LSI Industries Inc (LYTS) 2008 Q4 法說會逐字稿

Good afternoon, and welcome to the LSI Industries fourth quarter fiscal year conference call. Today's host will be Steve. During the discussion, all participants will be muted. (OPERATOR INSTRUCTIONS) Now without further delay, I will turn your call over to [Steve Bunker].

Good afternoon, everyone, and welcome. As with our previous conference calls, supporting materials for today's presentation will be available -- are available on the web by visiting the LSI Industries website at www.lsi-industries.com and clicking on the investor relations tab at the lower left. If you're not within convenient access of the internet right now, you can access these supporting materials later after 5:00 p.m. this afternoon as well as a replay of today's conference call. Now it's my pleasure to introduce Bob Ready, the Chairman and Chief Executive Officer of LSI Industries.

Thanks, Steve. Good afternoon, everybody. I'd like to take a moment to introduce our group. Scott Ready, the President of the Lighting Group is with me as Ron Stowell, our Chief Financial Officer. And Fred Jalbout, who is in Montreal, is on line and David McCauley in North Canton. And all our folks are here to answer any questions that you may have. After kind of a quick overview of what's going on, we thought it would be interesting to show you especially with the new solid state LED products, of what's kind of in the queue and what's coming and Scott will address that with a lot more detail.

To start off, obviously the news that has come out in the fourth quarter was very disappointing. It is something that I think we were all somewhat prepared for, as we started to see gasoline go through the $3 then into the $4 mark and certainly the effect that it's had throughout our retail economy. And as I'm sure most of you are aware of the fact and we have said many, many times, the graphics business is a product -- project-driven business, whereas our lighting business is a product-driven business and as you will hear from Scott and see some of the things that are going on, our lighting business is quite solid. It is right on plan. We are extremely pleased with where we are and certainly with some of the things that are coming in the very, very near future. As David will share with you, the disappointment is is that our retail customers are basically on a "hold and see" basis. Certainly, the dialogue continues, but we really just don't have anything strong that we can really talk about as it relates to a major roll-out program. There was a little bit of good news that happened last week with the announcement of CVS buying Long's. David will address that in his discussion with you as well.

I think my press release kind of said it all. I kind of went through that in my comments in the press release about the direction of the Company. What are we going to do about it? Obviously, we recognize the fact that primarily our graphics market has changed and I can assure you and all of our shareholders that it is in our commitment that we are working on a structure within our organizational as well as business plan to adjust whatever that really requires us to do, to meet whatever the market conditions are truly going to be. There's certainly a lot of opportunity still out there, with all the things that we've done and I think from my perspective, to have a quarter like we've had was extremely disappointing, coming off a record year and all the things that we had worked on to get in place in order to continue on what we felt could be a very strong future. We certainly haven't given up that feeling. Our lighting business, as I said, is well on its way with these new products.

To continue on with the direction, as most of you know, we are truly a market-driven Company and our retail environment or those markets have changed accordingly, because I think that in all essence, the consumer has certainly lost some confidence and certainly his and her buying power has been affected by the change in the pricing of food and the pricing of energy. As we look into our continuation of our plan, we will stay focused on our lighting and our graphics. We feel we have all the opportunity. We certainly have all the people in place and certainly have all the capability to meet any kind of objective that may be thrown at us by any customer and we're going to keep that in that direction. Our solid state technology is doing just what we had hoped it would do. As a matter of fact, in the last week or two, it's even growing in greater leaps and bounds. It's working the way we hoped it would be when we structured our marketing objective and that was to start with the petroleum industry, getting the Crossover product line into the petroleum canopy applications and from there, it is beginning to grow in other segments of other markets, which Scott will go into.

The fact of the matter is is that we're going to stay focused with our business plan and I have the confidence that our lighting business will continue to grow. I think David's group recognizes the challenge and those folks brought us to a record year last year. I know they haven't given up hope and they will continue to work their hearts out in order to offset some of the softness in the retail economy. With that, I'd like to turn it over to Scott and let him quickly kind of give you an overview and we thought that we would be -- would find his presentation interesting with some of the things that are going on, especially with some of the products that are either now in the marketplace or soon to be introduced to the marketplace. Scott? Thank you. Welcome, everyone. As we have mentioned in earlier conversations, the lighting strategy is relatively simple. And it's one that is built upon our belief and our desire to grow market share in new markets as well as maintain the market share that we've had in existing markets.

We're operating in a tough environment, as is all lighting opportunity or lighting companies, I think in the marketplace today. And I think we've proven that with the successful implementation of this strategy, we can do just what we set out to do, and that is grow in those areas that are going to allow growth because of the opportunities that exist and maintain market share in those areas where we have had such a strong basis in the years past. We have layered on top of that, obviously, our LED solid state lighting product development and that is having a major opportunity to, frankly, accelerate and leverage against that base strategy, new opportunities that are creating a brand identity and, frankly, an opportunity base for LSI that grows almost daily. This applies in all markets. And it applies to even the retail business, which is one of the more challenging marketplaces today.

We, at the very beginning, worked very hard to develop a product that would be quickly successful and one that would give us the opportunity to have volume opportunities in both the new construction, but most importantly, the retrofit market. We built a marketing strategy that was developed on a concept called seeing is believing and it was our contention that once the marketplace got an opportunity to begin to experience solid state lighting on a broad base, that we would quickly have opportunities develop beyond that initial base and that's really what is happening. We're happy to announce that there's been strong acceptance of the product in the petroleum market. The opportunity to present 84% savings, for instance, in a number of different locations, there's a slide here which shows you a before and after Shell location, in which that customer did experience just that, a tremendous amount of savings in energy consumption to the degree that the project is quickly paying for itself.

