LSI Industries Inc (LYTS) 2007 Q4 法說會逐字稿

Good afternoon and welcome to the LSI Industries' fourth quarter 2007 year-end earnings conference call. Today's host will be Steve Brunker, Chief Information Officer at LSI Industries. During the discussion, all participants will be muted. If you have any questions (OPERATOR INSTRUCTIONS).

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

Good afternoon, everyone, and welcome. We're glad that you're able to join us this afternoon. As with our previous investor conference calls, we are simultaneously showing handouts on the Web. If you're interested in viewing these, you may find them at our website, which is www.lsi-industries.com. At the lower left, click the Investor Relations button and you'll be presented with a screen that has a link that will take you to the online slides. If you do not have access to a computer at the moment, you may check in later to either see a replay of today's conference call or to simply view the slide set themselves.

And now I'd like to introduce Mr. Bob Ready, Chairman and Chief Executive Officer of LSI Industries.

Thanks, Steve. Good afternoon, everybody. I think the format this afternoon will be a little bit different than in the past. First of all, I'd like to introduce the LSI attendees that are with me here. Sitting in our conference center is Ron Stowell, our Chief Financial Officer; Jim Sferra, the Corporate Executive Vice President of Manufacturing and the co-founder of LSI; Scott Ready, President of the Lighting Group; and online we have David McCauley, President of the Graphics Group; and Fred Jalbout and Jonathan Labbee in Montreal with our Technology Group.

I've put these folks together because I think today will be a format that we will continue to produce in the future and that is to really spend more time with you folks having you ask us questions. I think the numbers speak for themselves. It was a great quarter and a great fiscal year. Obviously, we're all very, very pleased with it. The reaction to the market -- with the market today was very positive and we hope that we will continue to see that positive response as '08 continues to rollout.

On a few opening comments, I'd just like to address the three different groups. From a lighting standpoint -- and again, there will be, I'm sure, questions in reference to this -- I'm very pleased to say our program with the 7-11 program is certainly well underway. We're about 50% completed. We hope to have the balance of those sites done by the end of December. Our commercial industrial business is strong. However, the niche markets -- the petroleum and the automotive and the fast food -- again, continue to be soft. I don't think there's a lot of explanation for that. We know what's going on in the petroleum industry. The automotive industry has been very, very lackluster with the exception of a couple of programs with Toyota and Nissan. And certainly from a graphic standpoint, their numbers really stand on their own. It's been an exceptional year with the programs that we have. I'm very proud of the fact that our graphics folks have done the kind of job that they have.

From a technology standpoint, we're very, very much into the early stages of releasing some LED products. We'll talk more about that with Scott as it relates to the lighting side. We'll also address the billboard situation and where we stand with that.

I do, however, would like to make a remark in reference to a recent press release that I saw from one of our competitors. I read that with great interest and I think it was really important to -- and it's very important to understand that some of the comments in relating to some of their new technology that they just released to the industry is really old news for LSI. These are things that we've been doing for quite a while. The entire package of both software and the technology as it relates to our LED and our management systems are certainly some of the items that we have been sharing with you for the past few conferences and certainly talking to some of our customers.

I'm very proud to say that today, as in our press release, we now are in a position to start getting into production with a new generation of billboard. It's been going on -- a new design has been ongoing for the last eight to ten months. The manufacturing facility is now in place and our sales group has been given the direction to start soliciting business.

It's important to know that we really haven't been active in trying to secure business. The reason for that is that even though Seiko had all of this technology, they certainly didn't have the manufacturing expertise. That's one of the main reasons the two companies came together. And it was our feelings that it made no sense to try to produce a billboard system that was really designed by Seiko over a year or two ago. We knew that we had a new board as a concept design. We knew that we had a new direction that we wanted to take. And it really made more sense to wait until we really had the new system, the new manufacturing process, in place before we actually went out and solicited business. Today LSI is ready for that. And hopefully we'll see things to come as the months continue on.

We also made an announcement today in our press release, that is, certainly we've shared with the market that we have been actively working on a very, very important product for the petroleum industry -- a new canopy fixture using white LED and solid-state.

We're very pleased to announce that that product now is in place, as it relates to the technology that we have developed through Seiko and the manufacturing expertise through LSI. This product will effectively be introduced to the petroleum industry in late October, early November. We're going to have a national sales meeting with our reps introducing the product to them first. And then at the NACS Convention that will be hosted in Atlanta the first week of November, the product will be officially introduced to the marketplace. However, in the last month or so, we have had selective customers that we have shown this new product to, and I'm very pleased to say that I believe that they are excited and that we [are] definitely have a product that we believe is going to excite the petroleum industry.

With that, those are just my opening remarks. I would like to have Ron Stowell, our Chief Financial Officer, make a few comments in reference to the financials. And then it will come back to me and then I will open it up for questions. Please forward those questions to me and I will pass them through to the appropriate folks that are in place to answer those questions as we move through this conference call. Ron?

Thanks, Bob. The first thing that I'll talk about is our Safe Harbor statement. You can refer to our 10-K's and 10-Q's that have been filed. But today we do not have any material, non-public information, to discuss.

