LSI Industries Inc (LYTS) 2008 Q2 法說會逐字稿

Good afternoon, and welcome to the LSI Industries second quarter earnings conference. Today's host will be Mr. Steven Brunker, Chief Information Officer, of LSI Industries. During the discussion, all participant lines will be muted. You will be allowed to ask questions at the end of the presentation. (OPERATOR INSTRUCTIONS) As a reminder, today's conference is being recorded.

And now, without further delay, I'll turn the call over to Mr. Brunker.

Thank you, and good afternoon everyone. Welcome to LSI Industries second quarter investors conference call. As with our previous calls, today's conference is supported by visuals that are available by connecting to the Internet and visiting our website which is www.lsi-industries.com and clicking on the investor relations tab at the lower left. If you're not in convenient access to an Internet terminal at this time, you may be able to access our visuals and the presentation by visiting that website at the conclusion of today's presentation. And now without further due, let me introduce Mr. Bob Ready, Chairman and Chief Executive Officer, of LSI Industries.

Excuse me, thanks Steve. Welcome everybody. I think the format today is pretty much set the way we have been doing it. I'm going to make a couple of remarks about the quarter. We're going to move right into Scott, who will be-- I'm sorry, we're going to move right into Ron Stowell, our Chief Financial Officer, who will go through briefly on some of the financials. And then we'd like to take a couple of minutes of your time and really bring you up to date on the new Crossover product and the direction that that product is starting to establish with other new products where we're going to be introducing shortly. Online with me, I have Scott Ready, the President of the Lighting group, Ron Stowell, the Chief Financial Officer, Fred Jalbout is in Montreal with our Technology group and David McCauley with our Graphics group.

I would like to start off by making a couple of comments regarding the quarter. I want to remind everybody that over the past few months, we have been very active in a couple of major programs, specifically the Dairy Queen rollout and the 7-Eleven conversion. As we have said in prior conferences and in many discussions, that those programs are very large and obviously very successful for LSI, and that our biggest concern as these types of programs rollout, what we would have next in queue in order to start filling in those holes. I want to reiterate the fact that the Company is very strong. The programs were tremendously successful. There are definitely other directions in place that we will not be in a position to get into discussions, but obviously the disappointment, as it related to the guidance that we're looking at is that we have really nothing that is really in place to -- to step -- or to develop the revenue change that's come about by the completion of these programs. However, there are a lot of very, very important and very strong things that are in place.

I am extremely optimistic about the position of the Company. We're probably in the best position that we've been in in years as it relates to a number of different items. On a long term basis, I think LSI is going to be extremely successful with some of its new product development. Certainly, some other programs that we feel confident that in the months to come will establish a direction in some of the other markets. And certainly last but not least, the continuation of a very strong and very active financial position with our balance sheet. And to move into that, I'm going to turn it over to Ron now, who will briefly go through some of the quick directions in our financials and then Ron will turn it back to me.

Good afternoon, everybody. I want to start off with a reference for you to our 10Ks and 10Qs for the published Safe Harbor Statement and I want to indicate today that we do not have any non--- material nonpublic information to be discussed. Net sales for the quarter, $84.1 million. That was a record for any second quarter in Company history. It came in as a 3% increase over the prior year. You can see that lighting segment sales were $48.8 million, essentially level with last year's second quarter. And the graphics segment, $35.3 million, nearly 8% up from the prior year. And graphically, you can see the kind of growth and so on that we've had by quarter over the years. The operating income for the second quarter, $7.7 million. That was a change from the prior year of about 7% lower than last year. And we have about -- just under $4 million of graphic segment net income, $3.7 million in lighting segment. And we can see here, and it holds true for the full year, that the graphics segment is continuing to run more profitable than the lighting, just due to the nature of the program business and the custom work that we do with graphics.

I will also mention that there will be some slides at the end of this presentation that I will not cover today, but they will be available with some additional information about the segment data and net sales and so on, as we have done in the past. Again, the growth from a graphic perspective of our operating income over the last couple of years. I want to point out that research and development is now running about 1% of net sales. For the half we've got about $1.7 million and that's up about 39% from the prior year. A lot of that is coming from the acquisition of SACO Technologies and the R&D effort that is involved there. Net income, first thing to point out is for the first half is $11.8 million or $0.53 per share. $11.8 million is a record for the Company for any first half that we've had. That was up about 12% from last year. For the quarter, we came in, as the press release indicated at $4.823 million or $0.22 per share and those figures are about down , down about 4% from the prior year.

Bob mentioned our balance sheet, and you can see two balance sheets here, June of '07 and December of '07. We have over $9 million of cash in the balance sheet. We've got strong working capital at $76.5 million. And our receivables and inventories are in good shape. Assets of about $218 million. Still no debt on the balance sheet. We've been essentially I think all-- yes, we have been debt free for the six month period and we've got shareholders equity of almost $180 million. Capital expenditures for the six month period running slightly ahead of last year at $2.543 million. A lot of that's coming in the second quarter. Cash dividend, there we declared $0.15 per share cash dividend. That will be paid February 12th and that $0.15 is an indicated annual rate of $0.60 per share. That's a 15% increase over the indicated annual rate from fiscal 2007. And our policy continues to be that we will pay between 50% and 70% of expected net income for the current fiscal year.