But to take that and now roll that into a broader base of opportunities, again, in that petroleum industry on a retrofit basis, clearly, the marketplace in the petroleum market is challenged. The opportunity for these guys, the particular dealers and retailers that are managing facilities today, as the major oils move out of that responsibility on the retail segment, is tough. While the gas prices are high, their margin on their business on a day-to-day basis is a challenge. But to see the kind of reception that we're seeing gives us a great deal of confidence that the value is being recognized and that is something that as we go through and do more and more work in this marketplace, we believe will quickly translate into other market opportunities. The slide that you see here is another facility that actually represents the move now from prototyping into program roll-outs. The facility that you see here is a prototype, but what's exciting about it, we're moving into that next phase when a customer is so happy with what we've done initially that they are ready to begin to make this a standard process and upgrade in new construction on all their facilities. Scott, I'd like to point out for the viewers that have the ability to see this slide, if you look at the before and then the upgrade, look at the pump, which is really the merchandising part of a petroleum application as it relates to the -- under the canopy. Look at the tremendous improvement on the lighting. And what's really kind of neat about this slide is the one above is certainly our product of before, which is a Scottsdale product. Most of you know the success of that product. But look at what the outstanding lighting, the control around the canopy and the brightness on the pump. This is what the seeing is believing is beginning to really make its impact to our customer.

A year ago, this concept was developed and it really was in a concept stage. I think that's what we've been able to accomplish in the last really nine months since we've gotten into production. We've moved from a concept to a real solution. It works. It's proven. And it's beginning to be adopted in more than just the prototype phase. And that's really what's going to generate some volume opportunity for us in the future. Scott, how long have these been out? We went production, recall, for even our prototypes were in the March time frame. The kind of exposure that we've been able to develop really in about six short months, it fits right along the plan that we've had, both in terms of market identity, market acceptance, as well as the volume targets that we have set. We're doing this -- again, I can't repeat this enough, on a retrofit basis more importantly than on a new construction basis. New construction will continue to be challenged. But as such, dollars are being spent in maintaining and upgrading existing facilities and we can do it in a number of ways. The initial Crossover product release in March that I just spoke of, essentially has been expanded now to a larger variety of product versions, if you will. So we produced and introduced into the market a variety of different ways to allow the customer to get the same solution, regardless of the kind of facility or canopy he has.

But what's really exciting, I think, as we mentioned, the kind of press that we're starting to get and the kind of identity we're starting to develop for LSI Industries in the overall solid state lighting marketplace. And that's going to generate and leverage what we've done so far with our technology development into more opportunities that then again present a better footprint, a better position, a better development platform, for not only future solid state lighting products but also carrying forward the traditional fluorescent products. This is where some of our continued growth in the lighting market is going to come from. We're going to package, if you will, the offering as LSI in a way that we have not been able to do in the past prior to the introduction of solid state lighting. We've gotten some good press here recently. Those that can see the slide presentation, particular site in Houston carrying the Chevron brand, has a lot of LSI product on it, not just the Crossover product. But you can see the kind of attention that it's getting in that kind of press, paper release specifically with a great deal of support from the customers that are enjoying the advantages of the product and the technology.

What's really exciting is what we do beyond canopies now. And again, based on the platform that we've developed going into other non-petroleum applications, building soffits, we have actually not represented in this photograph but a new roll-out program developed now in the financial market place. Bank drive-throughs, again, using similar overhang type installation applications, but all, again, based on that original platform that has been extended now through a variety of other products that have been released into the marketplace. We continue to pursue some of the original concepts that were developed. I'm sure you've heard me say many times that there's market opportunities out there beyond what LSI's traditionally been involved with. In this particular case bridge lighting is a good example. We're very, very close I think to securing some long-term business there. The city of New York has publicly published now a bid on that and we'll close here shortly. I can't say that we're going to get it but I can say that we're in a very, very strong position as a competitor for that opportunity.

I may add, that slide actually shows a little bit more than just the fact of the bridge application, but take a look at -- again, for those folks that can look at the slide, look at the tremendous improvement in efficiency that has come in such a short period of time. If you look at the -- on the slide on the left, May 2007, and then you shift over to the right in March in 2008, and you see the tremendous advancement that's been made in this LED technology. And of course, this is what's really driving us as it relates to the markets that were going after with this high retrofit volume capability that as the efficiencies of the LEDs and the drivers are forthcoming, it is really building more value and a better ROI for our customer. Thanks, Bob. Here's a photograph that actually does show the bank application, if you will. But it's again, representative of taking that basic platform, that basic technology and using it in a number of different ways so that we generate the cost advantage and the production advantage of volume production but apply ourselves -- and frankly, in this particular case insert our self into opportunities that we had not participated in in the past. Not only are we participating in this particular financial institution's upgrade program for their exterior overhang, but by virtue of the fact that we had an LED solution for their exterior package, we were also invited to participate in the interior program as well. Other non-petroleum LED applications, display case lighting. We have a current roll-out program with a major retailer, involved in retrofitting their display case lighting. We're currently involved in a number of different opportunities where cooler lighting will become a factor. And last but not least, again, on a similar platform, have developed a surface mount, pendant mount version of the initial Crossover fixture that works well in parking garages and had a number different opportunities now that we're prototyping there. This all represents product variations that are currently in production, currently released, and frankly currently adding to the first quarter volume for 2009.

We continue to have products that are close to release, specific products for inground application, architectural application and indoor applications and retail application. One of the most exciting products we're very close to release now is an area like street light package. This is something that the market is very hungry for. There are a number of opportunities that have been discussed in the press. Cities, municipal projects, as well as government projects and we'll be in a position to participate in that in the next 60 days. So it's a very, very bright future from that perspective, no pun intended. We're very excited about what we see domestically, but even more so internationally. All of these products have international applications. All of the products fit well in the international market.

The light weight, the ease of shipment, the small, compact packages, frankly the electrical characteristics are much easier to apply in the international market than previous technologies. And based on that, I'm going to ask Fred to make a comment about where he is, not only on the entertainment side of the business but also in our international opportunities. Fred.

