LSI Industries Inc (LYTS) 2007 Q3 法說會逐字稿

Good afternoon and welcome to the LSI third quarter 07 earnings teleconference. Today's host will be Bob Ready, chairman and chief executive officer for LSI Industries. (OPERATOR INSTRUCTIONS)

Now without further delay, I will turn your call over to Mr. Ready.

Thank you. Before we get into the meeting, I think Steve Breniger, our CIO would like to make a couple of comments in reference to this conference call. Steve?

Yes, good afternoon everyone and I just wanted to remind you as with our previous conference calls, supporting visual material is available for you to view on our website which you can reach at www.lsi-industries.com and in the upper left you'll notice an investor relations button that will take you to a page that has the link for these materials. If you don't happen to be near a convenient access to a computer right now, you can view the slides after the conference is concluded. They'll be posted there shortly following today's conference.

Thank you, Steve. Good afternoon everybody. This is Bob Ready. I've changed the format of this meeting a little bit today. We are going to have a question and answer period unlike some of the other quarterly calls. I thought it would be very appropriate to do that today and actually I have invited a guest that you have not had access to in all the years we've been a public company. Jim Sferra, who is the co-founder and the corporate vice president of operations for all operations of LSI Industries, is part of our panel.

I have with me also Ron Stowell, our chief financial officer, Scott Ready, the president of the lighting group, David McCauley, the president of the graphics group and Fred Jalbout, the president of the technology group.

And I think what we're going to do today is really kind of get into the future of what's going on at the corporation. I have a few opening remarks regarding the third quarter. I'm going to ask Ron to then step in and kind of go over the financials and then the format that I would like to use with your help is that all questions will be funneled through me and I will direct your question to the folks that I feel are appropriate to answer your questions. This way you'll have the opportunity to have a dialogue with each of the presidents as it relates to that specific question of that business segment and of course I will be part of that discussion.

At some point as we go through this, Jim is going to talk to you about where we are today in reference to our billboard program, our LED new fixture project on new LED fixtures and just the overall direction of the operations, because I think that as I've said before, even though our quarterly results were a little bit short of our guidance and the street expectations, it was a good quarter and there is a reason for us falling short. It is directly related to our lighting business and that is directly related to our automotive market and our petroleum market.

And Scott will address the position of the rest of our lighting business and at some point we will share with you our feelings about those two niche markets which are running flat. I don't think there's a lot of discussion about those two markets. We know the condition of the automotive industry right now and certainly the oil industry is still going through a relatively flat direction with the exception of the two major oil company programs that we are involved with and are definitely are forth going.

I think the other thing that affected our quarter slightly, February was the disappointing month from the standpoint that the weather conditions did hamper us in some cases basically compared to other quarters and it was to be expected that the third quarter historically is a lower quarter, a softer quarter than other quarters and that is historically true.

However, we are very pleased with the fact that our C&I business is growing and growing consistently and certainly our graphics business is extremely strong and the fact that we did deliver the first of the five billboards to the Memphis area, which Jim is going to talk to you with more direction and actually we're going to share with you a few slides that really show those boards up and running.

With that, I would like to turn this portion over to Ron. He's going to cover a few of the normal financial slides that most of you folks really ask questions about and have the highest interest in and then Ron will pass it back to me. Ron?

Not that this slide is of the highest interest but it's our Safe Harbor Statement and I will refer all listeners on this call to our Safe Harbor Statement in the 10K and 10Q that we file and I think the important thing here today is we do not have any material non-public information to discuss.

Bringing out the first slide on net sales of the third quarter. I will mention that in the file that's supposed to be posted on our website after this call, there will be additional information that we will not cover here in this call. For instance, nine-month sales by segment will be posted at the end of this file and a number of other slides and information.

$75.3 million gross sales; it's a 17% growth over last year. It is a record for any third quarter in LSI history and you can see the breakdown, $45.4 million in the lighting segment, $23.8 million in the graphics. That represents a 28% growth. The lighting was almost a 1% shortfall from the prior year and of course the technology segment is new is fiscal 2007.

Graphically you can see the play out of that and just note the green bar, which is the current fiscal year, and a progression each quarter of increasing sales.

Operating income, $5.121 million, that is 46% growth from the prior year and you can see how that is reported out by segment, $1.9 million in the lighting segment, $2.5 million in the graphics segment and a little over $700,000 in the technology segment.

Graphically you've got the same presentation as the net sales on a quarter-by-quarter basis.

This is some new information. We thought it would be important to bring this out, research and development expense, and I would say that we're at least this amount of expenditures. I think if we looked harder and farther we could probably find more that we should and would categorize in R&D expense. You note the significant increases from last year. Of course a lot of that is because we have the Saco operation in our technology segment on board now. Nonetheless it's evident that we're spending a great deal on R&D and increasing that spend to prepare for the future.

Net income, this was reported on the face of the press release. $3.3 million for the third quarter. I believe that also is probably a record for any third quarter, 37% increase and $0.15 per share and of course $13.8 million for the nine-month period.

Balance sheet data, there's a little bit more data here than was in the press release. I will make just a couple of comments. Working capital is at $68.3 million now. In December it was I think around $85 million and the change between December and now relates to two things, a seasonal and normal pay down of our receivables. You can see the receivables here, a little under $47 million. That's certainly less than it was in December and also we have a major program in the graphics segment whereby we're receiving customer prepayments on essentially all that program upfront, before any shipments are made and those payments went to pay down the debt and you can see now our long-term debt at March 31 is $6.5 million.

As of a couple of weeks ago we are now in a cash investment position. That will hold until we get into the throes of this program in the graphics segment and of course be producing inventory and shipping it out while we've already had the customer prepayments. Equity is now up to $171.6 million.

The next slide shows capital expenditures and I put that in there to show on a year to date basis we're at almost $4.9 million. More than half of that came in the third quarter and we had put out a press release several weeks ago about the Salvagnini metal fabricating center that we purchased and Jim I think will have some comments about that a little bit later. But it is a significant part of the expenditure that you see in the third quarter.

The board continued the dividend payment of $0.13 per share. That's at an indicated annual rate of $0.52 and in the file that you'll see on the website you'll see the annual progression over five years of consistent growth in our dividend payouts.