Steve Brucker mentioned that these slides will be posted later tonight on our website or certainly available tomorrow. In addition to the information that I'll talk about and present here, there will be some additional financial data that many of you I know are interested in. So, that will be available.

The $93.8 million was a record quarter, record fourth quarter for LSI. You can see that we've had a lot of good success here; overall, a 31% growth from the prior year's fourth quarter.

Lighting came in at a 1% growth overall, but in all fairness we need to pull that apart a little bit and look at our niche markets and national account business. And Bob has indicated that that's been soft and actually down from the prior year. However, in the commercial industrial lighting market, in the fourth quarter we had 12% growth. Under the graphics we had over 100% growth from the prior year. That's certainly been a big boost to the profitability of LSI, not only in the fourth quarter but for the full year because that's continued the progress of growth there.

In our technology segment, we had just a partial year last year and we had about $2.7 million of sales this year. And then graphically you can see that the fourth quarter has come in well above any prior fourth quarter that I've presented over the past three years as well as any other quarter of this fiscal year.

The operating income for the fourth quarter was 10.4 million. That's an 11.1% growth. Most of that growth from a percentage standpoint again follows the sales growth that the graphics segment had, at about 17% growth in graphics. And lighting segment, mind you, it was just a 1% growth in net sales for the quarter -- but I'm quoting some wrong numbers here, percent of net sales. We had, yes, 8% of net sales. Those were not growth numbers that I referred to.

So, the 11% was percent of total sales for the 10.4 million and 17% was the percentage of net sales in the graphics segment. And lighting was 8%. Similar to the net sales graph, graphically, you see how strong the fourth quarter was in operating income.

Research and development, as a result of increased expenditures not only in our lighting and graphics business but with bringing Seiko onboard for the full year, we've just about doubled our R&D expenditures for the year. You can see that's pretty much true for the quarter; it's more than that for the quarter. Net income of about $7 million or $0.32 per share in the fourth quarter. That's a 56% increase in net income and it's 44% increase on the year to $20.8 million and $0.95 a share.

We continue to maintain a very strong balance sheet. We have over $10 million of cash and short-term cash investments. Our receivables are up and that's reflective of the strong fourth quarter and sales volume that you saw. But I'm very happy to report that our DSO's are down to what I think is a near all-time low of 48 days. And that's certainly assisted by the Dairy Queen program and the nature of the cash flows with that program.

Inventories are up and that's in support of the programs that we have active, very active, at the moment, especially Dairy Queen and 7-11. So that's the increase over year-over-year but we are managing inventories down from what they've been in the last couple of quarters. So, that also is good news.

Working capital maintains in that mid to upper $60 million range, $68 million. The debt is still -- or now is at 0. I think it was 6.5 million at the end of the third quarter. We would expect that to continue to be debt free for some time into fiscal '08. And strong growth in our shareholders equity to 176 million. Capital expenditures, pretty much on target with what we've expected. Almost 6 million for the year and 1.1 million for the quarter.

As we announced in the press release, I just want to reiterate that our quarterly cash dividend was declared at the level of $0.13 per share. In addition to that, this time there will be a special year end cash dividend to $0.05 per share paid. So a total of $0.18 per share to be paid on September 11.

The other dividend actions that were taken was to increase the indicated annual rate to now be $0.60 per share on an annual basis. That's over a [15%] increase from last year. And then we, from a policy standpoint, increased the dividend payout ratio to now be between 50 and 70% of expected income for the current year.

With that, I'll turn it back to Bob.

Thank you, Ron. I would like now to open up the conference to questions. If you would, please, maybe take the first one in queue and we'll move forward now to a Q&A period.

(OPERATOR INSTRUCTIONS) [John Fosaltler].

[Paul Salter] on for Pete Lisnic. I guess my first question is just kind of you look at the technology segment, the margins they weren't exactly where we were expecting. And I think part of it has to do with what you guys are doing on the billboard space, which is -- what exactly is going on there?

I think I'll at least pick up part of that and then we can turn it over to any other folks. When we acquired Seiko, obviously at the beginning the real acquisition was focused more on the lighting side. During the due diligence we certainly realized this billboard industry had a great deal of interest as it related to what the customer market potential was. And using the technology that Seiko has and the experience that they had in the billboard market, we looked at that product line as they had developed it and felt that with the LSI manufacturing expertise, we could probably come up with a better design, a lighter design and a product that would move through the production process faster than the original design. And therefore, we took the time to establish the proper manufacturing facility, which was actually developed right here in Cincinnati, and it didn't take a lot of money to do that. We had a bay that was really dedicated to another product line that we moved to another manufacturing operation and dedicated that bay to the billboard.

During the process of doing that, we set our engineering teams to work together to design a different type of billboard; one that's a little bit different than what's out there in the marketplace today. We feel it's going to be a better board for our customer and we know it will be a better board to produce, based on the way we produce lighting fixtures. As a result of that, we've really kind of kept things in a very, very status quo basis. We didn't really want to get into a production process of an older design board. We felt that it was more important to bring to the industry -- because LSI is new to this; not Seiko, but LSI is -- some ideas and a board that we think will be more interesting and hopefully more acceptable than those of our competitors. And that's where we are today.

