LSI Industries Inc (LYTS) 2007 Q1 法說會逐字稿

Good afternoon. And welcome to the conference call hosted by LSI Industries. Today's moderator will be the Chief Executive Officer, Mr. Bob Ready. (OPERATOR INSTRUCTIONS). And now without further delay, I will turn the conference call over to Mr. Ready.

Thank you. Steve, if you want to make a quick announcement of what's going on here?

Good afternoon everyone. This is Steve Brunker and I just wanted to let you know that, as with our previous conferences, there are supporting materials available online for today's conference that you can view by looking at the LSI Industries Web site at www.lsi-industries.com. And in the lower left, click on Investor Relations and there you will find a link that will bring you to the supporting materials for today's presentation.

If for any reason you are not able to view those at the present time, then you would like to see them later, there will be an archive of today's presentation available after the conclusion of today's presentation.

Thank you, Steve. Welcome everybody and thank you for joining us. This is Bob Ready. And today, we are going to follow a similar format and we are going to have the three segment business Presidents speak to you individually about certainly the quarter, but more importantly about where we were going into the future.

I'm going to save my remarks until the end of the presentation and I'm going to turn it over to Ronald Stowell, who is basically going to start off by kind of going through the numbers with you all and kind of giving you an update as how has the quarter rolled out. And obviously to start off this, we are extremely pleased by the results of the quarter and I think more so about what the future is going to bring to us. So, with that, I'm going to turn it Ron Stowell. Ron?

Good afternoon, everybody. The first and formal part is our Safe Harbor statements and I will refer you to Safe Harbor statements in our 10-Qs and the most recently filed 10-K. And importantly today, we have no non-public material information that we can -- we will be discussing today.

We had a great quarter. We had almost 87 million in sales; that is a record. And in this first chart that I've put up, you can see that we once again had the three segments, we introduced that first at year end last year. And this is the first full quarter for our technology segment. So, in the fourth quarter last year, we just had them onboard for five days. Our growth in sales was 22.2% and again it was a record quarter. And then, graphically, you can see how that portrays. I will not be discussing every single thing on these slides. They are for future reference for those of you that are used to this format, and I will just be bringing out some particular aspects that are important, which -- here is the single largest market that we have, petroleum convenience store at 18.4 million for the quarter. It's almost a 5% increase and -- but we are at 21% of sales that is down from last year and a lot of that in spite of the growth in that market is due to the advent of the technology segment coming onboard.

Gross margins are up both in dollars, they are up 24% in dollars as compared to last year to 23.1 million, but they are up as a percentage of sales as well. And that's due in part to the mix between the three segments certainly. Operating income of almost 8.8 million is a little over 10% of sales and represents different profitability percentages in each of the segments, as you can see. About 7.5% in the Lighting segment, 12.8% in the Graphics segment, and 21.9% of sales in the Technology segment. And then graphically you can see the flow of that operating income. The effective tax rate came out this quarter at 35.3%. It's a little down from last year, and in part, it's due to a mix now of the US tax rate that's running higher than the Canadian tax rate, and the advent of our foreign tax credits and so on. So, I would expect just a little bit higher than that as we go forward into fiscal 2007, perhaps 35.5% to 35.6%.

Net income was 5.5 million or $0.25, and it's really nice to say that net income was up almost 50% from last year in the first quarter and net EPS was up 39% from last year. Even though we have -- and the difference between those two numbers, percentage growth is that we have more shares outstanding this year than we did last year in the first quarter, almost 21.9 million shares with a large increase due to the shares issued for the SACO acquisition.

The balance sheet remained strong. We've had a little bit of change in the balance sheet from June. We have a growth in receivables. In part that's due to the record quarter we have, in part it's due to the timing of the payments from our customers, and we would like to see them pay this a little bit quicker than they are, and we are working on that.

Inventories have grown a little bit since June. In part that's due to the volume of business we have and the programs that we are looking at in the future. Working capital is strong at 83.6 million and equity at 167.9 million. Of course, that's up from what we had at June, and our balance sheet is up. We funded some growth in receivables. We funded some of the growth in the inventories.

CapEx, we have 1.4 million this year in the first quarter as compared to 900,000 last year. And the biggest change in our depreciation and amortization, most of that almost entirely is the amortization of intangible assets related to the SACO acquisition. So, we are at 2.2 million of depreciation and amortization. And as has been the case in most quarters for us, CapEx is running under our depreciation and amortization.