In our press release about two weeks ago, we did give guidance for fiscal 2008, and that guidance, as indicated here, was that we would expect our sales to be in the range of $322 million to $332 million, and diluted earnings per share in the range of $0.75 to $0.81 per share. Now, I'd like to introduce Scott Ready for some comments on the

Before you do, Ron, this is Bob again. I would like to make a couple of comments before Scott brings our folks up to date on what's going on with the Crossover. I would, again, like to remind our participants that in the markets that we serve that we have experienced and continue to experience in two very key markets, the petroleum and the automotive, definitely a very, very flat direction. I don't think we have to go into a great explanation of what's going on in those markets. I think they speak for themselves. I think that LSI over the past few years, recognizing that some of our core business, specifically the petroleum business, was definitely going through a change. And the efforts that we have made to expand our market opportunities in some of the other lighting markets, as well as what we've done with our graphics business I think really bodes well for what we've been doing in our strategic thinking. And I think it really lays out the format of a lot of great things to come.

The disappointment, of course, was the fact that we really felt that we would be up and running in the digital visual board, the advertising market sooner than we are now, and I think it is -- that most everybody realizes that in the early stages of March and April, we installed five large boards in the Memphis area. We were monitoring those and we started to see a deterioration of the red LED which is a failure of the lightship. It had nothing to do with the design or the, or the software or the electronics of the board. It was just one of those situations that happens in the lighting industry. We acknowledged the fact and actually told the customer what was going on. We upgraded those boards and I think where we are right now is a continuation of the test load, because we didn't have all of those boards completely upgraded until November. We're very confident with the product that's out there now, and we're extremely excited with some of the new designs that we're working on and David will get into that discussion with a lot more facts when we get into the Q&A.

The beginning of the real LED future started with the Crossover product. I'm sure most of you are aware of the fact that we actually had the opportunity to introduce that product in November at a major trade show. At that point, we knew going in that we did not have a UL label. We knew that there was a time element in securing that label. We estimated that it would be January before all of the testing would be done, and that that label would be achieved. In essence, we are actually working with a company called ETL which is really a higher standard of testing than even UL. It's well accepted in the industry and we just notified the market, just a week or two, that we did receive the ETL label so now we're getting ready to go into production.

This product was really the beginning of things to come and I've asked Scott this morning, before we get into the Q&A, to kind of walk you through so you can see where we're -- where we're going with this and the excitement that we have, because we really believe that this is the beginning of a lot of new things to come, that we believe will stimulate even our softer markets and certainly show a leadership role in some of our other markets. And with, that I'd like to turn it over to Scott. Thank you, good afternoon. Surely one of the most exciting developments in the second quarter was our ability to show the public, show the market and specifically the petroleum industry the Crossover product concept and it's something that we've spent a great deal of time developing through the expertise of our operation in Montreal, combined with our engineering knowledge and background in the lighting industry here in Cincinnati. It was, it was the belief that we could develop a product that could reach a tremendous amount of interest based on a number of different features in the product and really perform the platform or become the platform, I should say, for a number of other products that will then be released subsequently throughout the remainder of this fiscal year. We're very excited about not only the ETL certification that we received, because that really, to our knowledge, puts us ahead of anything else out in the market place today. To our knowledge, we're the only one with a product of this application that has certification now. And we believe that this is going to be tremendously important to it's acceptance in the market.

The overall marketing strategy is something that the entire LSI Industries Corporation is involved with, and this is exciting for me because of the contribution that we have now from all elements of the Company towards developing this critical first step and critical platform, if you will, that so much more will be built upon. The product itself is a product that is so different than anything the market has seen to date, that there's a great deal of education that must go along with it's introduction and we have worked very hard from that introduction point in November to today to, to begin that process of educating, as well as promoting this product. Specifically, I want to share with you a couple of slides that are part of that marketing effort. The introduction has been so successful, frankly, that we have a tremendous amount of interest, not only from this industry, but from other industries as well that will benefit from it's, from it's product concept.

The product itself has a tremendous advantage over current technology, in that the optics allow us to provide a superior visual clarity to the facility that we're illuminating that lasts more than 60,000 hours and maintains a higher level of light output than any other technology. The slide you see on the screen today dramatically demonstrates how we can bring attention in this particular application to the dispenser, and this is something very important to the industry.

It also has a tremendous appeal from an environmental sustainability perspective. And our marketing campaign, it's geared to appeal to not only the folks that have to pay the maintenance and the energy bills on this, but also the folks at the high level of corporations that we're working with that have a tremendous interest in participating in the movement that we see in this country towards more environmentally responsible products. LSI believes in this philosophy, not only in marketing, but in practice. We do that in our facilities and we're very excited to offer to the market the first Mercury-free product for this application that the market has seen. With recyclable components and a reduced amount of packaging that goes along with it. We're taking the product from not only an applications perspective, but an entire logistics perspective to the customer in a fashion that creates a tremendous amount of savings, both in freight, in packaging, all the way through the process.

The facility itself has a tremendous amount of marketing appeal, and in today's environment, where such a great deal of influence is coming from legislative bodies and zoning influences that in a great deal affect what can be built, and what can be permitted, we have a tremendous amount of lighting control with this system. As it applies to an energy formula, there's no other product out there that can do what this product can do, and save the customer anywhere from 60% to 80% of his current energy bill. Now, we believe this has a tremendous appeal to not only the end user, but the utility market and the power companies themselves and a number of governmental bodies that are taking responsibility to try to drive new levels of standard into this industry in order to reduce this country's demand for electricity. This marketing direction is being applied at the top level from governmental bodies, through CEOs of oil companies, all the way down to the individual owner. And we have really begun to blanket not only with the LSI brand, but the specific appeal that this product can have to that, to that need.