Okay. Then I guess switching gears to the white LED kind of initiative or new product that you talked about. Just with that kind of being at -- I don't want to say a revolutionary product for kind of the customer base it's into but is the business selling cycle there going to be kind of materially different from what you've sold before? Are they going to require product testing or just a certain level of lead time that you normally don't see when you're just introducing kind of the next family of, say, like HID lighting.

Well, what I'm going to do is turn that one over to Scott but I would like to add to that before Scott answers in more detail. During my career and certainly working with HID, if you take the success of the Scottsdale product that we developed about 11 or 12 years ago, it took 2.5 years to develop that product to go to market. We now have within a period of less than 10 months a product with an LED, white light LED, that will be going to market. So I am extremely pleased with the ability to not only design but bring online a product that we think will definitely have a major impact in one of our niche markets.

And I'll turn it over to Scott to let him answer in more detail about that particular design.

yes, thank you very much. The selling cycle will be somewhat different in that the technology, as you referenced, is new. I think there are two conditions that we have to be cognizant of and we are planning for. One is the condition of the market itself. At the time that the Scottsdale or typical HID fixtures being introduced -- around that timeframe was introduced, the market conditions within the petroleum market were quite different than they are today. The number of customers that are available to us has been greatly reduced through acquisitions and mergers. The rate of expenditure, the rate of capital investment in that market is quite different than it was back 10 years ago when the Scottsdale was introduced.

However, having said that, our market share and our influence in that market is probably stronger today than it ever has been. We'll combine those market conditions with the adoption of a new technology. And I think that your observation that the selling cycle will be potentially a little longer than what we might see on a new metal halide fixture is accurate. However, I would suggest that the kind of influence that this product will have on the market and frankly, the level of spending that we believe that this product will inspire is what is really creating I think a tremendous opportunity for the Company.

We do expect that the types of features and characteristics of this product to attract a slightly different level of attention, if you will. There's a lot of environmental and green value to this product. It's something that we understand and believe all of our customers have a great deal of interest in. And certainly can benefit from a return on their investment as well as a PR value in their efforts to continue to be known as environmentally sensitive to their customer base. So we believe there's a number of different ways that this product will be reviewed. Time will tell how quickly we can start to see significant volume from its adoption.

I might add as a reminder, Scott, you might address the fact that the timing of this product is very, very important to the cycle of what's going on in the canopy world in the oil industry. You might address that.

Sure. That's a great observation. One of the things that had occurred during the adoption of the Scottsdale was the -- the high point, if you will, of the construction and manufacture and supply of the petroleum canopy into that marketplace. Those canopies now are anywhere from 10 to 15 years old when you look at the average age or older, frankly, of a petroleum canopy out there. The age factor involved with that network of canopies, that population of canopies, means that the amount of maintenance that has to take place on that canopy continues to increase. And frankly we believe that we'll be entering a new cycle of replacement in those canopies which will then also favorably influence the adoption of new technology and lighting that will go on the canopies at the same time.

And of course the one thing that Scott hasn't mentioned that we believe is an important driver to this timing is the energy reduction that will come about by showing the market that in our product right now we're approaching a better than 60% reduction in energy per fixture. And certainly a tripling of the life of a product, an LED product, compared to an HID. And those two combined we believe will have a definitely an -- will develop an interest at the highest level of the oil marketers and I think that are timing is absolutely right on.

Our market share is strong. We have a very, very good LED white light source now that's approaching 90 plus lumens per watt. And we have product that has a solid-state driver that will continue to operate that lighting system for anywhere from 8 to 10 years at almost 90% efficiency. And certainly last but not least and one of the most important things, as I've said, is the 60% reduction in energy.

All of those things are important to the market conditions. And again, with our market influence, we will establish a very strong marketing program to influence that time cycle and get products started definitely in a test mode and very similar to the way we did 11 or 12 years ago with the Scottsdale product. And as Scott said, time will tell but I believe that we're in the right place at the right time with the right product.

Okay. And then I have just -- as a quick follow-up and then someone else can get on. I assume there are kind of further LED products you're developing and currently for other verticals such as auto or other [periods]?

Yes, absolutely. Actually we're looking at a number of product releases during the second quarter that cover a variety of markets.

You know, and to add to that, one of the reasons that we decided to select the petroleum industry was certainly because of our market share. But equally as important as the visibility of this LED product, in this country everybody -- more or less everybody -- buys gasoline. And as we start to develop the marketing strategy, we want that product to be visible to many, many different people. LED has been a word, as we all know, that is gaining a tremendous amount of interest, but it literally is getting it out in front of the consumer. And certainly 10 or 12 of these products as an average under a canopy in the petroleum market we think is a very good start to get that message out loud and clear of what LED looks like and what it can do as we do move that into other products or other markets.

Okay. Thank you. I'll get back in the queue.

Jed Dorsheimer.

Thanks. Congratulations on a good quarter, guys. Couple questions. One, I may have missed it here, did you provide guidance either for the following quarter or for the following year?

Not at this point. No, we have not, as we're looking into this billboard industry and that will be forthcoming shortly. Looking at our capacity and certainly looking at what we're doing with this new LED product. And by the way, we'll give you at the end of this a kind of a look at the name of the product. The name of the product is called a Crossover, which is really moving us from the old technology to new. And we believe that as we now have this product in place we will be giving guidance here very soon.