Thank you, Ron. I think what I'm going to do now folks is I'm going to introduce Jim Sferra and ask Jim to discuss with you or comment to you basically where we are in the direction of starting out with our LED lighting program and then move into the billboard and actually then I'm going to open it up to Q&A. I'm not going to have each of the presidents make opening remarks. I want to take as much time as you would like to ask as many questions as you would like to be sure that we cover all of the areas that you may have questions and interest in. Then of course toward the end I will wrap it up with the overall final direction of the corporation.

Jim, introducing you to the folks that are on board. Folks, this is Jim Sferra who has been part of this company for 30 years, the co-founder and obviously a very instrumental part of the manufacturing side of our business.

Good afternoon, everyone. I would like to start out with the LED lighting fixtures. We are in design of several lighting fixtures that are on our test program right now before we release them to sale to take to the marketplace. We want to make sure that the quality and the product is substantial when it hits the marketplace.

We'll probably be seeing products come out into the marketplace around end of July, first of August.

Getting into the billboards, we do have some slides. When we installed the Memphis billboards, the five billboards came in the Cincinnati from SACO and we assembled four pieces into two pieces and then loaded them on a truck and sent them to Memphis.

When the truck got to Memphis, the installing contractor lifted the top section, put it on the bottom section right on the truck and bolted it together. The slides are showing this. As they're bolted all together, it made it one piece and then they lifted it up into position.

This board left here in two pieces, 7 foot by 48 foot, was installed, put together in the field and it became a 14 by 48 foot billboard that they raised up into place.

Jim, I believe it only took a few hours to actually take it off the truck and get it into place?

Yes, it was, the actual time was about two and a half hours. The first board took a little longer because they had to get acclimated and get everything lined up and get familiar with the board. But then from there on it was about two and half hours to get it up in place.

The boards are functioning. There's a board at dusk actually on and then it's gone into its media mode and showing several different advertisements on the board.

Jim, you might want to remark, the decision that you have made in reference to the manufacturing process and how we're going to go about doing this as we start moving into production.

When we took the first five boards and took them to the job sites, we also sent a crew of engineers to the job sites. We had them visit with the installing contractors and the customer and our mission was to understand what the contractor needed to make his job go quicker and easier and thus that's where a lot of time is taken to put these boards together and install them. And we wanted to understand the contractor's side of it and when those engineers came back, we visited with it and made changes to the board that were in the middle of making right now in order to make the board easier to install, more installer-friendly and also we made changes so that we can run this board down an assembly line to get higher volume than just building it one off.

There are several design changes to do that but that was our main goal was to redesign it to get high volume production. The board originally was designed to do one at a time.

I think if I may interject here and I think we'll get some information from Montreal, but as I understand this, in looking forward in our process of making decisions on how we're going to produce this system, we recognize that the market needs and is looking for an additional capacity in manufacturing. And with our background in lighting and the way we design and build lighting fixtures, Jim has taken the direction in utilizing the experience and certainly the design concepts of a light fixture and literally applied that knowledge and that education and that experience into what we believe to be a unique method of production.

In other words, from what we understand our competition literally basically builds one board at a time. It's our intent, taking this new billboard concept and basically designing it to be a production run product. We think that a number of things will occur as we develop this expertise, is that number one, we're going to improve the efficiency and the number of boards that we can produce per hour, per man hour in the factory. We're going to develop the ability to, in the redesign to take weight out of it, which is one of the targets of our customer. Clear Channel has asked us to do that. Number three, we're going to put ourselves in the position where we can literally build this in a similar manner as we do a light fixture and we believe that that is definitely going to add to the capacity of the industry.

And with the quality of the board and the software systems that have been designed by SACO, the uniqueness of our board, which these guys in Montreal will share with you a little later in the program, we believe that we have a huge opportunity in a very, very important market that will have a big affect on the future of LSI Industries.

Jim, you might talk a little bit about how you approached the lighting fixture part of our business now with LED.

The first blush of lighting fixtures would be in the outdoor market. We're looking at sign lighting. We're looking at area lighting. We're looking at street lighting. We're working in conjunction with SACO. SACO has the R&D and the technology. We're bringing that technology in here, training our people to understand it, to know how to work with it so that we can design lighting products around their technology, which I might say is a state-of-the-art in the LED market today.

And that's basically what we've been trying to do and what we've been going through is educating, training and developing engineers that can develop a quality light to put in the marketplace.

The direction that the company is going in relation to the lighting fixtures, and Scott will remark on that in his discussion, is very simple, is that we have certain market penetration that we're very strong in. We recognize the need of specific type products that really generate the volume in those markets.

It will be our intent to try and rejuvenate the petroleum industry with some very interesting LED products that we hope will have a great interest by the oil companies as it relates to energy reduction and low maintenance by a longer life cycle of the LED chip. We have watched the efficiency of the LED chip improve dramatically even in the last few months.

When we started with the SACO acquisition and the review of the lighting fixtures, the lighting fixture part of our business, we were working with light chips in those days and that's only a few months ago, where the light output was measured in around 35 to 40 lumens per watt. We're up to now to LED chips that are 80 lumens per watt and greater. That's a major breakthrough in the lighting business, especially the outdoor lighting business, giving us the opportunity to now take a much more efficient product and apply it in a whole new design concept for a lighting fixture.

It will also offer us some opportunities in other markets that we haven't really been involved with. We have recognized the opportunity using LED starting with the outdoor business and that's where LSI started 30 years ago. We started this company manufacturing outdoor lighting products. That has been our expertise and really our identification in many of the markets that we serve today.

We added the interior product line with acquisitions. We feel that LED has an application for interior but right now we believe that the opportunity for the exterior lighting product is much more, how do I say, much more interesting and certainly has a higher capability than the indoor at this point in time.

I think the process of how to build a light fixture using the LED is definitely within our control factor and with our investment in that Salvagnini piece of equipment that we referred to earlier, it now gives us an opportunity to create a much more efficient, higher volume, production capacity or capability and this piece of equipment will not only allow us to improve our production for the standard fixture that we build today, both indoor and outdoor, it also will give us the flexibility to really come online with a new design and a much quicker capability of introduction of the next LED product that will be coming out.