From a national account perspective, the product has gained a great deal of interest, and we're really excited about it's potential. Is a platform for further product adoption. We've had a number of inquiries for a product like this for a number of other applications, parking garages, sight lighting, roadway lighting, and this platform is going to be so important to build upon. And what's key for our investors, I think to understand, is that to a great degree the hard work is done. To a great degree, the work that we've had to put in to develop the actual driver technology, the circuit board technology and the manufacturing technology that brings this product together can now be replicated in a much more rapid fashion for other applications. Bob? Well as a matter of fact, before we get into Q&A Scott, we have taken a direction here in Cincinnati to take our engineering group and focus them on a number of products that we feel will bring us the potential of high volume. And you will see in the next 120 days more announcements of more products that we feel will really start to fit a specific market that has a great retrofit capability. And I think that's the key and understanding that the economics of whatever's going -- is happening in this country right now, when we know there's certainly a lot of -- there's a lot of concern about what is going to happen, but we also know that energy costs are going up. We also know that there is a great push to reduce energy. We know that there's a tremendous opportunity in the retrofit market and that's where we're putting a lot of our marketing emphasis. It's certainly will fit new applications or new projects that are under construction. But more importantly, it's the thousands and thousands of fixtures out there that we really believe now that we have an answer to tremendous energy reduction with tremendous increase in life, which is a win/win situation for everybody.

I know there are a lot of questions in reference to what's going on. We're focused on the future. The fact of the matter is that LSI is a very lumpy Company with these big rollout programs. I don't think that's going to change in the near future. I think there's no question in my mind, the strategic direction is to stay focused, build our Company's reputation. I think you'll hear from the other guys that our customer base is growing, which creates more opportunity for our diversification. The disappointment in what happened as it related to the stock is very obvious with me and the rest of my team. But it is something that we are not allowing to drive our focus away from the strategic direction that we believe is absolute for the strength of the Company, and will continue on. We will continue on with what we believe to have the greatest market potential as we move into the future. And with this, I would like to turn it over to Q&A. I will, I will filter those questions to the appropriate guys that are online now, as it relates to technology, graphics and certainly lighting. And Michelle, if you would, please, open up the lines and I'll take the first question.

(OPERATOR INSTRUCTIONS) First question in the queue comes from Jed Dorsheimer, and he's with Canaccord Adams.

Hi, this is actually Josh Baribeau for Jed. Couple questions. Could you give us an update on the Wal-Mart situation?

Sure, Scott, why don't you handle that because it's directly related to the lighting part of it. I would be happy to. As you may recall, the listeners that have followed us over the last several conference calls, LSI has been a very important supplier to Wal-Mart. We transitioned from a previous contract, in which we were supplying their indoor package to a majority of their stores to now a new contract, which allows us to supply the outdoor package to a far greater majority of their stores. The challenge for us has been that since around September, we began to get push back on deliveries from Wal-Mart, based on their slowdown of a construction schedule. And that has continued through the remainder of the second quarter, and we expect it to continue at that level now through the third quarter as well. We're certainly not losing any business to anyone. We're certainly expecting to see these stores come to LSI throughout fiscal '09, but at this point in time, Wal-Mart's construction schedule is simply slower than it was anticipated to be. And I'd like to add to the fact that we're not necessarily getting a tremendous amount of information, Josh, from Wal-Mart as far as what truly those schedule changes are about. If you could look at a good side of this, I think that we feel very comfortable in the fact that -- that the outdoor package is a utilization of a product, which is our number one area lighting. It's called the green brier, and that's the spec by Wal-Mart. I'm somewhat happy that I'm not necessarily high in the indoor, because the indoor package is really a Wal-Mart package, and really what I'm saying is that whatever their schedule is, we're not going to get stuck with inventory that would relate to a special package. This product that is being used for the Wal-Mart outdoor program, is utilized wildly through with many customers throughout the outdoor lighting market. So that's an area that it's a wait-and-see, but we have not had one single store cancel. It has been strictly a pushout, which has been certainly a disappointment as it relates to the revenue side. Hey Josh, one thing that I will add is from a positive looking perspective, we are involved with Wal-Mart on a number of different initiatives to develop some other products for their facilities, specifically, the facilities of the future, based on the LED technology that we're developing. So we are still very, very important supplier. I feel very comfortable with our relationship and just look forward to their renewal of their construction schedule.

Are we ready for the next question, sir?

Next question if we answered Josh's, yes.

Can you still hear me?

Yes, we can.

Okay. Okay. As the pipeline for the graphics business, do you anticipate making announcements as they come and can you give us maybe a timeframe for some of these catalysts?

David, please?

Well, yes, we will be releasing the announcements for major programs and we'll give you the details and the time at time of the announcement.

But nothing to report? You can't say, for instance, we expect one major announcement in six months or three months from now or something like that?

No, nothing -- nothing of that status that we're going to report.

I'd like to add to that because I think most who have followed LSI understand that there may be programs out there, and we may have been given direction, as we have in the past, but we also have learned, unfortunately the hard way, that not necessarily is the information maybe forthcoming from the customer in true reality a time standpoint. So we're going to be very cautious as it relates to any information as a starting time in relation to a program. We certainly do not want to put misinformation in the marketplace and in the national account arena, even though our customer intentions may be good to get a program started at a specific time, we have learned over the years that I don't think 95% of the time do they hit the actual start schedule that they intended to do. So we're going to be very cautious with what information we do put out there.

Okay. And are you still pursuing the UL certification of the Crossover or have you've given up on that and just settling on the ETL?

Go ahead, Scott. Actually we made a decision early on not to pursue UL. So it's-- I don't want to leave the impression that we're pursuing it and not able to get it. We simply made the decision to pursue ETL instead. We feel-- we're continuing to work with UL on a number of products but this particular one, the ETL timeline met our requirements.