All right. And just on the billboard side, I guess one of the challenges is the lumpiness as you start to build this business. It looks like you delivered the five products to Clear Channel. Has Clear Channel given any sort of indication with the other four that you had in backlog as to whether or not a delivery date or where those are going, et cetera?

I'm going to answer that with a no, but I'm going to turn that over to our folks up in Montreal if they'd like to explain a little bit more about what the thought process is in that direction.

Hi, this is Jonathan in Montreal. For the next four boards we're still waiting in terms of which markets they're going to be putting them in. So those are on standby and we're still waiting for direction from Clear Channel to which markets they want those to go in.

And if I can add to that, Jed, one of the things that we thought would be a more direct approach with Clear Channel, which we are going to be discussing with them very soon, is that even those four boards that are here in Cincinnati, we started thinking about the fact that maybe the best thing to do with Clear Channel is release them from those four boards, we'll move those into maybe another market area, and put them immediately into the new board design. We think that will be more prudent for LSI and certainly more acceptable to Clear Channel. It will be an offer that we're going to make to them once we have an opportunity to sit down and discuss with them what we're doing with the future of the boards.

What type of -- would that mean that you would take a hit on margins, then, as you -- what would the margin implications be -- (multiple speakers)

Not at all, no. It's really shifting from an old design to a new design that we believe will be in a better position on the margin side.

And what would happen with the old floorboards, I guess?

There's markets out there. You know, smaller customer base, as an example, that we would move those into as an offer.

All right. And then maybe could you provide some additional color on the graphics side of the business? It looks like your strong fiscal year in the past quarter was driven largely by some of these new national rollouts -- Dairy Queen comes to mind. I was wondering as we go forward, how many quarters will that be expected to continue? What is the lumpiness associated with that particular side of your business?

David, would you like to handle that, please?

Sure. Jed, as you know, the Dairy Queen Bob mentioned is about in the middle of the program along with the 7-11 program. That's currently -- obviously it was only about 33% done at the end of June. Both those programs will continue through December. And keep in mind too that our largest customer last year, the drug chain that we did the conversion for, that program ended in January of 2007. So our second half of 2007 fiscal was very strong without our largest customer. And we're in a lot better shape August 23rd, if I got the date correct, today than we were August 23rd of last year in terms of our backlog and our customer base and activity.

One other comment as it relates to large customers. Our fourth largest customer, who will go unnamed at this time, has increased their demand by 60% here last week in their forecast for the next 12 months. So, that's all encouraging.

I'd like to add to that, David, if I may that the Chevron program, Jed, is ongoing now and is gaining strength. And of course like all other national rollout programs, as everybody knows, this is obviously a challenge to LSI from year to year and I don't see that changing a lot in the future. These are big programs and we're going to take advantage of them.

What I do see changing, though, is some of the things that we now have in place that over the next few months we think will start taking root and will start growing. Certainly our lighting part of our business as it relates to the LED as part of that. We'll see where the billboards go with our production.

We announced that on a conservative level we started with 50 and as we move forward, we'll be increasing that through '08 going into '09 to 100 per year. Our salesforce is going to be very active in going after that business. Certainly with the technology that we have we're going to aggressively go after some of the sports opportunities now that we have a new production facility in place, and handle that as well.

It really is important to understand that with Seiko's capability, they just didn't have the production capacity to do much of that at all. And now that LSI has entered into this, we have really taken the time to effectively improve our production facility so that we can handle this kind of business and be a major player as time goes on. We think that will help with that lumpiness.

But, with that said, we are still going to take on national programs. There are definitely programs that are ongoing in discussion now that are other large ones. When they will kick in we don't know for sure, but obviously we'll make every attempt to smooth out that lumpiness over the years as we become a larger company.

Great, that's helpful. A couple more questions, then I'll pass this on to somebody else. Just speaking about the new products, the solid-state lighting downlights, if you will, for the canopy fixtures, curious what the payback period -- what the payback is for installing one of these devices? And then how does that compare with the HIDs from a value proposition?

Scott?

Sure. Jed, the payback really varies depending upon the market that the product is going into. The major driver on the payback is certainly going to be the energy savings. The energy savings combined with the reduced maintenance cost will generate on average anywhere between two to three years payback. The market price, of course, has a great deal to do with that. We'll have to see how the market reacts to this product, but certainly our expectation is that the payback will be earned well before the life expectancy of the fixture is arrived at.

We really expect, frankly, that while the product has the potential of lasting a long time, we're preparing from the design standpoint, we're preparing from a marketing standpoint to respond to a market which we believe will demand continued upgrades in their canopies of products like this or the next generation of products like this. And as long as we can give them a reasonable payback within that 24 to 36 month time frame, we expect the market to react very favorably to that.

It's a very safe thing to say that energy, as we understand the cost of energy today, is definitely going to change in the future. It's not going to get cheaper. It's going to get more expensive. And you combine that with the maintenance cost reduction, we think that we can show a very, very strong payback in a very short period of time. And again, timing is, I think, is so critical with this is that we will see some things going on in the oil industry as a result of these aging canopies and certainly the opportunity in a retrofit. And this product that our engineering group has designed, as unbelievable as it is to as it easy as it will be to take an old HID product down and install a new LED product and give that customer a 10 to 12 year life that he has never had in the history of lighting before.

