us on those 165,000 stations through '06 and '07. But we're certainly excited about the way we have grown our influence in the commercial industrial, the greater commercial industrial marketplace. And expect to see more from all markets. Thank you.

Thank you, Scott. I've got a couple of, just a few comments because my voice isn't going to last much longer than that. I think if we put our arms around all of this, folks, we're sitting here today with a tremendous amount of optimism. These aren't just words or just feelings; these are facts.

We have tried to explain to you what happened in the second quarter. That is the nature of LSI's business. Like it or not that is what we are; that is who we are. We're not going to change. We're going to do everything in our power to do or to work toward an objective where we can flatten out this lumpiness.

But to be honest with you, when somebody walks in and offers you an opportunity to do 25 or $30 million worth of a rollout program, we're going to take it. But we also know at that moment in time that somewhere in the future we're going to have to replace that business.

I hope what you see today, and what I see every day in this Company, is that we are building a day-to-day growth opportunity by strengthening our (technical difficulty) financial wherewithal, our investment in equipment. Certainly a very, very important part of our strategy is our shareholder, when you look at our commitment to the dividend policy.

When you take all of these areas and you look at the real LSI, we really have developed a tremendously strong Company. If we were not strong in the areas that we are building our future, I doubt very much that 3M would have selected LSI to partner with in a whole new marketing direction in relating to digital advertising. It's another new opportunity.

But you know, we are not going to forget the basics of what got us to the race. We are a lighting company, and we are a good lighting company. We have got great market image in the petroleum, the fast food, and the automotive; and we're going to keep it.

We're going to grow our commercial industrial because it is a huge opportunity.

The one area that we didn't mention that will get discussed is the LED. Everybody has heard about the LED light source. I can tell you sitting here today that LSI is extremely involved with LED development in our lighting program. That would not only approach our niche markets but certainly the C&I business as well.

You take our Graphics business where these huge opportunities are, and we have these spikes, as David said, some of the falls. That is part of our business; that is who we are. It doesn't affect our financial ability. It didn't affect our balance sheet.

What it did is it certainly affected, unfortunately, an attitude that we didn't meet our numbers. And we know that, and we understand it, and believe me we do know the responsibility to try to do that on a quarter-to-quarter basis.

But as the CEO of this Company, my goal and what you pay me for it is to continue to build a long-term, strong strategy Company that has great potential and great financial stability. I think that is what LSI is doing today.

With that, I want to thank everybody for their time. We ran right to the full hour. 2007, I think is going to be a real interesting year, because of all of the things that we have talked about today. Thank you, everybody. We appreciate your time.