Okay.

Josh, I think we are finding a very important change that appears to be coming into the lighting industry or maybe in other industries as related to UL. It has been very difficult working with UL in the past few years from a timing standpoint. They seem to be really pushed out as far as the testing process. And ETL, in our opinion, is even a stronger testing mechanism, and I think that this is an area that you'll see grow rather and be well accepted very quickly in the marketplace.

Okay. And finally from me, and I'll jump back in the queue. The-- did I hear you correctly when you said within 120 days you'll be announcing some new [inaudible] lighting products?

Yes, that is correct.

Okay. Great. Thank you.

Next question, please.

Yes, sir. The next question in the queue comes from James Stone.

Good afternoon, Bob!

Good, how are you?

I'm wondering, can you give us some sort of indication of how much visibility you do have from Wal-Mart?

Well, Jim, this is Scott. We received basically 90-day construction schedules from them. And every -- they're periodically renewed, and we have visibility to actual shipping schedules of anywhere from 30 to 60 days. So that's about the limit of our visibility.

And once they give you the 30 to 60 days, is there much pushout in it or is that usually pretty solid?

Well right now it seems to be settling. Earlier through the second quarter, there was a lot of change in that, but usually when you get to the 30, 60 days, that's pretty settled.

Okay. Can you bring us up to date on Clear Channel and what their plans are, and so forth?

I will let David and Fred handle that, if you would please. David, Fred?

Sure. Sure. As it relates to Clear Channel, along with any other major, the CBS and the Lamars of the world, we have a full court press on the top 60 and we market to all 600 in our category list for outdoor advertising, for the large billboards and the smaller billboards. And, again, full court press on that, but we have no announcement to make yet of sale of the boards. We are building an inventory of boards and we expect to have them sold before they're completed. That's our plan, and we feel that the market is growing -- not feel it, but know it. The statistics are out there. The number of boards in the country is increasing and the feedback and the revenue streams, everything's positive on them.

And I'd like to follow-up with that. One more comment, Jim, is that with the acquisition of SACO and the relationship that SACO had with Clear Channel, it was obvious that we would continue on with that relationship in getting to know those folks better and by-- but of course, having them get to know us. Now that we've been into this market direction for over a year, and we've spent a lot of time kind of reinventing, if that's the right word, the type of board that we're going to market, we feel it has some advantages over our competition and I'm not going to go into detail for obvious reasons. But with the mindset that we have now, is that we really have expanded our interest in certainly our direction to a much broader market position. It's not just one company now. As David pointed out, we've indicated who the top 60 are. We have a product. We have a manufacturing process in place. We feel that we have some advantages, and we have turned our direction now to a much larger market expansion.

Now, remember that all the years that LSI has been in business, we have been a market-driven Company, and we will continue to do that, be that Company, and we feel that we, that we really understand and we know where we're going, so that the principles and the strategic direction is now in place, and it's not -- it's not if, it's when this program starts to open up.

Okay. Can you comment also, it would seem in your written announcement today that you're pushing out expectations a little bit on the -- on revenue from the board. Is that conservatism or is something occurring in the channel that we might not be aware of?

No, I think you simply hit it. It's conservatism. I think that understanding where the economics of this country is going which is a lot of uncertainty right now, certainly looking at the marketing direction that is now in place, with all the efforts that are going on with the sales department, we're just now really starting to break into a, a, kind of a pace, the kind of pace that we feel, as David pointed out, we've got a program and our boards in production. We know where we're going to go with these boards, as it relates to efforts to sell them, to really establish LSI's image. Clear Channel is only one of those efforts, so I think it's the fact that we're in our third quarter, which is normally slower. It is absolutely a direction that we are working through this process and as I said, it's not if, it's when. And as this starts to break loose, we will certainly inform you, the market with what's going on.

And last, and then I'll get back in the queue, can you give us some feel of your strategy in the white LED market that you're going into, the expansion from Crossover. You're going into a market where others aren't or you're going into markets based on size? What's governing what your plans are in that area?

Well, James, I think we're pretty straight forward in that direction, and that is there are markets where the features that LED offers, certainly carry a great deal of value. We look at where that exists, where there's a volume opportunity to combine our manufacturing talents and our technical expertise and then lastly but not least, certainly, are areas that we have market reach into. We have the ability to penetrate those markets with our current sales force. So I think it's fair to say that the markets that we're pursuing beyond the petroleum market are going to be related to our core business. They're going to give us an opportunity to not only increase the opportunity for LED sales or solid state lighting sales, but also leverage our core product categories as part of that effort. And so we really see a dual benefit of market share expansion. Certainly a contribution from revenue from the solid state lighting product itself, but also leverage against the clear product line to continue to put positive results on the revenue side. Yes and I'd like to add to that, James, as well. I think that what has happened with the introduction of the Crossover to the service station market, which was done intentionally to -- to place this product in a very visible market, outdoor canopy lighting, with a tremendous market ownership that LSI has, it has now started to work itself into other markets related to the commercial side of our business. Our agents now -- our lighting agents, commercial lighting agents are beginning to understand and see more of what this product can do, as a base product.