Jed, the one thing that I have not mentioned or emphasized at this point is the amount of legislative action that's currently taking place in the market and being further defined and refined in the marketplace, which we believe, again, will also influence the rate of adoption of this product. Certain markets, certain parts of the country where energy and light control are more critical factors are going to have, we believe, a very, very positive effect on the rate of adoption of the product.

Great. One last question. Gross margins of the new product in comparison to both the lighting and the demographics, would these be more in line with the technology sector or with the graphics or with the lighting from a product margin perspective?

Well, that's a $64,000 question. In all honesty, looking at the pricing mechanism, we are working on that now. We'll be working with our vendors before we introduce the product to improve the margins and lower the cost. It's my opinion that we'll be able to move this product into the marketplace with similar margins that we did with the Scottsdale, which will be somewhat higher than our normal lighting today, the commercial industrial. And usually the niche markets do allow us to have a little better margin improvement than our standard commercial industrial for obvious reasons with these other four larger companies competing at the levels that they are.

Great. I'll pass it on and congratulations again and thanks.

Any other questions?

Jim Ricchiuti.

I was wondering if you could talk a little bit about the performance characteristics of the new digital billboard, the crossover, just in terms of maybe weight or power efficiency? How it compares with what's out there in the field?

Yes, Jim, thank you. I'm going to turn that over to the guys in Montreal. And I know why that question is coming from you because I read the dialog of some of our competitors of what was going on. So I think that's a great question and I'll let Jonathan and Fred answer that, please.

Okay, hi. On the weight side actually whereas some of the competitors have announced that they're working on reducing some weight, that's something that we had done prior in our original design. So right now we are the lowest weight screen in the market. With some new improvements coming with our new generation, which Bob was talking about a little earlier, we've been able to reduce by a couple thousand pounds the weight of the 14 by 48 digital billboard.

In terms of the power, as you have probably heard from some of our past conference calls, everything that we've developed for the billboard industry was developed with billboard customers and their input. And really understanding what that market is and understanding also that [certain] municipalities have limitations in terms of the available power with some pretty high cost to bring in some additional power. So what we've done is that we've designed a system that not only maintains its brightness but has a much lower power factor than traditional screens that are out there today.

Okay. In terms of the discussions you guys have had with potential customers, where do you stand with that? How far along are you in that process?

Well, Jim, let me address that and Montreal kick in. To be honest with you we are now just in the process of introducing this new product. We've kept it pretty much under wraps because we didn't feel that until we were ready we really didn't want to go out into the marketplace and try to solicit business until we were ready to deliver. Now we have the manufacturing operation in place and the product has been designed. And certainly the new LED modules are now in process of coming in for production needs. And the salesforce has been given, just in the last week and a half, the go-ahead to start soliciting business.

So we're still a little early in the game and I know the market is looking for it. So are we. But I made the decision a few months ago, Jim, that there was no reason for LSI to try to bring a product in place until it was absolutely sure that everything was going to work the way we wanted it to work. And certainly, the second reason for that was that in the process of looking at the manufacturing design -- and Jim is here, and if you'd like to ask questions in reference to that -- we really took the opportunity to take the experience of our sheet metal background of 30 years and the way we produce light fixtures, and really design a concept in production that would really make the efficiency of production a much stronger case as it relates to developing the product for our customer. That took some time and certainly took a learning curve.

And with Seiko's technology expertise and -- I'm repeating myself -- with LCI's manufacturing expertise, I think the 10 or 11 months were well worth waiting. And now of course the proof of the pudding will be when we make this product available to the customers. And again, I'm hoping in the next month or so we'll be getting people in here to see the product, to see the process, so that we can start developing that order entry.

Okay. And were the other four boards that are slated or were slated for Clear Channel, were those already assembled in the new Cincinnati line?

No, sir, they're not. What we did is we brought parts in, because obviously we wanted to be sure in the learning curve as we started looking at these boards and the pre-designs on determining how we were going to improve that design. So it made no sense to put those boards together. So those are just in parts and that will give us the flexibility to do other things if we so choose.

Got it. Just to switch gears for a second to the graphics business. Just wanted to make sure I heard correctly, the Dairy Queen and the 7-11 business, David, did I understand you to say 33 -- about 1/3 done?

On June 30, our numbers included the Dairy Queen and it was 33% on that date, June 30. And 45% was the figured completion for the 7-11 program on June 30. As Bob said earlier in his opening statements, we're about 50% done with both programs.

Okay. And as we go forward over the near-term in the next couple of quarters, I mean revenues in the graphics business were much stronger than I was anticipating. Do you anticipate maintaining roughly these levels and then as you wind down these programs? I'm just trying to get a sense of how we should potentially think about the ending, the ramp of that business. Ramp up of that business.

Well, as I said before, I wouldn't trade last August 23 with the current August 23. We're in great shape as far as our backlog and also with our activity and some of our customer pick up and announcements of what they're going to do 12 months out. We're very encouraged.