It has been our intention from day one not to put product out there until we, we are totally convinced that this is the type of product that will actually excite the marketplace. There's a lot of activity out there. There are a lot of people throwing a lot of things around but it is our belief that much of this is just an attempt to bring attention to what's going on in the LED market. Some of it works well on the smaller type interior fixtures but in our particular area with the large national account base that we have, we believe that the direction that we're taking will be a very instrumental part of the growth and the strength of this company in the years to come.

Now with that, what I'd like to do is start with Scott and Scott will make a couple of remarks and then open up the question and answer to Scott and then we'll move into David and Montreal will kind of chime in on both as it relates to the type of things that are going on because Montreal is obviously our R&D center and they have a huge impact on the things that are moving forward today. Scott?

Thank you. Good afternoon everyone. The line up group in the third quarter certainly continues to carry the burden of volume requirement for this company and as such we were, no sense in hiding from it, a little disappointed in the results.

However, below the surface, and it's really critical I think that everyone understand that our strategy remains sound and our strategy remains consistent. We've said month over month, quarter over quarter, that this organization is going through a transition as we look at the niche market business compared to our penetration in the commercial/industrial business.

And the niche market business that we have achieved such a great deal of success in and such a great deal of market share in was very clear to us several years ago that our ability to grow that market is completely dependent upon the cyclical nature of the markets themselves and we knew and committed ourselves to the strategy of growing the opportunity where the opportunity was greatest, and that being the commercial/industrial marketplace very early on. It's taken a lot of work, a lot of investment and we're still in the midst of that transition.

I'm very happy to say that the success of that strategy really does indicate itself when you look at the degree of growth that we have accomplished in the last two years in this marketplace. When we look at our results in third quarter 05 to 06, we grew 4% in the commercial/industrial marketplace. We look at the results from 06 to 07, we grew 16% in that marketplace.

The programs that have supported us on the niche side of the business, much like we see in the graphics side of the business, tend to be very influenced by timing and tend to be very influenced by the cyclical nature not only in the third quarter and the weather but also the budget and capital program cycles of the customers that we serve in those markets.

We are still very, very excited about the opportunity in those niche markets as we move forward especially as we integrate the new technology that we are developing and as Bob and Jim have both alluded to, are expecting now very soon products to be introduced that will serve those niche markets and in our belief excite those markets beyond their current capability to grow and that will represent the opportunity as we move forward.

When we are able to achieve that and later on the continued growth that we have in the commercial/industrial marketplace, which is not only evident in the results we published from a revenue standpoint, but also indications are strong from a backlog standpoint, the success and the excitement on the new product introductions that we've put forward on our traditional light sources over the last several quarters, but also on the acceptance of the agent base in the commercial/industrial lighting market.

And this is another critical measure that is somewhat below the surface from a financial standpoint, but it's a tremendously critical measure of our acceptance and our position and our firming of a position as one of the big players in this market.

We've recently signed on a very large commercial agent that had been representing one of our, what we call the big four competitors. This agent has the capability now in one of the largest markets in this country to form its package around an LSI product offering and contribute a tremendous amount of growth in both revenue and income to our efforts in the lighting group.

We're tremendously excited about this opportunity. It's all ahead of us. It's new. They've only been a part and signed on to the organization for four weeks and we're already seeing tremendous results from that new partnership.

As a quick review of the strategy, again in this mode of transition we can expect to see continued growth in the commercial marketplace specifically as it's related to the general health of the non-residential construction market. We can expect to see continued cyclical ups and downs frankly in the niche side of the business and as petroleum and/or automotive market healths indicate, mixed with what we can create in terms of market expansion with new product innovation, those forces will balance themselves against each other and it's our belief that we'll continue to grow in a positive fashion although maybe not as aggressively as we had really hoped.

That certainly should not spell any discouraging opinion I don't think on the lighting group's performance in the future.

With that, do you want to go right to questions?

Well I think what I'll do is have David make a few comments and then we'll open it up to Q&A and that way Montreal can chime in as it relates to some questions in reference to the things that are going on from the R&D side.

David, why don't you make a couple of remarks if you would. I think your numbers pretty well tell the tale so you might want to comment on a couple of the rollout programs that we're involved with and then we'll open it up to Q&A. David?

Okay. Good afternoon everyone and yes, those numbers are pretty clear. When you start to get that double-digit growth and that 30% range, close to that for the quarter and for the year, we're quite proud of that. And want to continue with those types of numbers and don't see any reason why we can't.

I'll talk about the strategy in a couple of the current programs that are pretty hot. Let's talk about two that I have mentioned before, one being 7-11. That's a program where we're doing a graphical changeover for 7-11. They have approximately 1,700 sites.

And the lighting, David.

Pardon?

And the lighting, David.

Oh yeah, I thought I did say that.

Okay.

Okay, 1,700 sites with identification of Citgo on and that branding has changed to the 7-11 brand. When we go out and produce products for those sites, which we have been doing in the third quarter here, and the implementation of that program. Where we wanted to install in February, we didn't get a good piece of traction going until late March. We look at every site for both graphics and lighting and installing and management of those sites. We did design reviews prior to the manufacturing process. We handle all the permitting and the engineering and fabrication of those products.

But right now that program is really getting the traction it needs. Over the next nine months we'll have about 1,600 sites to do so we'll be averaging close to just shy of 200 a month and we look for big things in our fourth quarter and through the rest of the year on that particular program.

We also again as Bob mentioned, we do handle the lighting. Whether we put new fixtures in or upgrade or just change bulbs or lenses at each site and again, that is for the Citgo conversion. Hopefully beyond Citgo it goes into just general housekeeping for 7-11 who has oh about 13,000 sites.

When this program is over, their intention is to grow over the years to 20,000 plus sites and we expect them to be a continued customer on all fronts of LSI product line.

David, let me comment on the 7-11 before you move on for the folds that are interested in that particular program. I think it's really important to understand that the whole concept of putting graphics and lighting together really fits this 7-11 program. And what's really unique about it is that in this conversion, in this image conversion, the graphics group are really handling the program. They are coordinating the lighting and the graphics and 7-11 has required us as a vendor to basically install both products at the same time. They want that store to be converted with the lighting products and the graphic products.