Now, remember as we've said many times, this product, this market was selected to develop the core product that we knew that we could take the solid state development, the electronics and certainly the utilization of our production facility as it's set up on high volume to look at the retrofit market, where products of similar, similar operating characteristics, different size, maybe a different look will fit that particular market again as a market-driven Company. We pretty well know where that volume market is. It's been part of our strategic planning for over six years. As we were starting to learn the LED and the solid state market of where we would put our efforts, once there are certain characteristics of white LED in place. And I am very, very comfortable in saying that we've achieved those parameters, which now give us this tremendous opportunity to take our engineering assets and put a full court press in place to take the basic platform of the Crossover product and expand it into new products for markets that we've already -- that we have been involved with for a number of years. And, again, I'll remind you, it's primarily looking at retrofit, because of the tremendous energy savings and long life that this product brings into that -- that customer's application.

Thank you for the update.

Thank you. Next question, please.

The next question in the queue comes from Jim with Needham & Company.

Thank you. With respect to the, some of the newer LED lighting products, Scott, I believe you alluded to some adjacent markets like parking garage, sight lighting, roadway, are the new products that you're talking about are those all geared towards outdoor applications?

Yes, Jim it would be-- well, no, I shouldn't say that. I think -- I think the greatest volume retrofit opportunity for us right now is in the outdoor business. Although I say that with some degree of reservation because we have a number of products that are -- that are more than halfway through their development process that are geared towards indoor applications. So I guess I'd have to really be a little guarded on how I answer that. I think you're going to see more initial contributions from the revenue side coming from the outdoors -- or outdoor product stream, but we've got products coming down the pipeline in both applications.

So it's potentially some new products for indoor within the next couple of months?

Yes. 120 days is the target date, Jim, to put our arms around a number of products that we feel will be important to the launch of this technology in the key markets.

Okay. And on the -- the LED video screen business, I think you guys had talked about potentially building as many as 10 digital billboards. Is-- that's over the near term. Is that still the plan? I wonder if you could give any kind of timeline as to when you see that happening? And it sounds like, David, you feel fairly confident you can sell these before they're fully completed?

Right, well the numbers correct. That's how many we have in the queue now and we, again, expect to have those sold before they are ready for shipment. So -- did I answer your question?

Just on the timeline for manufacturing these, are you going to spread these out over the next --?

Well, it will be this fiscal year that those 10 would ship.

Got it. Okay. And you've also, Bob, I think mentioned recently that there's some potential in the entertainment market. Any update that you could provide us there as to activity for the LED displays in the entertainment market?

I'll let Fred or Jonathan handle that, please.

This is Fred. Yes, for the entertainment, we have this year finalized the design of a new see through, excuse me, see through product that video screen. We introduce it to the entertainment market and presently are working with three different projects who are very confident that we will be able to obtain at least of them in the near future. And at the same time we are presenting the new product also to the rental markets. Since the rental markets been using for the last seven years the equipment they have and is the time in 2008/2009 that they will be changing, they will get rid of their old model screen and they will start buying a new screen. And already we have different sizes of portable model screen being designed and ready to introduce it, and that's going to happen in the near, few next months.

And, Fred, the new -- this new see through display -- so, in other words, you feel like there's a good chance you can win business with, I guess, two touring artists?

Yes. Yes. Absolutely.

And that's in this current fiscal year?

Yes. Yes.

Okay. Finally last question, and this just relates to your overall guidance. If we exclude 7-Eleven and the Dairy Queen business from last year, it looks like your guidance for this year for revenues were somewhere around flat to up 4% to 5%, and my question is, just in light of the softness with some of your larger retail accounts and just the general concerns on the economy, how challenging do you think it is to get to that guidance?

Well, I tell you what, if I could look into the crystal ball, Jim and give you an accurate answer, I would. I think where we are right now is we're in a transition of an industry -- in a couple of industries that are definitely going through some major changes. And our guidance is definitely very conservative. I think that we're probably internally very optimistic about some of the things that we know are going on. I think it comes down to timing more than -- than anything else. As we look out into -- through '08 and into '09, and understanding that a lot of this technology, these products that we know are going to work, we're very excited about them because we know that in the long term we have an industry that is going to go through change and we think that these products will find their way into the market place.

But as Scott pointed out, and I think anybody that you certainly would, would talk to, there is a definite challenge in the market as it relates to communications and education to the customer base. And we're working on that now. And so in our guidance, and you're absolutely right, we're being extremely conservative because the last thing that we want to do is, is put out information that until we absolutely know that there are certain programs that are going to be forthcoming on the, on the graphics side, with what I know that Fred and his team have been working with on the entertainment side, we're giving you cautious guidance that these things are in the queue, and that we think that they're going to happen.

And if some of this breaks loose, and if you just take the Crossover itself from the petroleum side, with the marketing plan and we have been sending out some of that information to the institutions and to the analysts, as it relates how we're going to actually go to market with the direct mail and the interest that we want to create, not only at the customer level but at the political level. Once we get a feel for how this is going to be accepted, then our guidance can obviously be a lot stronger and a lot more direct than it is right now. I don't know that I answered it exactly the way you would like to hear it, but in all honesty, it's the best way I can answer that.

That's very helpful. Thanks, Bob.

Next question, please.

Yes, sir. The next question in the queue comes from Rick from Columbia Management.

Hi, Bob.

Hi, Rick.

Question. I'm going to drill down a little bit on this billboard thing. You've got 10 in the queue. Originally you said your capacity was 50, but you thought it could actually-- 50 a year, but you thought it could actually be easily adjusted to numbers like two times that. How long do you expect it to take you to make the 50 -- I'm sorry, the 10 that you have already put in orders for?