Jim, if I could add to that. I think that's really where our guidance needs to help you. And that's kind of the -- certainly the question that we're asking ourselves is to really understand with some of the things that are going on now that are not necessarily in the discussional stage for the investment side of our business. And certainly the things that are going on with the business that we have is trying to get our hands on beyond January of next year so that we can give stronger guidance and be right on target. And that's where we've been a little bit slow in getting that because things are quite busy right now. A lot of interest, a lot of dialogue going on and we have to relate that to what the numbers will be as we move forward.

Jim, I might add too. With both those programs that we'd talked about, don't forget our setup and learning curve and the manufacturing process of getting those programs rolling is behind us. And we feel like we're really in the groove now to continue the completion of it. Go ahead.

David, how would you characterize the activity level with new reimaging programs for other national accounts? It sounded like there's some activity there beyond over and above what we've seen.

Yes, we're real encouraged there because there's so much change going on in the industry. So much new technology, therefore, means new products and new products means new advertising. And the venue of auto home TV or auto home digital advertising, digital signage. We're seeing our first two deployments in that area, albeit small, but the encouragement of what could hit at the beginning of 2008 in those type of programs is very encouraging. And again, because the market is so fickle in terms of their advertising, change is good for us. And we're very encouraged about people adding to their product line and changing their direction, whether it be at the coffee bar or at the retail clothing end of the business. I'm just very excited about the future right now.

Okay. And Scott, I don't want to leave you out. I just wanted to ask you how the C&I portion of the business had a good quarter. Were there any major drivers to that? You've had some success in California. I'm just wondering if that contributed in the quarter?

Well, I think it's a combination of a lot of good things. A lot of good things occurring, both on the product side as well as the service side. We've talked in the past about the number of changes we've made in the agent base. Those changes are mature now. Those agents are trained and they're familiar with our product. We've been very aggressive from a pricing standpoint and we're growing some share, some market share in that market. And that market has a tremendous opportunity for us. So I'd say it's really the fundamentals applied to a relatively healthy market.

If I can add to that, Scott and Jim. One of the things that we didn't really get into but it's an ongoing is the transition of the indoor Wal-Mart package to the outdoor Wal-Mart package. And I think that's a very encouraging part of our growth, is that our Wal-Mart business has been certainly much slower because the outdoor lighting comes in toward the end of the store rather than at the beginning. And as we transition out of the indoor into the outdoor, obviously we have absorbed some of that change with some of the growth in the rest of the market. So, when the Wal-Mart program starts to ramp up on the outdoor -- which is indicated now, we're starting to get orders for the exterior package -- I think that also will add to the growth of the C&I market.

Okay. And Bob, last question. In your press release you alluded to looking at some acquisitions. Can you give us a sense of looking at the businesses where you might consider making some acquisitions or some areas, technology or market-wise that you need to feel you'd like to strengthen?

Well, you know, from my perspective, Jim, I think that we have opportunity in all three areas. But where I would really like to see -- and I'll share this with everybody, it's no hidden secret -- that our approach is that there's a couple of holes in our product line in our lighting side to really give this Company the competitive strength that it will get. And I don't want to go into detail and tip my hand, but right now it's a very, very straightforward approach. And that is to fill those holes on the lighting side. And there are some opportunities out there to do that.

Now with that said, is an opportunity may arrive on the graphics side and/or technology side, and it just -- you know, something that comes up very quickly, we are in a very, very good financial position to react to that opportunity. So, I guess the answer is it's all three fronts. But certainly from my position, understanding that our growth is now very committed to the lighting side, the LSI image is very strong on the lighting side, the recognition that we have a couple of holes from a product standpoint. We can certainly fill those with new product development but I'd rather have our engineering group working on the LED future and looking for the right acquisition to fill those holes on the core business on the lighting side of today's type of product line.

Okay. Thanks very much. Congratulations on the quarter.

Rick D'Auteuil.

Yes, it's Rick D'Auteuil with Columbia Management. Great quarter, guys. Just to drill down a little bit with this comment in your press release on new national reimaging programs that you hope to land I guess in '08. What does the pipeline look like? Are these former customers or past customers or are some of these new prospects? Relative size to some of the programs you've already done, a little bit of color would be helpful.

Okay. Bob?

David, why don't you handle that, please.

Sure will. In fact, Steven, if you could change the slide to the Perkins Row photograph? That would help, too. Rick, as I was telling the former individual on the changing markets there, we're so excited and see so much new exposure that the majority of this growth, new growth, is coming from prospects and not our current customers. Our current customers will give us single digit [groups] but when we add these new prospects, that puts us in that over 10% category.

I'm going to hand the baton off to let Jonathan explain the slide that's on the screen as it relates to both the digital and the lighting end and the whole retail environment of this urban village. Jonathan, can you take it from here?

Yes. I'm actually not seeing the slide but I have a pretty good visual of what the project is here. Perkins Row is an urban environment, a private urban environment, developed by a company called GTS. And in here they're really utilizing I would say LSI to a maximum. We're doing video billboards, digital type [Signage 3], actually, of our new type billboard. It's 15 millimeter.

This is in Baton Rouge, Louisiana. I don't know if we mentioned that. Go ahead, Jonathan.