Hi, everybody. Want to start with the entertainment business. A few months ago we have introduced a new product in the video LED screen, called the V light and the V bright. And we had our first client in the U.S. who is a company that we work with since long time ago. They bought a good quantity of this product. It's a unique product, first time being introduced to entertainment. And they put it on different show. It's going very, very well. I will just give a brief description, what is it and what's unique about it. We have double -- a pixel that's a very smart pixel. That pixel itself contains the LED, the driver and the lodging behind it, connected to each other through cabling system and flexible cable and the cable itself, it's a structure.

So what it actually gives the opportunity to the designer by creating any shape or size of a screen with the free lighting from the back so they can be seen through. They can make an animation behind it. They can make any shape. They can use it on the floor. They can use it on the wall. They can cover any object with it. So it has a lot of advantages and it took big success. It's just the beginning of it. And we believe that has a huge future for the entertainment market. And not only to the entertainment. It could be used as we have discussed with many consulting in putting it on a building, in the city, many different applications. So it's going to be a big thing for LSI.

From the other side, we've been working on the overseas market. We made already two trips and as we mentioned last time, because of the economy in North America, we think that we should look about opportunities somewhere else. And because of the high value of the euro and the low U.S. dollar, this means our cost is lower for them. We have a bigger chance to enter the market in Europe and the Middle East area. We made already two trips and we're going another one next week. Our strategy is that we meet with all -- most of the consulting engineers that they work on large lighting and video screen project and we introduce LSI. They are convinced that LSI is the right company to work with for the future. We know that we are in early stage right now. We are in the development of this market and after the two visits and meeting with the different consulting engineers and designers, we find out there is a lot of application in the Middle East, in Saudi Arabia, in Dubai, even in Europe, in many places, in regard to the video screen, to high resolution digital video screen, that they will be used the same as the billboard in North America.

We met with one of the largest companies in France for that. We introduced it. We present the product. In addition, we present the lighting with it and in U.K. next week we have different meetings we set up with different retailers to introduce not only the video screen, to introduce the lighting, the replacement of existing traditional lighting, turning stores to LED. Opportunity is there. The market is there. They believe in LSI a lot because the way they see it that LSI is the company that is developing the product, manufacturing the product and it will be supplying the product. The strategy is not to go directly. In parallel, we are trying to double our network of distribution channels using OEM companies that we will be sending the equipment to them. They will install it. They will take care of the installation and the service after the sale.

Since those countries they are far away from us, so to save cost on us doing this part of the job, the best way we find out is that to deal indirectly with OEMs that they have good credibility and good reputation with their client. We see huge future for Europe and Middle East. And like I say, it's still in the early stage but the result is very, very positive. I'll turn it back to you, Bob.

Thank you, Fred. I think that if I can add to that before David has a few comments, about two months ago as we were watching the price of gasoline go up here, and certainly worldwide, but here in the North American market, we had some great concerns that with the completion of those two major projects last year, that we would feel this pressure that unfortunately has come about on the retail segment of our business plan. And as Fred pointed out, in looking at the international market, we've had the opportunity to have some visitors that have come from Europe to Cincinnati to visit us and look at our technology and I believe that they recognize that truly from a retrofit capability, LSI was on the cutting edge of the type of products that they could use because we were already in the prototype stage with many of these, as you have seen, some of them just a few minutes ago.

So the timing couldn't be better. It's going to take a little bit of work, for sure. We have to build our own image overseas. Fred and Jonathan from Montreal have a lot of contacts and this is one way that we will put the pressure on ourselves to try to offset the softness in the economy as it relates to our graphics business. However, with all that said, certainly other things have been moving and moving rather well. David is online and will address those now, starting with our sports package and discussing for a few moments about the billboard market. David, if you would pick it up from there, I would appreciate it.

Sure will, Bob. Good afternoon, everyone. On the screen now is a sports facility, this particular one was done a number of years ago by SACO before the LSI purchase. It's the Minnesota Timberwolves. At the end of next earnings call, our next earnings call in October, I'll replace this slide with a major Big Ten university, indoor program that is more spectacular than the one you see on the screen. We're also working with another Big Ten school on their outdoor football stadium. That one will take place, again, this quarter, just like -- well, like both Big Ten programs will. The next slide we'll show you is a combination of high school and soccer field. The one high school's in Texas there. There's a lot of high schools that will be able to afford or incorporate a sign like the one in the top right-hand corner of your screen. This is not unusual for the trickle down, started with the pros, went to the minor leagues and now we'll work through minor college and high school formats. The one on the bottom left portion of your screen is a soccer field right next to one of the Olympic stadiums in Canada. This, again, was just -- both of these were just recently installed and will be billed in this current quarter, our first quarter this year.

Next slide, if you would, thank you, again, is a reminder of other type programs that we're pursuing beyond the sports. Right now, the sports is hot for us. It helps fill the void where we weren't getting enough participation in the billboard market. We're very confident that we'll be a player in this billboard market. We just haven't gotten any orders into the queue like we expected at this time. We are in continued talk with major people on the billboard market and do expect to enter there. It's just a matter of time. We'll break through and become a player there. In our next slide, excuse me, I'm on a different program than the group here. Again, you probably may have seen this one before but it's a spectacular at an urban lifestyle center. Many of these are being developed throughout the country, although the pace is slowing right now because of the economy. But we expect to many of these to have video boards for both advertising and entertainment and, again, this is a trend that's going to continue.

Let's bounce off of the LED business, the board business, and go on to the next slide, which shows quick service restaurants. Although we're really feeling the pinch in retail and because of the economy and the stall or the hold that many vendors have placed on their programs and thinking, we're not seeing it near as much in the restaurant business. As you know, it's a very fragmented business. Three or four players don't make up the game like they do in office supplies or top discounters. The restaurant business, being very fragmented it's a real war out there. We still have a lot of opportunities. Two of our customers are making major conceptual drawings on their facilities that we're participating in right now. Whether those start tomorrow or a year from now, we don't know, but we are excited that two of the majors are doing that. And then we have another company that we're working with that's an upstart that, again, they're going to open a few facilities and if this thing takes off, they'll roll them out. So we stay encouraged in that industry.