Fourth quarter dividend was $0.13. We have indicated before that that's at an indicated annual rate of $0.54 or an 8.3% increase from last year. And then I have a graph here that shows a five-year progression of increases in dividends paid on an annual basis, on a per share basis, and you will note that in fiscal '06, we did pay a special year-end dividend related to fiscal '05, so that's indicated there.

We did announce today some guidance for fiscal year 2007 and I will just repeat that here, and that would be that we foresee net sales in the range of 330 to 345 million for the year, and diluted earnings per share in the range of -- well, this slide is incorrect, it should be $0.94 to $1.03. But, that is what our press release indicated. So, it's $0.94 to $1.03.

And with that, I'll give it over to Scott.

Thanks, Ron, I appreciate that. Steve, next slide, thank you. After a series of good positive growing results in both the revenue and the income side, the Lighting Group is happy to post another good quarter. It's -- it wasn't as strong as I would have liked to have seen it, but it was a positive growth in both the revenue and the income. And our confidence remains high because we've experienced some impact in the early part of the quarter due to some timing on national account programs, some days lost from a production standpoint on vacation and the physical inventory scheduled to be ramped.

And the August and September results have been trending very, very strong. So, the overall quarter is positive and we are not quite to where we would have expected to be from a plan standpoint at this point, but our trend is in the right direction. We've got the heaviest impact in the first quarter on our gross margins, again due to material freight and energy and labor cost increases that had more impact in the early part of the quarter than in the later. Our price increases that have been announced at the latter part of the previous fiscal year began to really gain traction in the August and September time frame. You have to remember that a lot of our pricing on national account business takes a little bit longer to get changed. Our business is not based heavily on distribution and stock and flow business, but can accept price changes a little bit more fluidly.

But, we've done a much better job in the August and September time frames. And as you can see in the impact on the income side, about a 7% increase in -- I think we've got a couple of slide glitches here as well, it looks like -- so, I'm going to skip reference to the slide here and talk a little bit about what we are seeing on an improved operating income. We are running about 7% increase over the same period last year, and this reflects again some of the costs we've put into place to support future programs in that product group. It's going in the right direction.

Our internal cost -- process and cost improvements that we have made with respect to the coordination of the operations is proving to be on the right track. And frankly, it's well balanced with our efforts to remain aggressive in terms of market penetration, especially the C&I market, but to do so on the basis of service and products, and not on the basis of pricing only. Overall, our strategic outlook for the second quarter looks very, very strong.

Majority of our new product releases have been targeted towards the commercial and industrial marketplace, and we will see a much stronger impact from those contributions as we move forward. We began to see good results for months of our work on the Chevron and the several other rollout programs. And really the good news here is that our first quarter results don't include a significant contribution from these programs. The contribution that we expect to see will be more active in the second and third quarters.

From an automotive market standpoint, I know a number of you may be concerned about what appears to be sagging automotive sales or impact -- or overall economic impact in the automotive market. We would view this as an opportunity. Most of our customers seem to be motivated on the retail network side, and best at raising their image. And as a result of that, we have added additional volume substantially over the last year. New programs such as the Toyota [new image] program will again continue to accelerate through the next several quarters.

Our improved customer service performance remains on track, and it really enhances our ability to penetrate the market through the basis of improved service. We are effectively using the benefit now of our coordinated systems integration. We are somewhat ahead of many of our competitors in this regard, having of all of our operations on the system now and working well. We built this Company on an [inaudible] service, it remains the best vehicle for us to grow our market share.

We continue the fundamentals to keep our cost controls in place, and we see that the overall general scene in our constructive markets, not the residential markets, showed no signs of slowing. I think you will see that, on a comparative basis, with some of our competitors, they tend to have more at risk in that residential market. But, we have very little at risk there and are very confident with what we see at the general non-residential C&I market. We do expect of course to see the typical slowdowns in the retail sector, as well as the effects of weather in the third quarter, but nothing there gives us pause or causes us to have any concern over our general confidence for the quarter.

On the energy front, the market focus there continues to be a very critical one for us, because it's not only producing sales opportunities for us today with our existing products and technology, but it is also creating a very, very important platform for us to allow quick introduction of our new solid-state technology as a result of our cooperation and coordination with the LSI SACO team to be introduced as those products come online in the future. So, it is very important for us in terms of the work that we are doing today on our existing products. We are seeing good results there, and we are very encouraged with our market presence and our acceptance as a leader in the energy story from that perspective.

Overall, the growth and the outlook both very positive. We are continuing to work hard on our approach to market opportunities that are compatible in solid-state lighting. It is a long-term project. There is no doubt about it. Solid-state lighting, LED lighting is going to be a significant part of our future. It is going to take time to develop. The smart direction -- vision, if I might say, is one that will take us into the right markets as the technology applies itself effectively there. There are things that the LED and the solid-state lighting can do well today, there are things that it cannot do as well as it will do tomorrow in our selection of markets. Our selection of product direction will be critical to producing those types of results.