And what's going on is there's probably a two or three week lag as it relates to us, to our ability to charge to revenue. This was a little bit of a setback for us in February and again the problem that we had in February was a combination of weather, the fact that we didn't get some of the stores done for the 7-11 program on the lighting side and just the fact that the overall third quarter is generally a tough quarter.

But what's really going on here is this is a very complicated, it's a very, very difficult project because there are so many different sized stores, different locations and it takes a true ability to coordinate a lighting and a graphic installation and meet the customer demands within a time frame.

And I'm very happy to report that as of today for example, and I believe, David, you had a conference call with 7-11 and I think you repeated to me that on a scale of 25, we are at a 24.9 or a 24.5.

24.9.

Which is a remarkable start because I don't think that there is anybody certainly in this country and maybe even in the world that could come in and take a very complicated project, go out and survey it, build it, install it and do it within a time frame that's been allocated and so what I'm suggesting to you is that as this moves forward, we will have certain expense and obviously a lot of time involved, product involved, that probably we won't be able to charge to revenue until the whole project per store is done and we might see a two to three week lag time, which is what we did see in the third quarter on a smaller level, but that's going to obviously increase as our efficiencies and we get to 200 a month, 50 a week, is that right, David, approximately?

Right, there you go.

That's a lot of stores, folks, to do with a combined lighting and graphics package. I think what's great about it, it has really made our company a much more experienced company that as other companies review what's going on, and believe me the competition of 7-11 is certainly aware of what they're doing, is they're going to have obviously an eye on how it works, what the results are and hopefully who did it and I think that's what's great about the vision of LSI and this truly is the ability to make one plus one equal three.

So I wanted to kind of do a little background on that, David, if you wish. Please move on.

Sure. Again, one more thing on this 7-11 and I can't emphasize enough is I don't know who else could have participated in this program that could handle the program both from a lighting and a graphics and an implementation. The addition of Adapt, oh approximately five years ago, with that group of engineers and the install and implementation process, along with all the design that we did for 7-11 and the ability to go out and change and coordinate the whole package, is prototypical of what we should expect in the near future.

In fact, with another large customer, I'm not going to mention names at this time, we're working a large graphics package. We tried to tie the lighting. Only because of the time and the franchise community that they're dealing with, it wasn't able to combine at this time, but when we did the design reviews we did study every site for lighting and we will approach that group afterwards on a separate program there.

Some cases where they just can't be combined, we might be able to take advantage again of our services that we offer during the design review period.

Now, let's move on to the Dairy Queen program and I'll refer to them as DQ here in my future comments. That program, running along just fine. We're really turning a lot of product that's being manufactured mostly in Cincinnati there. We have shipped a lot to the warehouses. We have half of our total crews committed to the install at this point. By the end of this month they'll all be, all the crews will be totally committed to it. The full program will be at its fastest pace and continue upon completion and this is a very large program. Again, it follows design, manufacture, implementation, just something again, there's very, very few companies in this country that can do, and also to finance a proposition like that.

In the graphics arena there are not companies near as strong as LSI on their balance sheet and have the resources to put a program together like this and we've very proud of that.

So this program, although it might be I'll call it a month behind in the revenue stream, and we've absorbed a lot of cost along the way, is full speed ahead as we speak here. At the end of the month, coming into May, full speed ahead and we'll be able to hopefully drop the numbers, we think we can, to the bottom line with all that cost behind us.

I think I'll stay away from the strategy right now, Bob, for the sake of time. We've got about 40 minutes used up so far and turn it back over to you.

I'd like you to make one remark on one area if you would please.

Sure.

I know the Chevron program that everybody's aware of is just continuing on at its normal pace and everything's fine there but from an activities standpoint in the industry, David, please remark your opinion and what you think about what's going on in the fast food industry, especially with some of the interest that we have with some of the larger marketers in that industry.

Yes, we're visiting next month in May, the National Restaurant Association show and we have spent a good amount of money on marketing and literature to the fast food people and we have many a prospects, and I mean prospects we have visited, put proposals from, having them visit both Cincinnati and North Canton or Houston, whatever was applicable to their geographic area. And we're starting to be recognized in that industry as we are in the petroleum/convenience store as the leader, and again, for all the resources that we have, especially the technology and the implementation.

Yes they know it's for graphics and lighting but now they want the total package and that industry, as I said many times before, has over half a billion or 500 million sites out there available for remodel. It is a tired industry.

500,000 David, 500,000.

Yes, excuse me. I'll get that number right.

Yes, please. 500,000.

Half a million, 500,000 and those sites all have our name written on them as far as we're concerned. They're an industry that's changing very fast, trying to shake their old image and the only way to do that from a visual standpoint is to take the look that they have at their sites, change that image and that includes again the lighting, the way they trim and accent the building, maybe with an LED color flow along with an LED video board. All those things like right in front of these QSRs and that industry is so ripe and so strong for us and again, we'll be positioned with that very similar as we are with the petroleum/convenience store as being the king of the industry.

I'll add that, and then I'm going to turn this open to the Q&A for folks who are listening, it's my personal opinion looking back over the history of LSI and certainly the markets we serve, I think in the years to come the fast food industry is going to be a much larger and a more dynamic industry than even the oil business. The numbers of sites are so great obviously by David's comments but more importantly is the affect that I think we're going to have with our menu board capability, our interior lighting capability, our exterior lighting capability and certainly our technology capability that's going to influence both the graphics and the lighting part.

Now because of time I'm not going to have Fred or Jonathan make an opening remark. I really want to turn it into you folks and ask any questions that you may have in reference to our technology, our menu boards, our LED with Jim on board and the graphics and so forth then if you would please, I'm going to field the questions and turn them to the people that I think will give you the best response as quickly as possible, so Fred and Jonathan stand by, please and we're going to open this up to question and answer and is the gentleman on board to open that up?

(OPERATOR INSTRUCTIONS) Our first question comes from Jim Ricchiuti.

Yes, good afternoon.

Hi, Jim.

Thanks for taking the questions. Two questions and then I'll turn it over to somebody else, and this relates I guess to the graphics business. As you've incurred the cost associated with the DQ project and also 7-11, how much of a factor was that in the decline in gross margins that we saw in the quarter?