Well, I'd like to answer part of that and then I will let the guys on the marking side answer that. The first thing is, is that when we establish the direction of 50 units, we did not have in place the production system that we do have now, that being the -- that very, very wonderful investment that we made, that we call the [Salmonini]. That is a tremendous piece of equipment that we are certainly learning a lot more about. It's a capabilities. We selected 10 as a starting point, and it really has nothing to do with our production process. Actually, our production process can be a lot stronger than that. It really starts the development of the flow of materials in the visual panels, the LEDs themselves, as the -- as we're working with different suppliers in the industry to establish a procurement program and a delivery schedule. I think from a production standpoint, once we start getting direction in the market place and we start -- and we're working -- and I'll let the other guys kind of comment on the people that we're working with. Once we get these things going, and that flow starts, we can crank out a lot more than 50 to 100. Fred or David, do you --?

Yes, I'd like to add, Bob, I'd like to add also that Rick, don't forget about the non-billboard area. I mean, there's still stadium sports and general urban lifestyle centers like the Perkins Row. Those haven't been mentioned either. We have negotiations going on in all of those areas. So that also has to be figured out when you talk about 10. That's strictly 14 x 48 standard billboards. A lot of other avenues there too.

Okay but just to go back to the question, how long will it take you to make 10?

Well, we can turn two week out, once it's in the production cycle, once we have the parts.

Okay, but you're--

Does that answer your question?

How long will it take you to procure the parts? I mean, say you had a real order. You don't have a order today, but you say you had a real order, when would you tell the customer you could deliver that?

Well before we start answering questions on an open line like that, Rick, I want to caution you on the basis that we're being very conservative in the information that we're giving out, as far as what our production capabilities are. I think that as time goes on, we'll show you that the production schedules will be as the way they are based on the market penetration, and I would prefer not to get into exact numbers. We selected a number of 10 as a starting point. Obviously being very, very careful on balancing our inventory, starting the dialogue in the direction with the material folks, the vendors that we are going to need. Certainly the education of the people who are producing the boards, it's a point where we're going from a, from a dead start to a program that will go into a process that we can, that once we start cranking this thing up and the flow starts, we'll be a very formidable competitor. And I'd rather leave it at that.

Okay, so you can't even-- I mean there's obviously going to be a learning curve is that a six month process, or --?

The learning curve has already been established, based on how we have understood the production process from the five boards that we actually took the components from Montreal and went through that process here, and how it will be made. We redesigned it. We've set up the production process to the way LSI produces products, not the way SACO or for that matter, no matter what others do out there. It is a process based on our efficiency and our manufacturing and we're, very, very confident that what we have in place, and the capabilities is just a matter of execution now.

Okay. How do you plan on selling -- how are you reaching out to these-- this universe of 60 billboard companies that you talked to?

Through direct sales call, through our marketing programs and advertising programs and now again the trained sales force that are committed, 100% committed, not part time in this direct call. So I don't -- I don't see -- again, this 10 is not a challenge as far as I'm concerned.

I want to remind the participants that LSI over its 31-year history has been building its image and its capability as a market-driven Company. I don't profess to say we're the best there is out there, but I'll tell you right now as far as penetrating markets, understanding how to get product to market, LSI has done a great job over a 31-year history. We know what we're doing. We're not changing our strategy. We're taking people that we believe in and we're training those people that has been more or less accomplished. We have established the customer base. We're working on that process of marketing, as David has said through direct mail, advertising programs are in place now at conventions where we're bringing the product in. There are a number of different avenues that we're using to bring our product to market. The most important thing is is that we do have a large customer base who already knows who LSI is, not necessarily is it just the Lamars or the Clear Channel. We have a rep organization out there that we're going to utilize in a stronger level. Believe it or not, we believe that some of our stronger lighting agents could really participate in market penetration.

It's a product that is designed or are architecturally specified by designers who work on lighting projects in the same manner. There's a multitude of ways that we're going to bring this product to market. The first thing we had to do was understand the product. We had to have the production process in place. Certainly it would have been easier if the first five that were shipped to Clear Channel as a follow-up, we were all hoping for that, but that didn't happen because of the setback on the red LEDs. We didn't sit back and say, well, let's get through this. We put a strategy in place. It's in place and there's a lot of pressure on the entire Company to go out and get this job done. We know that that's what the markets looking for, but to be honest with you, that's what we're looking for as well. So it's an internal self-development driven factor.

Okay. Just to go back on the history, you went-- because you guys were designing from scratch, you got some customer Clear Channel feedback on exactly what they would like to see. You developed a board that matched that, those, that criteria, and I guess it's -- I scratch my head when I sit here today and you still don't have an order for something that was designed to be perfect for the customer, and yet other people are selling digital billboards that are competitors. So it's something -- it's something that --

And those guys have been in business a hell of a lot longer than we have. We had--if I was at Clear Channel or anybody else's shoes, a brand new product coming out on to the market, which by the way those five boards were not the brand new product. The design went into play once we got to know what these people were looking for, and the fact that the red LED failed, as a new Company, and looking that I would have done just exactly what Clear Channel did is prove to me that your board is the kind of board that we need in the market place. We, as you well know, the product that was used, which was a Korean product, a product that was not as good as the product that we are -- that we have there now, that's the [Nachia] product. That product was upgraded and didn't get fully into those boards until November. This is only the 23rd of January, the 24th of January. So we've got 60 days or so of trial period. I think that we have to get through that and certainly from all that I understand where we are today, versus the conversion, everything is working at 100%.

And I don't think that we can look at the fact that it's a failure as much as it is a testing period that we're going through in order to prove to the market or to the customer that our board will work. Now, it's not the new one, and that's what we're going to -- that's what we are now projecting to not only Clear Channel, but to the entire market place, that this is a new design, a new board, and we will be getting that out in front of every customer that we possibly can.