To sum up, our strategic initiatives to protect our core markets, penetrate deeper into the commercial and industrial marketplace with improved service and not necessarily [fixed] price. To focus on better margin product sales and coordinate our operations to combat the effects of decreasing material freight and energy costs to improve our production efficiencies are working, and we'll continue to strengthen the basis upon which we build our new product and market directions with the future integration of LED solid-state lighting. We really look forward to the next two quarters, and are excited about the results thus far.

Thank you, Scott. This is Bob Ready. I think I would like to make a comment or two on the lighting segment before I introduce you to David McCauley. As Scott kind of walked you through the direction of where we are going in the lighting business, from my perspective, I look at the direction that we have put in place and probably one of the best directions that we have had in our 30-year history. I am very confident that the opportunities that are being developed through product introduction and through improved service are definitely going to increase our opportunities in market penetration.

Our petroleum business, as I have said, those who've known me for years, it's been my goal for a number of years to reduce the dependence on the petroleum market, but not lose market share. And as you could see in the percentage, we are now at 21%, and yet the market right now looks like it's going to start growing again. To the levels of the past, probably not. But, it is a new market, it is a better opportunity for us, because today, we have fewer competitors that specialize in the petroleum business than ever before. And we feel very confident that, as these new programs are developed, LSI will have more than its fair share of opportunity to participate in them.

And certainly, as we bring new LED products on line where they will be applicable to those -- that segment of the market is really an exciting opportunity in our development plan. And those are my comments in reference to the lighting business. It is a business that's growing. It's a business that we have a lot of confidence in. We certainly aim to the market share improvement as we are working more closely with our reps. And certainly, from the technology standpoint, the product development that's well answering right now working between the engineering group at SACO and Cincinnati lighting engineering group, and introducing new products using the LED Source.

David, let's talk about the graphics business for a few minutes, if you like, please.

Sure thing, Bob. I might -- the operator jumped on and said Cincinnati is having a little problem with static, so I might want to adjust that before we move on here. In the mean time, I am assuming everyone can pick up on my microphone here. The graphics, I feel we are in the midst of our finest hour. We have had a record quarter with over 29 million in sales -- yes, got a slide glitch here, sorry about that again, bear with me.

David, I think, I found that we kind of lost control of the slides today. You might want to just kind of proceed without them and I think that's what I had to do.

Okay. Microphone-wise, though, I'm going to patch it to all, can you hear me?

Yes, we hear you fine. Hopefully everybody else hears us.

All right. Well, proceeding assuming that you may not see the slides. Graphics hit $29,440,000. That's a 37% increase over our near 21,500,000 last year same period. Better news, as we move on, the operating income is up an incredible 74%, hitting 3.7 million. That's not been the highest in our history, but we are very proud of it and looking to keep this type of work up. We are out of control of the slides. So, everyone says what can we do there today, what can we do tomorrow? I am going to address the market I have had addressed about a year-ago in one of these calls and that's the Quick Service Restaurant market commonly referred to as the QSR.

And we know, we realized -- the industry knows there is a huge market out there in front of us. In fact, this market grows about three times the number of sites that we consider the convenient store petroleum sites to have. Petroleum convenience, we've referenced to have there between 150,000 and 160,000. And the nice part about the QSR market that LSI recognizes and the industry recognizes is that it's a tired market with their stores. They have [quick] there's near half million stores out there, sites out there, but they are tired, they need to look new, they have to get away from the fast food feel, become more casual feel and get away from their cold plastic gauche look into a warm fabric comfortable market.

Talking about a particular candidate that we have now, we announced on September 13th our agreement with DQ, Dairy Queen, of a replacement of their total menu board systems at all their sites. This would include approximately 5,600 sites that will get interior boards and 3,600 sites of those that will get an additional drive-through board. This is again a very large order and it is 50% larger when we add the installed portion. Through our Adapt group, we are able to take this from conceptual all the way to completion and will start our revenue stream probably February, that would be our third quarter of 2007.

Obviously, we have had caution involved with prototyping upfront engineering, et cetera, that we have absorbed all along and again in the third quarter, we will start capturing the revenue that relates to this cost. LSI is extremely in great position with their balance sheet to handle programs of this size and many more, especially in that QSR arena, because they are all in the same boat from having tired and old images.