Also, another exciting part about the quick service restaurants, that we have a lot of graphic business in, we're now introducing our lighting package to them. Because energy has become their battle cry. Whether it be on their menu boards, in their grill area, just any conservation, heating, cooling, but lighting obviously gets hit hard with the challenges. And with our line of LSI LED products, gives us a great opportunity to present to them environmental friendly, energy conservative, green initiatives, they answer all their questions there. We've been asked to present in many of them. We're expanding again beyond the graphics and showing them the whole package. Okay.

The next slide on your screen is a Stop & Shop. And tomorrow, Stop & Shop unveils their new logo. You can see this logo if you go to the internet today. They have released a lot of information. But tonight we'll complete our 580 stops that we made throughout their chain, that's how many stores Stop & Shop and Giant have together, on the east coast involving 12 states. We visited those 10 stores and this was kind of a surprise order because this was kept as a well-guarded secret, this remodel program they have and you can see the stores look very refreshing and new and we expect to do more beyond just this initial attack with these stores. Again, this is something that we'll be able to bill in our first quarter here.

With that -- one other thing I did want to mention today. You might have seen during the Olympic events a smart vision SACO LSI screen at the Raven stadium. We upgraded that screen. They had their first pro home football game this year, exhibition game, but after the event they continued to let the people in the stadium view live from China the feed of Michael Phelps getting the eighth medal in the Olympics. And again, that was on that large screen that we provided a number of years ago for them. With that, Bob, I'll turn it back over to you and we'll go from there.

Thanks, David, for the overview and we'll be opening up to the group some Q&A here just a moment. I think Ron Stowell would like to just touch base with some of the financials. Obviously, a lot of that was published in today's press release and Ron, if you would quickly go through that, I would appreciate it from a timing standpoint.

Thanks, Bob. We have our normal Safe Harbor statement and really we have no material non-public information that will be discussed today. Certainly, a big topic for the quarter was the impairment charges. In the first slide, and I'm only presenting a few slides, available in this file later tonight as Steve talked will be the normal financial information that you've seen from us. I'm only going to touch a few of those items here. The goodwill impairment was all in the graphics segment, as you can see. We had some intangible assets and some trade names were in the lighting segment and we had some intangible assets in the graphics segment. So as we've said, it was $28.9 million total, $1.8 million in tangibles, $27.1 million, goodwill. I had to put this balance sheet data in, again, to show you that after this goodwill impairment, we still have a very strong balance sheet. We've got cash. We've got good work, solid working capital. In fact, the working capital is up from what it was last year.

Remember that these impairment charges were a non-cash charge. We have no debt as of 6/30. We have no debt as of today. And we've been debt-free for about 18 months or so. Yes, our shareholders' equity went down, but it was with that non-cash impairment charge that brought the equity down to the $150 million mark. Still very strong as we indicated. The two cash dividend actions that were taken by the Board yesterday, the Board declared a $0.15 quarterly cash dividend that will be payable in about two weeks from today on the ninth. The other action was right in line with our dividend policy of initiating or indicating, rather, that next year's annual dividend, annual dividend will be $0.20 per share. And again, that policy remained the same that we would intend to pay between 50 and 70% of our current year net income. The guidance that we gave actually last week and we reiterated yesterday for fiscal '09, is net sales between $290 million and $310 million, diluted earnings per share of between $0.29 and $0.36. Thanks, Bob. That's what I have.

My last comment, and that last slide is without any acquisition or any kind of a reimaging program. We took a very conservative approach on our guidance because of the unknown in the economy. We feel very comfortable with our guidance at this point. And as a matter of fact, being conservative, if a few things start to happen, obviously as we start rolling out more information you'll be aware of it. I did want to address the release as it related to this acquisition. Over the years, in our lighting business as we've been growing our commercial industrial direction, we have recognized that there were certain product offerings that we did not have in our line. We knew we needed them in our line. And as we have grown in recognition and market share, it's been my hope and certainly my intent over the last year-and-a-half to find a company that we felt would fit the culture and fill the, as we called it, a bolt-on acquisition.

There may be some questions in reference to why not a company with LED. The fact of the matter is is the product line that we're looking at -- and I'm not at liberty to really go into detail yet. I don't quite want to tip my hand until this acquisition is finalized. But the letter of intent has been signed and Ron is now in the process of doing the due diligence. But I can assure you this. The company is a very fine company. It really fits LSI's culture, that bolt-on capability will enhance our entire lighting package. It will certainly strengthen our position in the CNI marketplace. It has all the great potential to utilize the technology that we are now developing as a Company in their product offering in the months to come. It is an important part of the long-term strategy to strengthen our company, to meet the objectives of the commercial industrial market. It also has great opportunity to expand in our image business as it relates to our retail.

So it is a company that as I said, we had a focus on for over a year-and-a-half. And I'm very pleased to say that the folks that -- it's a privately owned company, have recognized the importance of becoming part of LSI and during the next four to six weeks we hope to accomplish the due diligence and announce who that company is. With that, I would like to turn it over to Q&A. I hope that this little presentation kind of gave you an overview of what's to come. It's an important part of the future of this Company. And we wanted to be sure that you started to see these things that we have been working on for the past few months in the prototype process now starting to take root. And with that, I'd like to open up to Q&A, please.

(OPERATOR INSTRUCTIONS). The first question comes from Glen Wortman. Go ahead, Glen.

Good afternoon, everyone.

Hi, Glen.

Hello. In the fourth quarter your graphic sales were about $17 million. Do you think the number could fall off much further? Do you expect to see sequential growth? What are you guys thinking.