Yes. Each one of them are roughly 12 by 23 feet high. They're in the vertical format. And on the backside of it is some graphics that we're actually printing out of our graphics division in North Canton. And then they have a massive amount of lighting that is going in this environment to enhance, I guess, the story they're trying to tell. They've got lighting in the fountains, lighting around the perimeter; all designed and manufactured by LSI.

And then, Jonathan, I had a little more spice to the total package. I think there's somewhere around 60 retail environments, companies like old Navy, Talbots, BCBG, Coach, Tiffany's, along with office complex and urban living condos.

That's correct.

And you see these popping up all over the country like you've seen the shopping centers many years ago and the malls and now these urban centers or urban villages, as they refer to them. It's a giant opportunity for LSI.

Yes, you see an opportunity like this can be handled by only a few companies; LSI being, I would say, the major one. Because there's so many different elements, there's not one company that does all of them. But these big developers, they like to deal with one company that can integrate all this properly. And then after that have all the elements at the same quality, I would say. And LSI was the perfect choice for these guys.

You know, I'd like to add to that. Rick, I think that to answer your question more specifically, and certainly you know the history of this Company as well as anybody does, is that the success of what we're being able to accomplish in these rollout programs is catching on with other perspective customers. The opportunity that we're seeing made available to us with discussions of new customers come directly as a result of the success of the programs that we're able to rollout and have been for the past few years. And that is, I think, the most interesting part of the opportunity, is that people are now starting to source us. They're coming to us. Obviously we have an aggressive salesforce looking for new business.

But I think that from my perspective and watching our Company grow, it is the ability for this Company to do the things that we are doing and creating the interests beyond just that particular customer. Because usually, like a Perkins Row, it's not just one customer; it's many customers that we open the door for. They become part of the image of a Perkins Row and they also get exposed to LSI and all its elements. I think that's one of the most interesting parts of our Company.

And I look forward to that as being a very important part of the growth curve of LSI, is all the different markets and all the different customers that we touch now because we're in the lighting business; we're in the -- or will be in the billboard business. We're certainly in the visual board business; we're in the menu board business and the graphics business. That's where our excitement is. And I can speak specifically without mentioning names; in the last six or eight months, we've had so much interest with so many different customers, they're looking at some of the opportunities and products and services that LSI offers, that that is really where our growth is going to come from as it relates to the day-to-day business.

In the case that you referenced here, the Perkins Row, is that -- would your customer be the developer in that case? Or you'd have to go off and one-off sell each of the retail elements there?

Jonathan, why don't you answer that, please?

In the case of Perkins Row, we dealt with the developer directly. With these new city centers popping up -- and you're going to see the same type of thing in a much larger format in Las Vegas and some other areas around the country -- the developers are giving a direction kind of as a director to these facilities, to the look, to the type of branding that's going to be happening in there. And the retailers are kind of conforming to that vision of these developers.

One comment about the developer in these type of complexes. The standard retail store that you see in the mall is not what they put in these urban centers. They're more robust and a completely different design and the margins are much better, even though there's a lesser quantity. But they are a good piece of business.

Yes, they -- you could reference them back to like in the '90s in the superstores that they used to have, like let's say in Las Vegas or New York, that kind of branding. But now they're taking those retail stores, they're a little smaller than the ones you would see in Times Square and Las Vegas but they're putting as much energy and effort into them and in quality of build.

And this is really where the developers are looking at how can they enhance their environments? The shopping mall business has kind of changed into these urban centers. And like this one particular developer worked with people that do work for Cirque du Soleil, designers, lighting designers. So they're really looking into a quality long-term build and then they're looking for products to support that vision.

It's beyond a concept at this point. There's actually production going on?

We're going to be on-site installing week of September 17.

Alex Rygiel.

Yes, from Friedman, Billings and Ramsey. Thank you, gentlemen. A few questions. First, could you quantify what the sales to Wal-Mart was in the quarter?

Alex, they were less than 10%, both for the quarter and for the year. So that's -- we're not at liberty to disclose volumes other than that.

Okay. And were they down -- could you quantify what on a year-over-year basis Wal-Mart was? What it was down year-over-year or whatnot?

Yes, well, why don't I try to handle that without getting into specifics, Alex. I think what it's important to understand is that as you're probably all aware of, for a number of years, three or four years, we were very much involved with a much -- a stronger interior lighting package with Wal-Mart. And when they went out for bid about a year and a half ago, we knew very effectively that it would really get down and dirty. And we went through the fundamentals of the bid process but we really knew that we weren't going to get that into our indoor. And to be quite frank with you, I really didn't want it, due to the fact that the margins we knew were going to be quite low.

Our focus then was to get back on the track of the outdoor lighting package, which effectively is more profitable for LSI because we have our own pole plant, which most of our competitors don't, and we are a very strong outdoor manufacturer. What our business with Wal-Mart was probably down about 20% over a prior year, which was the transition as Wal-Mart was turning over the interior stores to other manufacturers and certainly awarding us the exterior package.

And as I pointed out, any construction package, the outdoor lighting fixture, the parking lot lighting, is about the last thing to go in. Usually the blacktop is -- the first phase, the blacktop starts and the bases hurry in; the folds are in and then the last coating of blacktop goes in and that's it.

We're now just now getting orders and releases, which will start shipping when, Scott?