All right. I will let others ask. Thanks.

Thanks, Rick.

The next question in the queue comes from Glen.

Yes, good afternoon, everyone.

Hi, Glen.

Hi, Glen.

Just some questions on the Chevron program. Just a few questions here. How far along are you? What's the current rate per quarter? And do you see that accelerating at some point?

Yes, and I'll let David, with guidance David-- I'm not necessarily would be comfortable with numbers based on by quarter as it relates to the rollout but certainly fill Glen in on the activity of the program.

We'll talk about a percent. It is probably 25% to 35% towards completion and it has another, I'll guesstimate two and a half to three and a half years left.

Okay. Thank you.

And by the way, I'd like to add, it's been a real successful program.

Okay. Thank you. Just also, I saw that your-- the CNI lighting gains were fairly significant. Are those increases coming more from pre-exisitng relationships, are you signing up new customers as far as the indices go? Where are the majority of those gains coming from?

Glen, I think, this is Scott. I think that it really supports the statements that we've made in the past. And that is that a strong growth in that market is reliant upon the work that we have been putting in place, the building blocks that we've put in place over the last two years, specifically developing the agents that we now have online, training those agents, getting our products specified on projects that were being designed during that time frame and are now coming to fruition. So clearly the strategy is working. We very, very happy with where we are in that market, and we see no reason why that won't continue, as long as the economy will support it.

Okay.

And I think that I'd, Glen I'd like to also add to that, that not only have the guys been doing a great job in the outside market, or the rep market, but the Company has gone through in the last two or three years a major investment on the interior side. We've been working very hard to strengthen our customer service. Understanding that our Company was so structured around the niche markets and that being petroleum, fast food and automotive. It was a very select type market direction and the commercial industrial was really a lot different than the niche markets. And in order to compete with the four big giants that are out there, we've had an internal process going on for the last three or four years of getting an internal structure to support that growth.

You can't go out there and start developing and selling a lot of product if you don't have a great, strong customer service, a reaction capability to handle the reps inquiries, the layouts that are required now, in order to help the reps establish the type of lighting that goes on. It's a much more complicated process to internally structure your company to support the ability for that sales force. This has been ongoing now for four or five years. We've been hiring more regional managers for stronger penetration, and I think that all of those seeds now are developing into the market direction that we knew we could do, and that we knew over a period of time who start to develop into a stronger revenue. And we believe that that will continue to grow, and I think with the addition of some of the new products that will be forthcoming, especially on the LED, that we'll have some, obviously some very good opportunities for those agents out there, which will subsequently help the revenue on the lighting side.

Okay. Thank you very much.

Thank you. Next question, please.

Two more questions in the queue. And the next one comes from Peter and he is with Robert Baird.

It's John [inaudible]. But how are you guys?

John, how are you sir?

Pretty good. Just a question or two on Crossover and it kind of relates to how you were just talking about the billboards, I guess. I mean you were kind of saying that it takes a big customer awhile to kind of just get acquainted with the new product. And with you guys just having just been certified is this something where Chevron or someone like that is going to have to run up, get one or two installed at a specific gas station and then based on their experience over 90 days, that's when the real kind of fall on order for the entire thing would happen? Or is this something where given your pre-existing relationship, it could kind of be fast tracked through the program?

Well we certainly, I think we certainly have greater opportunity with a strong relationship and the kind of leadership position we have in that market, and that is different than certainly the digital advertising market. That leadership certainly earns us the right, I think, to -- rights not the right word, but earns us the opportunity to put in not individual light fixture prototypes but really more facility prototypes. So I don't envision us putting a single fixture on a canopy and having a customer evaluate that. I do foresee us having a customer put a couple of facilities in and taking a look at those over some period of time to determine the-- their satisfaction with that product. The market being the way that it is, and our position being as strong as it is in that market. We've had a very, very active last 60 days in terms of registering those prototypes, developing designs to install those prototypes. When I say design, not the picture design, but the actual fixture layout, how much fixtures and where they go and so forth. And we've got a pretty good backlog of prototype facilities that we'll be rolling out between now and the end of the fiscal year. Yes, I'd like to add to that as well. I think it falls on the heels of the most successful rollout concept ever in the lighting industry as it relates to the retrofit market, and it goes back to 1995, when we, LSI, introduced the Scottsdale product, which was a very vibrant part of LSI's growth in the '90s. And the success of that product really, really catapulted LSI into that leadership role where we have established a very strong feeling by our customer base that when LSI brings out a product, it's a product that will work and fits the market place. And I think with that reputation, certainly the market penetration over the years that we built our Company, the confidence that the customer has in the products that LSI puts out is absolute. I think that we'll have a shorter time frame as far as testing compared to the Scottsdale. But the big step, of course, is educating the customer to all the advantages of really what LED brings to the market.

Even though they're excited about LED, it's really kind of -- for me anyway, it's been kind of a real surprise that they don't know as much as you think they would know with all of this technology that's been thrown around in the industry for the last two or three years. But I can tell you this, from the visits that we're getting here in Cincinnati, and certainly the interest from our rep organization with their discussions, this is another product that, that market, I think is extremely interested in, and it is going to take sometime. It's not going to happen overnight, and I'm talking about months. And I'm not talking about years. But we still have a lot to do. We haven't even really shipped our very first order yet. So we have a few months of that break-in period, but I -- I've got to believe with -- you can enter an industry as big as this industry is with 60% to 80% energy reduction, with the kind of programs the utilities are now offering as rebates, in order to incentivize people to reduce their energy, and looking at the maintenance curve on this product, once the market understands what the value is, I think it's just a matter of time when you'll see this kind of a retrofit market fall into place, just as it did 10 or 12 years ago, with the Scottsdale.