David, would you like to field that one?

Certainly it could fall lower. Do I expect it to? No. How's the saying go? I think we've hit bottom here. With the interest and growth that we're seeing in our video/LED screens and recently announced we're encouraged, although we don't have an order, the CVS acquisition of Long and the interest I said about the restaurant, there's enough positive signs there to exceed that number. Not impossible not to, if we were not to get the CVS/Long order. That wouldn't help matters. But again, as Bob said, that was not forecast in our projection numbers. So we're very encouraged here.

The other thing I would like to add, Glen, to that, is that in the forecast that we're giving you, we really looked hard at our best analysis of what's going on in the retail segment and it's almost back to the basics with smaller orders, rather than big roll-out programs. And as I'm reinforcing my comment a few moments ago, we're very comfortable that our forecasts are right on target.

Okay. Can you actually break out the revenue guidance between the graphics and the lighting?

Well, if it stays true to form, we've been running around 60 to 65% lighting and about 35 to 40% graphics. Understanding that the mix is somewhat going to be adjusted based on the efforts and the results of the digital boards and some of the things that are going on in the fast food industry, like the LCD that David related to.

Okay. And then just finally, in the fourth quarter your sales were higher but the margins narrowed a bit. I assume a lot of that had to do with a shift to a higher percentage of lighting versus graphics. But can you highlight any other causes for the decrease in profitability?

I think part of that is certainly a reaction to the price increases in materials and specifically in some of our contracts that we have with some of our larger national accounts, specifically on the lighting side, there's always a tendency to be kind of following that and I think that's where that pressure -- you started to see that. Certainly the product mix has had a lot to do with it as well. But I think it's more the material side. We have initiated a price increase. To the depth of where that will hold yet, it's a little early to tell. Most of our effort of course has been to start to roll out these solid state, which we will have higher margins and it's still a little early to tell. I don't want people to get too anxious. As Scott said, we started rolling this stuff out in March.

We really didn't get some of the stuff in the field and get it installed until the last 60 to 90 days and now these things are starting to show the promises and certainly the capabilities that we told the customer it would. And in the last week we've had in some cases we've had -- we just had -- recently received $100,000 order on some Crossovers. We received a large order on the -- what I call the jewelry case light. The linear display. These are the encouraging things. We sure know we've got our work cut out to offset some of the softness in the retail environment and we've made a lot of adjustments in our work model as we're going toward that and hopefully depending on things as forecasted we'll start to see some improvements on the bottom line.

This is Ron. I don't want to minimize that shift of sales, the weighting, with graphics being a little bit lower this quarter. They're traditionally a higher margin business than our lighting and when they're down, when they're lower, we really feel that. Compounding that were some inventory adjustments that were necessary up in Montreal and that really -- that flows up through the graphics segment as well.

Okay. Thank you very much.

Thanks, Glen.

Your next question comes from Robert Kosowsky. Go ahead, Robert.

Good afternoon.

Good afternoon.

I was just wondering on the impairment charge, how much of the $28 million impairment charge was directly attributable to SACO and which specific SACO businesses got hit?

Well, we'll call it the LED business, because we have some of the digital boards that the revenue stream is in our traditional graphics business and so, all told, there was about $21 million of that -- sorry, of the goodwill from the SACO acquisition was about $14 million from SACO. There was additional impairment in our traditional graphics business as well with the state of the retail markets that we serve being uncertain and low and holding back.

No impairment at all on the technology side, though.

Bob is absolutely right. When you look at the technology itself, how we drive the LEDs, the electronics behind them, the firmware, the software, the -- as I say, the technology itself, that is as good and better than it's been. It's what we're deploying in the LED products that we're selling and LED boards. There's absolutely no impairment in the actual technology itself. This is an actuarial, economic, academic kind of a calculation and our base technology is very strong.

Okay. So $14 million of the SACO goodwill was impaired?

Correct.

Okay. And how has this experience with the goodwill impairment kind of impacted your attitudes towards the current negotiations with the proposed acquisition?

Right now, everything is right on target. I think that the benefit of bringing the two companies together is very, very obvious to both companies and the present owners I -- I can't speak for them, obviously, but from our dialogue I don't think this has any effect on it whatsoever. This is an impairment charge that's really academic and the structure of the Company, the strength of the Company, the balance sheet, it's certainly its position in the marketplace as it relates to those folks, I think is as strong today as it was before all this happened.

Okay. And can you give a little color on the increase in SG&A? At least sequentially?

I'm not sure I have all the data here necessary for that. I just don't. You're going to have to contact me, if you would, later.

Okay. Thank you very much and good luck.

Thank you. Are there any other questions?

The next question comes from Jed Dorsheimer.

This is actually [Josh Farrabo], sorry. I didn't see the K yet, obviously. Could you give me the number, what the cash was at the end of the quarter, please?

The number that I have for you, Josh, is cash flow from operating activities for the year, not for the quarter, for the year.

Okay.

Was about $12.7 million.

Okay. But you don't have ending cash?

Ending cash, sure, we've got $7 million approximately on the balance sheet.

Okay. And I noticed that of course the dividend, if you add all the -- if you add the payments together for this year, was higher than your cash earnings this year. I think it was $0.53 and you're paying a total of $0.60. Do you anticipate borrowing for that dividend with the acquisition coming down the line? Or will that be paid from cash?

No, the dividend that will be paid in a couple of weeks will be paid from cash that's on the balance sheet.

Okay. Can you provide any more color on the situation with Wal-Mart?