Well, we're starting to ship in August.

Starting to ship now in the Wal-Mart business. So, what's important to understand is with our growth of 12% in the fourth quarter. It was without a similar level of lighting with Wal-Mart a year ago, and we will see again an improvement as our business starts to ramp up on the outdoor. And really without getting into numbers, that's really how it's all working. I hope that answers your question.

Helpful. On the billboard side, can you -- how many billboards have you actually shipped to Clear Channel to date so far?

A total of five.

How many do you have in your backlog right now besides the four -- is it only the four?

Yes. And please understand, again, I repeat myself, we effectively put a hold on any sales effort of any boards until we were in the new design and in the production mode. And so therefore, for the last 10 months, we have not been going out and soliciting any additional boards. We are now in that mode. We turned the salesforce loose because we're ready to go after it.

Okay, so you have capacity to manufacture 50 right now but you have no backlog?

Correct. That is correct.

And you think you're going to end up taking your capacity up to 100 despite the fact that you have no backlog right now?

Well, it's a learning curve, as any new product is. Remember that our competitors have been in the billboard manufacturing capacity much longer than LSI. We're new to this production side; not new to the technology side. SACO brings a lot of seniority in that. And it's the application of the technology and applied to the manufacturing expertise of LSI. We're being very conservative in our approach, starting with 50 boards and moving towards an objective as those boards enter in the order stream. Obviously, from a production standpoint, we'll be adding more capacity as it's needed. And we are establishing a very conservative approach in how we're going to go after this business.

You talked a lot about your urban centers opportunities. A number of other electrical products companies are starting to see some weakness or some softness in light commercial construction activity, which is obviously a lagger to the housing market. What is your thought longer term on that light commercial construction segment which includes urban centers?

Scott? David?

Yes, sure. The type of work that we're seeing, I think, in that market, our developer business has been very strong and whether we're serving that developer market with lighting and graphics or lighting and graphics and boards, digital boards. I think our opportunity right now with the types of products that are going into that market as a whole you can imagine we're expanding the product offering. Even if it is a smaller opportunity in total number of sites, LSI's position is stronger because of the increased number of products that we can offer per site. And I think that's our perspective.

Great. Thank you.

And I think the developer as a market for us has not necessarily in the past been one of our strongest suits. We're developing that capability. We're not in the residential business so we don't have that to effectively improve. And from my perspective, I look at our position in the lighting industry as a solid number five in product offering. This Company for 30 years has developed the approach to go after segments of the markets of our competitors. And nothing has changed. We look at an 8 or $9 [billion] industry and we now have a strong product offering. We have a new rep organization, as Scott indicated; it's already trained.

And I really think that we're going to do okay in the lighting business because we don't have that residential monkey on our back and we have that expertise in the niche markets that I think to some extent are going to come back. And certainly from the product opportunity that we've developed. And certainly the direction we're taking with the LED product line over the next couple of years, I think LSI is in great shape for the lighting industry no matter what happens to the development side of it.

Great. Thank you.

Jeff Beach.

Yes, good afternoon, Bob and Ron. You didn't offer any guidance for the upcoming year yet, you're looking at it. But are there any specific profit margin challenges ahead in the next couple of quarters? I'm asking this looking at the new dividend and payout rate and it would suggest the midpoint of that very modest growth this year. Is that just you being conservative?

I think that's a very fair -- we've always been a conservative company in our approach. I think that we look at certainly the next two quarters as being extremely strong. I think we are having a high expectation as we bring the billboard product on stream and certainly even to some extent the sports package as the market that we're going after. I think all those things come into play.

And it is a conservative approach. I've always been conservative in our approach. I wouldn't take the fact that our guidance isn't out there yet, other than the fact that we're really trying to understand what other things that are coming -- going on and where they'll play out when we give that guidance. I really believe that that's an area that we will certainly share with you very soon.

All right. Thanks for the answer.

We have a very positive approach for this year. And all I can say is that there are a lot of things that this Company is in a position to do and there's a lot of interest from a lot of customers, both existing and new. And now how those things play out, obviously time will tell. But I don't think that LSI has ever been in a better position than it is today to execute so many opportunities and so many different opportunities than most companies out there, with the multiple markets and the multiple products and services that we offer and an economy like the US.

Our next question -- I'm sorry, there are no more questions in queue. If you do have another question (OPERATOR INSTRUCTIONS).

Well, I think this would be a good time to end this conference call. I appreciate everybody's time. And I want to just end with a couple of observations from my standpoint as we look forward.

We have positioned ourselves to move into some new markets. We certainly are committed to the LED technology and the solid-state. We will give the market some guidance here very soon. We'll talk a little bit more in the months to come as our billboard opportunities expand. And certainly, last but not least, the direction that we're taking and maintaining a strong balance sheet will give us a lot of flexibility to move into an acquisition which we will actively pursue this year to fill some of the areas that we believe will really help improve the overall ability of LSI to grow in the years to come.

And with that, I want to thank you for your time. And as always, if there are other questions, please give Ron or I a call any time tomorrow. We do have a visitor tomorrow but we will get back to you as quickly as we can. Thank you. Have a good day.

Thank you and that will conclude today's conference.