I am going to skip the next slide, because I did have a slide that talked about our tradeshow on our picture, but from a verbal standpoint that tradeshow went extremely well. We demonstrated LSI's ability as a total package using our Technology Group's product line, the Graphics Group and the Lighting Groups and it was quite a hit. That was National Association of Convenience Stores that had taken place mid-October, earlier this month.

And another area that I want to talk beyond the QSRs is the remodel business versus the new build, especially as it relates to the graphics group. The remodel end of our business is much larger than the new build. If, in fact, we look at an example, Dairy Queen would be a good example. When they remodel, they are talking a 5,600 store remodel program. When they build, their average build is 200 to 300 sites a year. This holds pretty much true for all the people in that QSR industry and also for the people in the retailing industry. They remodel more than they build and this is where our strength lies. Now, keep in mind that we sure are in the new build business. But, again, the biggest billable dollars is in the remodel win.

Also want to talk about the category killers of the industry and again, we talked before in previous sessions like this and in our tours, these category killers -- I will name a few segment people, the office supply stores, when I mention their names you can think of three off, right off the bat, that would be OfficeMax, Staples, and Office Depot. But, when we go beyond that and you try to think of the next player, it gets a little bit of a struggle. Same story with drug stores. You think of CVS, Walgreens, and Rite Aids. Again, after that, the players are not near as they. TV appliance, TV stores, Best Buy, Circuit City, and again you struggle for a third. What does this mean? Again, because of the size of LSI as a relation to remodeling business, to the graphics business, because of our good balance sheet, we sure outclass and outmuscle the competition and placed ourselves in good favor with these people.

Lastly, to remind you that the trends, not too many years ago, the trend was 10 years in an image program. Five years ago, it was down to 7. I would go as far to say that we are between 3 to 5 years in a trend now with the fickled US and North American ways, the technology moving so fast, the stores get tired and old fast, and they have to be new and vibrant and that again -- that plays into LSI's hand.

Lastly, I am going to remind of points I made last month. Growth drivers. Customer programs that were delayed in fiscal 2006 are now accelerating much faster. I said that 90 days ago, that is a true statement today. New programs for fiscal 2007 are at our doorsteps and our backlog is near an all-time high, again 90 days ago that was my statement. I will take the word out near now and say our backlog is at an all-time high in the graphics arena. And the growth opportunities prevail with the combination of lighting, graphics, and technologies after coming back from that recent trade show that I talked about earlier today. That proved to be a very strong statement and there is no reason to doubt. Again, my outlook in our graphics portion of our business is very positive. Bob, I will turn it back over to you.

I am not sure you can hear me, David, we are having real technical problems here. And if you do, I'm going to have Fred pick up please.

I do hear you, Bob.

Fred, are you there?

Hello?

Yes sir, your line is open. You may speak freely.

Okay. Hi, everybody. As I have said the last quarter, I will say it again, we are very pleased to be part of the LSI family and LSI has given us strength to go after larger projects and larger markets. We are pleased with our first quarter results at LSI's SACO and I am happily to report that we exceeded forecasted sales and with higher gross margins than anticipated. We are maintaining also a good working capital. In addition, in the near future, we will use the cost of our metal works for our product line, but sourcing the fabrication inside the LSI family.

LSI metal fabrication will fabricate the metal work for [inaudible] LSI SACO products resulting in lower cost and higher margin. In the face of marketing, due to continued sales growth, LSI SACO is expanding its sales and marketing strategies throughout its sales network. We will be opening in new markets to existing and new sales partner in adding innovation of product to our product line, both in large format video and solid state lighting.

The new product offering will lead to significant future business in this area. Another effort that is being implemented in the green lighting innovative, which was started at LSI's SACO. The program consists of environmental-friendly and low energy parameters. Our current solid state lighting product line meets this standard, and we are currently expanding this effort into a full long program that will be driven by LSI as a green friendly company.

In our R&D, the continued development on a new innovative product is ongoing. With our 19 years plus experience in the design and development of the next generation product and now with the integration of the LSI group, we are progressing more rapidly than ever.

Prototype projects are yielding great results with positive feedback from the field and our R&D efforts are providing to be successful, and also we are continuing the development of custom-made software that are related to our product line. We see that the year 2007 will be a great year for LSI SACO.

More detail in regard to the application and sales marketing, I will turn it to Jonathan Labbee.

Thank you, Fred. I will speak about three market segments today for LSI SACO. The first being sports, which has been a flourishing market for LSI SACO since 1997. Now, the products that we typically see in the sports industry is large video boards and in the recent year, LED ribbon boards. Even with all that technology and the facilities, our advertising space would be coming at a premium, as the knowledge on how to use this technology is increasing by the customer.