(LAUGHTER) Yes, I think Scott can handle that one, but from my perspective that has been certainly one of our more challenging direction, as probably you are aware of the fact, it started a number of months ago when they started putting a hold on their new construction projects, but Scott they're just beginning now to release -- There's two things really happening. Not only have they gone through an initial slowdown, if you will, on their new construction, but they're also re-evaluating their store design and I think they've selected this point in time to move that forward a little more aggressively because they've pulled back on some of the capital expense side of it. What we're looking at today is a slight acceleration, if you will, I'll categorize it that way. We're seeing more activity. We're seeing more store releases. We're seeing more definite dates that would indicate product is required. The way Wal-Mart works, that product is required several months in advance of the new store opening. So there's still a lot of variable to pay attention to or to consider. We're getting indications that they will need more material this year than they needed last year. Could that change? Kind of, as David said, absolutely, it could change. It is a fundamental characteristic of the economy I think today.

Our expectation is that we'll do a little bit better and as I mentioned, our expectation is that some of the changes that they are looking at for their overall package, specifically their exterior package, of which we are the major player in, will also have an impact and potentially a positive impact as they move more towards solid state lighting. And I would like to add to that. I think it's fair to say that certainly Wal-Mart is one of our more challenging customers. Unfortunately, we don't get a lot of information from these folks. And it really is difficult when you look forward to trying to build a forecast or a guidance with a customer as big as they are, with the least amount of information that they really allow us to have. So it's very difficult to give you more information. From my perspective and looking at the account, they're very important to us. They're not the biggest account as far as just the overall direction. We haven't allowed them to do that. But it's our hope that with this LED technology and the fact that next month we are going to bring out an exterior area light that we feel should be interesting to them, hopefully we'll stimulate their energy reduction feelings to look at this fixture as a retrofit opportunity. That's our hope for sure.

Okay. Great. A bit more on the acquisition. I know you're obviously withholding a lot of details. But can you give us a little bit of color on when you expect it to be accretive or how you plan on funding the acquisition?

Simply accretive immediately, as far as the funding is concerned, it would be a combination of stock and cash.

So you don't anticipate tapping the $57 million credit facility?

Yes. We will utilize the remaining cash that's on the balance sheet, and we will then borrow from our domestic line of credit.

Okay. That's it for me. I'll pass it on. Thanks.

Thank you.

And the next question comes from Jim Ricchiuti. Go ahead, Jim.

Thank you. Bob, I was wondering if you've had any discussions yet with Wal-Mart on this new exterior area light that you're planning to introduce? Are they aware of it? Have you had any presentations to them?

Jim, we have not necessarily had a great deal of conversation with anybody on this area light. It is something that we have developed that we believe is going to be very unique in the marketplace, without going into a lot of detail on this conversation. We are scheduled and Scott, help me on this, to -- in September to try to bring this technology to Wal-Mart. Why don't you fill Jim -- Jim, it's -- I think we're well aware of what competition is out there, Wal-Mart knows we're developing the product. We haven't given a formal presentation to them yet. We've got a few things that we want to verify through testing before we do that. But this is a product that's expected to be available to the market in general in the October time frame and we'll be presenting it to Wal-Mart as well as other customers through September. This technology that we're talking about and we're being a little bit mysterious with it, in the fact that with all of the information and the knowledge that we have now with solid state and what's going on with our competitors, we have been working on something that we believe is really going to be unique to this product or this application of this product. And obviously, Wal-Mart would be one of the first customers that we would bring this technology to.

It has the similar -- the same, similar marketing approach that we used with the Crossover on the petroleum business. It was our intent, as you know, to develop a product that really had a statement, that could be seen by many people and hit that market in the direction that we took and it seems to be that that strategy is working very, very well. The area light is recognizing how LEDs are working and the fact that the efficiencies of LED are improving almost monthly has given us the strong feeling that the type of technology -- it goes beyond the solid state and the utilization of the white LED. It's a more complex design that has more efficiency and more control, which area lighting requires. And this is the kind of lighting that we believe our big, national accounts that use our type of area lighting are going to be looking for. Remember, that we started this company 32 years ago as primarily an outdoor lighting company. We are probably recognized in the lighting industry as the major, if not one of the major players in outdoor lighting. That was the whole concept of the design process, so that when we announced an outdoor area light, it was going to be a lot different and hopefully we feel a lot better than anything anybody else has even thought about. We'll see when we roll it out in about four weeks.

In Q4, I wonder if you'd be able to give us a percent of your lighting segment revenues that was represented by solid state lighting. It would be nice if we could start to track this progress on a quarterly basis.

Well, without getting too detailed, we really, as you can appreciate, don't like to put that kind of information out. Let me put it in a more direct way. It is the type of lighting that is really still in the prototype process. But it's growing. And I think when we feel comfortable in acknowledging what that is, so that we're not tipping our hand too much to our competition, it's still in the primarily early stages. The whole key behind this was -- and if you recall our strategy is to allocate a certain percentage of products by market, by agent so that we didn't allow one customer or one market to tie all that production up and we allocated by agent and gave them the opportunity, each agent, to go out there and get their prototype started. And I think it's safe to say, from a utilization standpoint, that every major brand in the oil industry has now got a prototype of LSI Crossover product. Is that right, Scott? That's pretty close. I think, Jim, we've always said that the first challenge is to get them to do one. The second challenge is to get them to move from a prototype experience to a commitment to do continual installations in the product. And then really, at that point, I think, which is still a little ways down the road, we'll start looking at it as a percentage of our overall lighting business. Right now we really are in that second stage and that was a tremendous challenge. It's easy to get somebody to try one. The real challenge is to get them to say, okay, I like it well enough, I'm going to do two, three, four, five, six, work it into their program and that's the phase that we're in now with the Crossover and we'll be entering really on an early stage in the sight lighting, in the pole-mounted lighting we'll be entering that prototype stage with our new introductions this fall. So that's kind of how we're looking at it Jim. I don't think it's really ready to really track as a percentage of our overall lighting business yet. But we certainly are tracking the number of units out there as well as the dollar value.