Jim, this is Ron Stowell. The costs that we're incurring are I believe going to be for the most part in our SG&A costs. Of course as we're in the production process and producing product in advance of the sales, those costs are capitalized in manufacturing. Now there's going to be some setup time, some learning curves in some of that production process. Some of that falls through.

There has been additional people added too as well.

And then people, if it's an SG&A cost, it would fall there. If it's additional people in manufacturing, then generally it would come through our burdened costs.

I think too, Jim, that part of the--in answer to your question, some of the lighting, it's the recognition that we are now, whether we like it or not, the fifth largest lighting company in the North American market. We are definitely within that same playing field as the other four guys and there's definitely a challenge there on the margins side in order to stay competitive and keep our volume and our growth.

What we're doing right now is working on the internal function and the one thing that I failed to mention to everybody is that within the last three weeks we have hired a very professional and what we believe to be a top experienced corporate purchasing person. We are taking a complete review of our materials and our processes in purchasing in order to help us start to reduce these costs, hopefully reduce these costs, in a much stronger manner so that we can become a more competitive and more profitable level in the commercial/industrial business.

Okay, thank you. And I'll just put this question out to Fred or Jonathan or anyone else who cares to answer it. With respect to the billboard market, I wonder if you'd characterize the opportunity you see for follow on business at Clear Channel or possibly one of the other billboard companies or if you've begun to see any activity from the tier two billboard companies and how soon do you think you could be manufacturing in--

Those are great questions and I'll let Montreal field that and Jim here can field the production side of it. It's a very astute question because I think what's happening is the industry is waiting for us to tell them what our capabilities are and until we're really ready to announce that, we're kind of in a hold mode but I'll let Jonathan or Fred comment and Jim can follow up.

Yes, hi, this is Jonathan here. The first five billboards we delivered for Clear Channel were part of a package of nine so they wanted to see the first five going into the advertising market, evaluate the software because we were offering much more than just a billboard. We were offering a full package including the software, the controllability, inventory management system and now that they've been able to evaluate this, they're now looking into where are they going to be placing the next four billboards, which market they're going to be placing those in.

And as they're deciding that and Jim will be able to respond more to this in terms of the production, we'll be sitting down with them and obviously some other ones and the tier two advertising companies in terms what our capacity is going to be. This is what we're in the process of determining right now. I think that with the technology and packages that we've been able to put there, it really makes LSI a superior company to deal with in terms of advertising.

Jim, did you want to add to that?

Right now the final four boards were already as far as the parts and the fabrication fabricated up in Montreal. We are going to do the final assembly on those four boards here in Cincinnati. The first board will help us develop our routing times and develop our capacity. That's going to take place here in the next two or three weeks. So once we go through that learning curve on that first board and develop the routing times, the man minutes it takes to do all the operations that we're going to do on the new board that we have designed, then we will be issuing a capacity statement.

And I think, Jim, that's where it really all falls in line. It's been the actual study that we've been doing and the redesign to our production efficiencies an the investments that we've made in this new equipment that will give us the ability to forecast and tell the industry how many boards we will be capable of building over a period of months.

And we've been very, very careful not to excite or try to generate a program until we're really sure that we can do what we're going to say we do and we think that we're just weeks away from having that understanding so that we can now start notifying folks what our capacity is going to be. And I think that's, and not speaking for Montreal, but I think that's what Clear Channel is waiting for us is to give them guidance on how many boards we're actually going to be able to produce.

Is that correct, Jonathan?

Yes, that's exactly what it is.

Thanks very much.

Thanks, Jim.

Our next question comes from Peter Lisnic.

Good afternoon, gentlemen.

Hello, Peter.

I was wondering if we could talk about LED a bit more and just in terms of, I mean it's still early days there. Can you talk about a couple of things? One is what your--what kind of R&D spending you have to basically have to support growth in that business? And then two, and this is probably the more important of the two questions, but just give us a sense as to what your competitive advantage there is. In other words, what kinds of intellectual property or manufacturing capabilities, what's there that LSI has that competitors don't or can't?

Well, Peter, let me help you with that if I can and I want to be sure that I identify what you're asking. Is that related to our lighting or our combination of our billboard and our lighting business? Is that the kind of information you're looking for?

Yes, absolutely correct.

Okay. Let's start with the lighting side if I can and then maybe Montreal with your input on the solid state and then Jim can tie in with the production and how we're approaching it using the LED chip. So we'll start with Montreal please and help Peter understand how the solid state, but it also does have an affect as well on our billboard business, so there's a combination of answers I think that you can throw into the equation here.

Okay, this is Jonathan here again. I would say what our competitive advantages are besides our experience in the market, which dates back to the late 80s with LED, is really, comes down to our unique understanding and the way that we design the solid state driving electronics. As LEDs improve in brightness and efficiency, it is very important that the electronics that we design have the ability to take full advantage of the characteristics of the LED without affecting reliability.

This is where I believe that we are very unique in the market in the way that we drive the LEDs. If you look at the lighting business, if you look at the video business, billboard, it all stems from our SMARTVISION technology and we just keep building upon that technology to create better packages. It really comes down to packages, how you drive the LEDs. If you're sending a signal to them, how you send the signal, the components that you select, the tolerances, all this combined, the way you manufacture, all this combined gives you a final product that is very reliable and very high performance.

To add to this, Peter, Jim and I had a conversation just about that a couple of days ago in reference to how our approach to the lighting side of the business is and Jim's point to me was, and I'll let him clarify that, is that looking at our industry, and we've been following LED for six years now in the lighting side of the business, and Jim's comment to me just a couple of days ago, he said, 'We're really taking 180 degree different approach than the way the lighting industry seems to be going with the information that's out there right now and the type of products that are trying to be sold.' And I'll let Jim share with you why he feels that way.

The LED products that we're developing of course we're getting all of our technology from SACO. SACO is our R&D arm for the electronic part and the LED chip. Of course we're working together to design the electronics to fit within our fixtures. Our goal is to not just dump the LED into existing products that may or may not support the LED technology. We see a lot of our competition doing that.