So, through our partnership with ANC Sports, we will be introducing in Q2, a new innovative product that will give facility owners another avenue to sell high visibility advertising and increase their LSI SACO inventory. The second market segment is [Confessions touring]. Ever since the introduction of the Saco V9 and SMARTVISION LED screen, [not in] production with our partner in the [Confessions touring] business as was with most of the major tours in the North America over the last two years. The strong position of the LSI Saco product line in this market is bringing more and more business to us and new request for innovative types of products, which we are aggressively pursuing.

The third market segment I want to talk about is the outdoor billboard industry, which was -- this year is the pivotal year for Digital Signage, which the outdoor billboard product line falls into. The innovativeness and quality of our products made LSI SACO a top choice for large format Digital Signage customers. The big factor that differentiate us and our product line from the rest of the market is that here at LSI SACO, we fully develop and integrate the hardware and software portions of this particular product. It gives us a strong competitive advantage.

What I would like to do now is address a question that most people probably have since the acquisition of SACO technologies and that's, what makes LSI SACO different than all the other competitors in the different markets that we serve? The answer to this is that, first of all, you will see LSI SACO in every market that we serve as a top innovator in all of those markets. The other one is that the products of LSI SACO is the technology solutions themselves, not just an off-the-shelf products, but really the technology. We spend the R&D money on the technology so we can bring new solutions to the marketplace and we integrate and manufacture those products to serve the particular needs of our customers. Now, in combination with LSI, we have the technology, the vision, and the muscle to maintain our leader position. Thanks. Bob. Back to you.

Thank you, Jonathan. I hope you can hear me all right. I'm going to do a test here. Do you all -- do you hear me okay?

Yes, well, with a little bit of noise.

Yes, I apologize to our audience. So, technology at its best sometimes doesn't -- sometimes doesn't work the way we want it to. We did a test on this, and two days ago, we had a major catastrophic phone failure, power failure here in the Blue Ash area where our corporate headquarters are. We worked through it, we thought we had everything fixed, it was working earlier today and I apologize for the terrible mishap that we've had. But, the bottom line is this, I can conclude this and recapping everything that has been said.

It's a great quarter, business is strong, the opportunities are great, programs are in place that we have been working on for better than a year-and-a-half to two years, the operations are in a very effective, efficient mode. And the most important thing is that the real concept of the business segments of Lighting, Graphics and Technology are really working together now. I look at this as our 30th anniversary. It's just 30 years ago next month that we started this company, and I look at the next -- the opportunities of what we have put in place. And being on record that we are having a record year, and I think we are going to continue to show that ability.

We are going to still, as a company, experience some of the lumpiness that we had in the past, but it's really going to be a lot better than it has been because we have SACO onboard. We have definitely committed to some new produce development that we think will even out our Lighting business as we penetrate the commercial and industrial markets.

Our fast food business, and this is something that I think only time will tell, is the fast food industry is really going through a tremendous evaluation of how they will market their products in the future. And we are seeing all kinds of indications that the fast food industry may become LSI's next petroleum industry. Only time will tell.

But, when you look at the opportunities and when you look at the ways things are changing in the culture and the way effectively the marketing is being done, there isn't a company out there that can provide the lighting, the graphics, and the technology that LSI Industries can provide.

For me, as shareholder and as the CEO of this company, it's probably the most exciting time that I have experienced in the 30 years. And as we commit to the resources of the corporation, and certainly the involved communication network that we will be doing with the investment community, I would like to extend an invitation to those who can make it our shareholders' meeting coming up on the 14th of November. That's on a Tuesday at 10 o' clock here at corporate headquarters.

At that time, we will have the entire management staff. We will be introducing new products that relate to the LED market and certainly have a much deeper discussion on the some of the rollout opportunities that we are now in the process of developing. The areas of major direction we are working on are inventory levels. They are little bit higher than I would like to see, but understandably so, as we are relating to building the inventories for these rollout programs.

I think the important thing to also recognize is that the first quarter is the beginning of what we think to be a strong year. We built a lot of cost into this quarter, getting ready for these rollouts, which really haven't even started, and then the Dairy Queen being a good example.

So, the bottom line is folks, and I again apologize for the technology mishaps that we are having here, but that isn't relative to the company and it's technology capability. But, it is a fact that this quarter was a great quarter and we are looking forward to the second quarter that we are in now and the quarters to come.

And with that, I would like to finish the direction of this conference call. More information will be available on the Web page. And as always, if you have questions, give Ron or I a call. Thank you for your patience, and again I apologize for the technical problems. And with that, we will complete the presentation.