From my perspective, as the marketing plan has been rolled out, it's doing exactly what we had planned. Actually, it's exceeding what we had planned, based on the fact that we're now getting press and I'm talking -- and we'll be releasing some other press releases that are forthcoming of customers that are now trying it and really seeing the benefit and I think, as the costs start to come down, and we are seeing the cost of LED technology starting to drop. Now, the metal costs have gone up. We all know that. So to some degree it's offset a little bit. But as the volume continues to grow, we feel very, very comfortable that we'll see these costs come down and the return on investment number that our customers are looking for are well within their reach. Certainly starting in parts of this country where the cost per kilowatt hour are greater, for example, the Northeast had an estimate of about $0.14. These are the areas, obviously, where we probably will see the quickest conversion program starting because the benefit is so obvious and our structure is to look at an ROI of two to three years, which is well within the grasp of these folks. And it's a recognized area that they're going to be looking at. We certainly will share with you in the oncoming months, as these programs -- especially if a specific, large customer starts a roll-out program, then we'll be comfortable to let you know who that is.

Okay. Fair enough. And one question for David, if I may. David the Stop & Shop program, is this -- can you give us some sense -- right now is this just a handful of stores? I wasn't quite sure.

No, it's all 580 that have had a refresh. Opening day's tomorrow on this. They'll do an unveiling of their logo. Then they'll revisit stores and do major changes, but not in a roll-out, like they did this quick hit on the 580, which is a pretty nice program.

Okay. Just in terms of what you're contributing to this, you're hoping to get business as they move forward with this rebranding in the store?

Yes, in addition to what we've already done -- again, that was kind of a run-through to get them spruced up for this announcement of their new logo. But then the stores are going to continue to be upgraded. As their press release says today to the newspapers and will be released on their website tomorrow. They actually talk the numbers. I'm going to let the paper do the talking tomorrow.

And David, we're comfortable talking about this, because if I recall, the Boston Herald a week ago announced this change-over and obviously we were comfortable with the fact, sharing it with you folks, that this program was in essence rolled out by LSI.

Right. And so you see additional business potential with Stop & Shop over the next couple of quarters. Would you characterize it as meaningful to the graphics business?

Yes. That's a good adjective to use.

Thanks, Jim.

The next question comes from [Lenny Brecken].

First question is relating to the, again, the acquisition. Just help me understand the motivation of why you thought right now was the time to buy it. And am I correct to assume, when you say converted product, some of the product line of the company you may be acquiring is going to be quickly converted to LEDs or solid state or is it somewhere down the line?

Let me address that, if I may. First of all, in recognizing our position in the marketplace as truly a lighting company and understanding that our reps have a need of a package, which is involved -- involves a lot of different types of products, the strength of those reps really depends on the strength of those products they put forth. We, in our commitment to growth, have taken that industry and related to those agents and have been working hard at specifically providing them with products that they sell today. The LED technology, solid state, is definitely here to stay. It is a long-term process. There will be a need for commodity type lighting fixtures, let's call of the past. But they truly are being marketed and sold today. This company that we have been looking at or the type of company that we have been looking at, regardless of the situation with the graphics, our lighting business is critical to the growth of this Company. And selecting the right company, has the right image, the right product offering, the right acceptance in the marketplace. This company brings us that capability. With that said, we have been spending as a much larger company and with our investment in SACO, have all of this technology available to us that we have been developing different types of applications and how it would fit. And my comment about their product offering, they definitely have, like all companies do, have a certain product offering that will be adaptable to LED technology. And that is the direction that we will apply sooner than later.

Okay. So that's a gradual process, it's not going to happen instantaneous. The second question in the graphics business, so did I hear you, I think it was -- I don't know who said it, it was Ron or someone else, that going forward the assumption is that the graphics business will contribute a higher percentage versus what it contributed this quarter, i.e. , business should pick

I think what was said is that historically, the graphics business has always contributed a higher margin direction than the lighting business.

I meant percentage of --

there should be no reason to believe that that will not continue to do so.

I meant percentage of rev.

If I may finish. It is up to us to structure our business model around the conditions of the market and that's what we're in the process of doing now. What that really truly means is that we have over the years built a graphics capability that nobody else can touch in our ability to roll out massive programs. And a great example is what happened just a year ago, when we had our record year and that being Dairy Queen and the 7-Eleven program. With all that said, we as a Company have spent a great deal of time and effort in building our image in that ability and there's no reason to believe that this economy is going to sit like this for many, many, many years. I think it's really important to realize and we've been through some of this type of slowdown before, is that when you go through this, that when it starts to show some kinds of improvement, the people out there are going to be going nuts to try to get programs going quickly and get them rolled out faster in order to bring that competitive edge into play.

That has been the historic education of this Company. We've adjusted our investments, our direction, to handle this and there's no reason to believe that that's not going to happen again and when that does happen, maintaining our market share and growing it as we can, certainly the ability to continue on and working with all of those massive customers, sized customers, with menu boards, with graphic roll-outs, with new visual boards now, with LCD boards. These are all expansions that have happened in the last three or four years. That new technology will be part of their growth plan. We want to be in a position to not only supply the product but be able to handle the project. And I think that -- and I think it would be a terrible mistake for this Company to walk away from that because we've had a couple of tough quarters with an environment that we know is directly related to that softness.

All right. So as a percentage of revenue, you really didn't make a specific comment then. Unless I misinterpreted what you said earlier. The last question is pertaining to a question earlier regarding solid state lighting, maybe as a percentage of business plan. I'm looking at your business and I'm noticing obviously your graphics is down. You've taken that into account in your forecast. But it seems like the solid state lighting business is -- like you said, is poised to grow. So I'm wondering what mix it may be in looking out in the next fiscal year, if you want to take a stab at that.