We're designing the fixtures around the LED technology that SACO has and has educated us on. That's where we've been for the last nine months is getting an education so that we're designing fixtures that are directly related to LED and how LED needs to be brought to the market.

We will not be relying on other people for drivers, for boards. We're designing the drivers; we're designing the boards and we're designing fixtures around our designs.

The question of patents, everything that we are doing we're running by the patent attorney, whatever patents we feel can be applied for at this time for all the LED products.

But do you think that puts you at a competitive disadvantage if the lighting companies are simply packaging an LED product whereas you might be spending more incremental dollars to develop a product or it sounds like what you're saying is you have a--at the end of the process, hopefully you'll have a better mousetrap and be able to sell it better than some of your other competitors.

Well and yes, and the development process is actually faster. Once we have the LED technology and the electronics then the fixture development process actually increases and becomes quicker and more quality and less costly.

Plus Peter, this is Scott Ready speaking, plus the fact that we have such a close and careful understanding of the particular applications that we're pursuing in our markets, especially those markets where we've had such a commanding market share, means that we're able then to bring a higher value in the total cost and total value of the product, which translates into a greater margin opportunity for us as an organization.

Peter, I want to add to this. If you go back in the history of this company 30 years, you could look back and you could see the same situation as we've moved into metal halide and super metal halide and PULSTAR metal halide and being the lowest of the smallest guy in the bunch. It's the way we approach the market, which is different than our competition is doing. We think that we've developed the opportunity with the relationships that we have and understanding the markets where the volume, especially in certain products.

The answer to LED is going to be in the years to come. It's how we're going to approach the market in specific markets and using the niche market attitude and giving the customer a higher value for the dollar and I think that that market is going to look at that the same way it has looked at it over the years that we've developed this company.

If it's a competitive one-on-one commodity product coming in from China, that's not the answer. The answer is truly to take solid state the way we're approaching this, take the LED chip as a new product and a product by the way that as you're probably aware of is growing monthly in efficiency and design the right product for the right application for the right market. And I think that there's a huge opportunity for that and that chapter has yet to be written.

The other thing is that the way we're approaching this gives us a lot of flexibility to meet competitive direction and we can follow the market. We're working with Phillips, we're working with Osram Sylvania, we're working with the people that are also struggling and trying to develop it, develop the future of this and by having the relationship, the association and certainly the R&D arm that we have now, we really believe that this is the right way to go and time will tell.

Okay, thank you.

Bob, I'd like to add--

Yes, please.

This is Fred Jalbout from Montreal. In regard to the R&D, you know that we are the first company actually who implemented LED into indicator lights using an (inaudible) control panel. Since the beginning of first version of LED when it was even a single color, we were always the faster company that worked with LED worldwide. We were the first company also to invent and to use the digital visual board using LED against all of technology. Three years after we present our LED visual board to the market and we changed the market to LED. Other competitors show up with their own design.

We're maintaining very strong research and development department that has both knowledge, hardware and software. We're a unique in the way we doubled our product. The philosophy of LSI is to maintain this department as a strong department because it's the fuel engine to the graphic and lighting and the experience of developing the LED visual board and the lighting, we will bring it into every new solid state development and we are very sure that our product will remind the best quality product and will be more advanced than any other product that exists in the market.

So we are really committed to the R&D division. That will continue developing fast and strongly to keep our product up to date and more advanced than anybody else.

Well if I may add to that, Fred, is the fact of the matter is that we have been involved with LED for six years and we have stood on the sidelines as we mentioned before and we've done a lot of our own studies to determine the future of this company. We made a major investment in SACO because we believe that the future of this industry is going to change. Now there's a lot of things that are going to happen to make this change.

The important thing to recognize is that we now, LSI Industry, are really more in control of its future destiny relating to lighting than ever before because we're going to be responsible for developing the solid state, working with the LED chip companies and then using our expertise in design into the next generation of lighting products.

The other thing to answer your question, Peter, in reference to the billboard side, I think from all our due diligence, is that the software system and the management system that SACO has developed for the future of the billboard industry is far superior to anything that's on the market now. The guys that are enjoying the growth of that market, because that market is becoming very strong and the capacity of the industry is very limited, when we're ready to announce our production capacity and support that with the R&D package that we have developed in the software and in the solid state, I think that the; I hope that our shareholders, our investors, are going to be extremely pleased with the results.

We are taking this very carefully. We're doing it step by step. We're not going to make mistakes. We're not going to rush into this thing. This is a long-term venture and I personally believe that the approach that we've taken is very similar in many cases to the way we built LSI over the 30 years. And if history is anything to support that, I think in the years to come you'll see those results on a very positive direction.

On the other side, we recognize that we have a core business that we have to support and we know it's challenging because we don't have the depth and the volume of those niche markets to support some of the things that we're doing on the C&I and it isn't because we've lost market share. It's the fact that actually, you may not be aware of this, but the alumni or the company that I came from and that Jim came from here in Cincinnati was owned by another company. They closed that facility last month and they were the second largest producer in the niche market category and that factory was closed and as a result of that I'm sure that the reason it was closed it because the volume of the industry has changed.

Now that does two things for us. Number one, it obviously puts us in a position where with the strength of our agents and the commitment we have is to go after some of that business that manufacturer had because they don't have the same manufacturing capacity and they don't have the same location, and number two, it's an acknowledgement that the industry is changing and now it's up to us to bring into play a new product or two, and I'm saying or two, to really stimulate, especially the oil industry, to spend some of that tremendous profit that they're making.

With gasoline prices the way they are, there's not a hell of a lot of interest right now in refurbishing their image. They don't have to. And they can change that with changing the price of their gasoline by a penny as we all know. But what that really does is tell us that there's a market there that's very wealthy. If we give them the right product, if we develop the next Scottsdale product, to motivate them to move into that, that's obviously a tremendous opportunity.

So hopefully that answers some of your questions, Peter, and you'll be getting more information in the weeks to come as we start moving into these products and into the process of building the billboard.

Yes, that is very good. Thank you very much.

Thank you.

Our next question comes from Bart Gianotten.

Hi, thanks for taking my call. Following up on the billboards, strategically how did you quantify the market opportunity in this market when you decided to enter it?