Okay. And thank you for that. And switching gears, just, if you look at your profile -- and I mean you are in a very advantageous not being levered right now and just kind of building up cash on the balance sheet. Is there a, kind of a strategic acquisition or bolt-on or something? I think you've mentioned that in the past as kind of being something you would consider. I mean is there something there that potentially could happen in the near term?

Yes, and I'm not going to go into detail. But personally my goal, my job has been to develop what that interest would be. We understand some of the areas that we need to improve our product offering. We are very, very busy on the LED side, but there's still a core business out there that we're paying a hell of a lot of attention to. We're not forsaking that core business, just in order to get LED out there. It's a balance, and I think that from a strategic development process, we certainly have our focus. We know where we are going. We know who we want.

And I can tell you, as I have said before, we have a dialogue going on, where we believe in the best interests of the Company that -- where it'll go, I can't tell you now. But there's no question that from my personal standpoint, is that an acquisition is definitely needed in order to put us in a stronger position in areas that we've already worked hard to position ourselves and now it's a matter of crossing the t's and dotting the i's, which would be acquisitions, product development, marketing direction, to bring this Company into a stronger future.

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

Thank you.

We have one more question in the queue and it comes from James Stone with PSK Advisors.

Good afternoon again, gentlemen. You keep talking about the advantages of the LEDs versus the old system. Was that incandescent or fluorescent?

James, the old system was HID metal alloy.

Okay. How do you see LED coming in competitively against fluorescents on the energy saving?

Well, the -- from a fluorescent application standpoint, we're really not talking about fluorescent applications with respect to the Crossover. But products that are in the pipeline will compete with fluorescent favorably. I think James, it depends on the market. Let's just take one step as a couple of examples. And I certainly understand that there is definitely a lot of interest, but also concern in reference to how LED will replace certain types of light sources. First of all, LED does -- it will not replace all light sources. Fluorescent, for example, in the tunnel application in New York was fluorescent. LED, for the product we developed for the New York Port Authority, it's on test., it's still on test. We're still waiting for direction from New York. That is a great one-for-one replacement on fluorescent. On an office fixture where T5 and T8 now is a very efficient product? No. But certainly from an application as it relates to Scott said to HID, where based on- whether it be a 320 or 400-watt, depending on the application, you have to look at the maintenance factor, the cost of maintenance as it relates to where the expense is and there's a lot of parts to this formula, that as you well know have to be plugged in to be sure that this is a cost effective way.

What I think is important is that LED white light is really on the horizon and the lumen efficiency is growing rapidly and the electronics to drive it, and the ability for the electronics to adjust it that we can't get in HID. By that I mean as these light sources come closer to end of life, it's adjusted for their efficiency for example in the Crossover, after 10,000 hours of operation-- or 10 years of operation, is still at 70% efficiency. There is just a lot of different parts of this puzzle that are still not in place yet, but like any light source -- and I've been in this business 44 long years, and I have watched light sources develop and create new light sources and new opportunities. I think that LED brings us that first step in many steps to come as it relates to the future of the lighting industry.

And then lastly, can you give us some indication of what you see in the competitive situation and who you worry about the most?

James, I worry about everybody. So I don't know that I specifically can pick one particular company over another. I think that my job here is to keep my people focused on what we do. Certainly understand what competition is doing, so that we understand where the marker is going. I think we have great relationships with vendors who certainly keep us in the loop as it relates to technology and what's going on in the industry. I think we've got a great group of engineers who really understand where we're going and certainly our sales force has an ear to the market place. So in essence, I look at everybody and where they're going.

Who is the next LSI? 31 years ago, this little Company with only four people started in a garage. I don't know that anybody thought that we would be where we are today. We certainly understand what the bigger companies are doing. They're public companies. There's information out there. We're very much aware, as a whole of what they're doing. But whose the next LSI? I have no idea. It's our job to be sure that we stay ahead in that leadership role in that strategic direction and that's the focus. And that's what I'm paid for is to keep this Company in a direction that's growing and will continue to grow. I think we all understand or hopefully understand that, that the lumpiness of LSI based on the experience of how we've developed our strategic direction is part of our lifestyle.

I'm sorry. Oh, I hope that we're still on. But on that basis, I really feel that our Company is almost in a process of -- of like a step-by-step growth process. We have these tremendous programs. We have some very big steps and then we have a leveling out period. A lot of things happened as a result of that. They are always not negative. We know what happens in the stock market when we don't have that consistency building on those big programs. But we learn a lot. We gain new customers. We gain new opportunities, and we grow off of those opportunities with those customers. And I am very happy with the position that this Company is in. I'm not happy with the, with the overall price of the stock, but I'm certainly happy about the structure of the Company, the strategic direction, the investments that we've made. And as we look forward, if the economy stays in some kind of a level direction, LSI is going to be in a great position, because we've got so many different things going on that eventually, if not all of them, some of them are going to hit and they're going to definitely add to the growth of the Company.

I think from a timing standpoint, I think we've answered all the questions. I want to thank you all for your time. I want to thank you for your questions, and as I said to our folks, tomorrow is another day, and I think that some of the things that we got going are going to show that LSI will be a continued growth Company, and I'm not one bit concerned about the strength of the Company. I think we've got everything going in the right direction. And with that I'd like to thank you and have a great day. Thank you, Michelle.

Thank you, sir. And this concludes today's conference. You may disconnect your phone line.