I'll be very honest with you, this is Bob Ready, when we were looking at the opportunity of LED, we actually started with the research on the lighting side. We found this relationship or developed this relationship with Montreal to help us develop a product in the lighting side and during the research of that particular product and getting to know the folks in Montreal and the engineers working closely together, all of a sudden we started to kind of unwrap, if that's the right word, some of these other opportunities.

And Montreal had been very successful in developing in their limited way because of their size, some very, very interesting applications. Not necessarily billboard but in the entertainment market and the sports market, which definitely applied to the same technology based on building a billboard.

What Montreal lacked was the size of the manufacturing capacity and what LSI offers is the size of the manufacturing capacity and with their technology and our efficiency in manufacturing, it was an obviously very logical move to move into an industry that has very, very, that has a high demand for increased capacity. And that's how we really got into it.

Montreal, if you'd like to add to that, I think that kind of really puts our arms around why we got into the billboard business.

Yeah, I mean, this is Jonathan here, and a few years back, actually we had evaluated the billboard industry a while back and had come to the conclusion that it wasn't ready. This was back in 2000 and as the years were moving forward, we kept in contact with the billboard companies for a variety of different reasons. And then last year and the year before really became pivotal in terms of both the digital signage.

At that point we took on the task of evaluating that market, sitting down with the contacts that we had, making new contacts in that market and understanding where they were moving with this, not just on the billboard side but digital signage as a whole. And when we did the transaction with LSI, the graphics department has a digital signage sub department inside, multi specializing in interior multi location LCDs or plasmas, dynamic technology.

So it was really a good fit for us and now with the explosion of this market, we have companies like Clear Channel that come to us as a logical choice considering the amount of LED video boards and the reliability of our systems that we have out there in the sports and entertainment, some of the spectaculars like NASDAQ and Toys R Us that we have out there.

So all of that combined together really gave us an insight into digital signage and where it's starting to move and also the commitments that Clear Channel and Lamar and the other companies like that have made to their industry and to their advertisers.

And I would like to add on that and hopefully we've answered your question that when we reviewed the capability of SACO on the R&D side, and certainly our knowledge in the lighting business, and looking at the change of the industry and change of the markets that's going on in our economy, we really felt that we had a grand slam homerun by putting these two companies together. The company of LSI that had the size and the balance sheet to invest into a changing market, the opportunity to bring a new product, LED, into multiple markets, whether it be interior, exterior, whether it be graphics, whether it be billboards, whether it be sports, whether it be entertainment. It's taking the capability of the corporation and really expanding its ability to meet the need of markets that are looking at different, and have different ideas of different products that fit that.

That's what LSI has been doing for 30 years. We're a market driven company. It takes products to build the revenues and based on the lighting side of our business, it fits so many applications because the solid state is really the future of how light sources like the LED are going to be driven.

I will also go on record saying that as time goes on the fact that the green environment that is obviously becoming stronger and stronger based on global warming, whether you believe in it or you don't, the pressures are there, the politics are there, and in the light sources that we all use today, with the exception of the incandescent, basically have metal additives including mercuries. And as time goes on with the environmental pressures that are changing, LED is going to be one of those light sources that will become the workhorse of the future of the lighting industry.

And we're in the early stages of developing the knowledge, the experience, creating the products and taking that product and moving it into many different markets with many different new product opportunities. That's why we are where we are today.

Did that answer your question, sir?

That is very helpful, thank you very much. On the previous conference call, you were talking about the digital billboards, you said that the production facilities that are now in place are equal or better to anybody out there in the billboard's market. And my question is how do you know that? What are you basing that statement on?

I think you misunderstood me. I didn't say that our production facility is different or better. What I said was that I think the way we're approaching the production process is different than the others, based on our understanding. Remember that we've been in the metal business for 30 years. Most of our competition hasn't got that background and whether we build a light fixture or we're building a billboard, it still involves a lot of sheet metal capability. And I think that what we're saying to you is that in our evaluation of understanding how these products are being built today by the people that are supplying them today, that we believe that in our process we will bring into play a whole new method of producing these billboards at a much higher and efficient rate than what is being done today. That's really what we said.

Okay, that makes sense. Just one more follow up. What kind of EBITDA margins are you earning from the billboards that you have sold thus far?

Bart, this is Ron. We really don't disclose product line profitability or EBITDA. We're getting what we believe right now is an appropriate margin.

And I think that as we look at the future of this business, again that goes back to our feelings of production efficiencies and looking at building billboards, as we understand it, and I want to clarify that. We don't pretend to know everything that our competition is doing but certainly from the research work that we've done, people that we have talked to, customers that we are involved with and are buying products from our competition, we have what we feel is a fairly good understanding of how that product is being produced by our competitor.

Understanding that, it's allowed us to take a different approach and we believe that our approach certainly because of our experience in building commodity lighting products, our approach will be different than theirs and we believe that we can improve our capacity and improve our margins based on the production efficiencies as well as what we believe will happen in the redesign of the billboards, again through the study of what we're doing. We're not only studying our own process and installation procedures, we're obviously watching and looking at what our competition is doing so that when we announce our production is in place, we can also announce the way we're going to build it, the capacity that we have and what we believe to have a much more quality board in our production process.

That's all part of the strategic marketing direction to bring a product that costs a lot of money when you're looking as you well know. You're starting at a half a million dollars and up. We've got to bring to that customer a true value for the dollar. We know that competition has been out there longer than we have but you know what? Sometimes that's not all bad because the problems that our competition is experiencing allows us in the design process to hopefully design through that and bring the customer a better product for his dollar.

Okay, could you just confirm perhaps, are you setting the amount of profit today?

I'm sorry, I didn't hear that.

Are you selling the boards, the boards that you sold today, are you selling them at a profit?

Oh absolutely.

Okay, thank you.

Thank you. We don't have a lot of time left folks, so I really appreciate the time that you've taken but I will answer some more questions quickly if you wish.

Our next question comes from Jim Stone.

Yes, question (inaudible)--

I'm sorry, there was static there. I didn't hear the question. Did we lose him?

One moment while I access his line.

Hello? Are we still on? We're off? There was a lot of static in that last question.

Jim's line went to static. Our next question comes from Jed Dorsheimer.

Hi, thanks for taking my question, Bob.

Yes, sir.

Question for you on the LED lighting and I'll make it quick. Your strategy, your go-to-market strategy, I actually agree with the decision to go after the outdoor lights just given where the color temp of the current LED technology is right now. I was curious, are you going to be going to market with a RGB or a white phosphor converted approach?

That's a--I'm sorry? Montreal, can you answer that from a technical standpoint?

Yes, Jonathan here. For area lighting, outdoor lighting, we're going with a phosphor approach.

Great. And will you also be looking at strategic acquisitions to enhance this product portfolio?

In my closing remarks I was going to comment on acquisitions and I think that is--I think I'll answer that question for you in my closing remarks if we may. If anybody has more of a technical question, I think I'll cover that for you in my closing remarks.

Great. I'll pass it on and thanks for taking my questions.

Thank you.

Our last question comes from Kevin Casey.

Hi guys, a couple of quick questions. One, in your press release you guys said double-digit growth for fiscal 08. Is that top or bottom line or both?

So that would be probably both, certainly bottom line.

I think that where we are right now from our best forecast is looking at the opportunities that we have in place and others that we're not in a position to discuss. I think that, and this is part of my closing remarks, I think we're in the best position as a company that we've ever been.

The disappointment of course is that when you have these big rollout programs, it's so difficult to be able to give guidance on when these programs are really going to kick in. And they are affected by weather, they are affected by a lot of different issues. As it comes down to the fact that we're not only installing the product but we're designing the product, we're building the product and it really has an affect on a rollout.

And then you have so many outside influences. In the case of Dairy Queen, it's not just Dairy Queen. We have the influence of the syrup company who are literally paying for most of this program. We have the influence of the franchisees. We have the influence of Dairy Queen themselves.

It becomes not only the ability for a company to balance the production, the design and the installation and the building of the product, but handling all the people that are affected in the decision process at the customer level.

This is a difficult thing to guide you in an investment community and to the best of our ability we're trying to share with you the strategic platform of how we're going to build this company. The fact is that we have a tremendously strong balance sheet. We have a great opportunity in multiple markets. We have new products that are coming online in the next few months that relate to the major core markets that we've been serving for 30 years. We've got a great customer base and all of these things are going through a dynamics change based on products, on how these, of this customer base will be using these products in the future.

And so LSI is a complicated company. I wish it was as simple to say we build a lighting fixture and we sell it to an end user. There is a lot more to the company and what's really exciting is that our company is maturing and learning through the process of how to handle multiple, and I say multiple, rollout programs.

When you look at the size of the Dairy Queen, you look at the size of the 7-11, you look at the size of the Chevron, and you've got a company now that is really in the process of having the ability to handle these kind of rollout programs.

I think that's important because as we build our core business on the day to day with this new product development, the R&D we've been talking about, the markets that we're starting to bring new products in, and we have the ability to show large national retail accounts who are now wanting to deal more and more direct with the factory than the way they used to do business, I think all these influences have a great message for the future of the corporation.

The tough thing is that we're going from quarter to quarter. We have these ups and downs and that is part of the--unfortunately that's part of the lifeblood of the corporation. I think that I can end all of this as it relates to the strength of the future is that I go back to the balance sheet. We've been able to do the kinds of things and create the kind of company on a balance sheet that I'll put up against anybody in business today. And obviously the dividend policy is very straightforward.

And last but not least, I'm sure many of you have in the back of your mind the acquisitions side. Right now, as I look at the future of the company, there are multiple areas to grow the business. Grow it smartly, and that's the key word--smartly, is to look at what we've done in developing the LED, taken the opportunity, building the opportunity in the billboard business. That's a mushrooming business opportunity. Looking at the opportunity in our menu boards process, which I think at some point will be affected by LED, and the fact that we are probably the largest producer of menu boards in the North American market. You look at the change that's going on in the fast food industry, which in my opinion is going to overtake the petroleum business, and you look at the petroleum business and you look at the opportunity that's going to come and going to go based on that market or at certain times, it's a different and changing economy for LSI.

The bottom line is that we're developing a company that have people in place and one of the things that is going on now is we're investing in people. We're building the strategy of the structure of the company around stronger people. We recognize the fact that when you're going to grow this business, and we've set our goals to build this company to a half a billion dollars. When that day will come, I cannot say. But the goal is in place. The strategic direction has been implemented to build this company to a half a billion dollars. And it's going to be done in multiple stages.

The recognition that if we do this to a half a billion dollars, that $200 million plus will be in the materials side from a cost standpoint. We went out and we found what we believe to be a very strong and capable person with big corporate background in relation to purchasing and that person is going to guide us and help us to not only effectively build to that level but hopefully to develop even a stronger ability to improve our margins in that commodity core business.

We believe that the margins will continue to strengthen and be strong in the graphics business. We believe that in the new products that will be forthcoming there will be better margins both on the lighting side and in the billboards side based on our manufacturing efficiencies.

The results for the third quarter were not disappointing. We fell short of our own guidance and even though you show the kind of growth that we had, we weren't happy with the fact that we didn't hit the guidance and we know the market isn't happy with those things, but the fact of the matter is that the strategic planning process is very solid. It is working and we're going to continue to build on that.

And I hope that we've answered most of your questions. We would be more than happy if you would like to call tomorrow, Ron and I will be available and we'll do the best we can to handle it. We do have a very active program that we'll be publishing coming into the late summer, early fall, with a number of presentations that we'll be making on the street and we'll share with you what those dates are and the locations that we're going to be into.

And last but not least, there's an open door policy for anybody that would like to come to LSI here in Cincinnati, meet with the management team and see what's going on. The folks that have taken that invitation, I think all of them have said it was well worth the visit and gives a much better and more clear direction of where the corporation's going.

And with that, I think that probably; I really appreciate your time. We've been on for almost an hour and a half, which is probably our longest conference call, but I hope it was beneficial to you the way we approached this today and giving you a little bit more of an insight of what we're doing and certainly giving you access to the people who are going to make it happen.

And with that I want to thank you for your time and look forward to the fourth quarter, which as we've indicated in our press release we believe is going to be a very strong quarter and then we move into 08.

And with that, thank you very much. Have a good evening.

That concludes the call.