I don't know that I can really give you a number. Let me give you kind of a strategy. The whole purpose of our LED solid state process started with the ability to understand what solid state really meant. And how do you design lighting fixtures to meet the criteria that we believe are going to be looked at and needed by our customer base. And in that strategy, we spent 24 months or a little bit longer with all the technology and the education that we get -- that we gain from the acquisition of SACO and started developing that first platform. The Crossover is nothing more than a platform of many things to come and that was the process that we felt was the right thing to do. But it also gave us an opportunity to display this technology in a very visible manner in one of the largest markets, certainly in the world, and that's service station lighting with as many canopies and canopy lights that are out there that are definitely not energy efficient today. As a result of that, with the development of the platform, we looked at other markets that had the ability from a retrofit and high volume. And if you really look at the product and the markets that Scott discussed, service stations with 160,000 or so canopies, we estimate 1.8 million canopy fixtures.

You've got the fast food industry with hundreds of thousands of stores that all have soffits and most of them have some kind of a soffit light hanging, which is an outdoor product. Then you move into the parking garages. Hundreds and thousands of parking garages. All with product that requires a lot of maintenance. And last but not least, as we start to expand, the ability of the banking industry, when you look at the amount of drive-throughs and ATMs. All of these markets and specifically niche and our approach as a niche market driven Company, has taken our platform and adapted it with tremendous volume potential. The next step was to seed those markets with the prototypes. Seeing is believing. We've done that. Where it's going to go is now up to our agents, the marketing strategy and the pricing based on volume. It's too early to tell. We're in our 26th month. Which is a very short period of time to approach the volume potential. But it is all there and now it's execution and I can assure you that certainly our agents are motivated and very simply the price is built into the motivation. If you were selling a canopy fixture yesterday for $200, and you were getting as an example, let's say, 5% commission and tomorrow you have a $550 fixture and a 5% commission, where are you going to go? And it's strictly mathematics where that incentive is already in place. Now that we've got this technology, now it's time to execute the markets and that's what we're doing.

All right. But understanding investor's point of view is that the dividend cut, the earnings expectation cut, I mean, the promise has always been here for a year and-a-half, but I think Management's actions aren't matching up with the enormity or the size of the market and the stage at which we're at. I understand the economy is not helping. I understand you can't predict customers. Just understand our point of view is that action is -- in terms of confidence in the payout of the dividend and such, is a much more convincing argument to us than the concept of selling a solid state lighting product. That's all.

I understand that. And if I may answer that, as a CEO and a major shareholder of this Company, I think I understand that very, very well.

Okay. Thank you, guys.

Thank you.

The next question comes from Shawn Boyd. Go ahead, Shawn.

Hi, thank you for taking the question. Just want to get a little follow-up here. On the operating income, did you guys provide a breakdown earlier in terms of operating income by segment, both pre and post the impairment charges?

We did not provide it earlier. That will be in the information that is attached to this presentation file. But it will not give any indication as to pre operating income or pre impairment I think is what you wanted. You can do the math, because there's a goodwill impairment slide by segment. There's a segment that has operating income. But I will give you that for the full year. In lighting we had about nine -- I'm sorry, about $9.6 million of operating income. In graphics -- mind you, that's where the heaviest impairment charge went, was an operating loss of $18.7 million. Totaling $9.1 million loss that we reported.

Okay. That's the reported loss after the impairment?

Yes.

For the full year. Okay. Got it. And now -- and the reason I'm asking the question, is I'm sitting here trying to look into '09. You've given us very clear -- a very clear range on revenues and earnings. And that gives us a rough feel on operating income, if we kind of make a couple of assumptions and back into that. Can you give us what your assumed -- just a range, perhaps, on what your assumed margins are for the graphics and the lighting that allows you to get to that guidance that you're providing?

We don't have that information available. That's never really been a part of our guidance that we've issued. And our guidance really is a top line and the bottom line earnings per share at this point. Obviously, the mix of graphics, which is going to have a couple tough comparable quarters, because of the large programs we were working on in the first and second quarters of fiscal '08, that's going to have an impact on the overall margins and the overall profitability in fiscal '09.

Okay. One quick one. Seasonality, within the graphics business, is there any kind of seasonality there that we need to be thinking about as we move into the next year?

David, I'll let you handle that. If I could add, certainly with the retail environment coming into the Christmas season has always been a period of starting in, what, mid-November, David?

Right.

And through December, as certainly one part of that cyclical direction.

Yes, in fact, you hit the nail on the head. It's even sneaking back to really November 1st, right after the Halloween holiday, it seems like Christmas comes out. It's hard to get into the stores. And then if -- during remodel phase and new construction slows down in the northern states during the winter season. But it's not as drastic as one would think, the seasonality.

Okay.

As I look at the graphics business and I certainly appreciate what you folks are going through to try to understand what's happening here. I can only go from being in this business for a long time and I've been through a couple of these, not quite as dramatic as we are seeing here with this gasoline price, but certainly as an experience. And when a company like ours that's very strong and well-managed as a total group of people, we're going to come out of this thing probably a better company because of all the changes and the adjustments that you make when your market changes. But more importantly is our customer base goes through some dramatic changes and because we have invested so heavily in so many different areas that we have -- I call them triggers that we have available to us. And you never know, especially in the retail segment, what brand, whether it be a Nike or it be a drugstore or it be greeting cards, whatever it may be, is that when these folks all of a sudden start to see a little better light, how quickly they react and how quickly they want you to respond to it. And those are the areas that we will protect, because we have become a company that is well-recognized to handle these kinds of programs. It is my direction to look at this Company and look at where we have these opportunities and leverage our size and leverage our relationships to work into those directions so that we can offset some of that softness. That's what we've done before. We've been through it. We've come out of it successfully.

Certainly last but not least, the balance sheet will continue to be in our sights. This acquisition is an accretive acquisition. It's an acquisition that strengthens our market position for all of our products, not just a single product line. It should open us into other horizons as it relates to other markets with products that we don't have. And certainly as we've talked about LED and we'll continue to, these are the things that will continue to emphasize the strength and the direction of the Company. We did well when we were running $300 million and we will go back to that strategy and we will bring this Company into that level and then we'll go on. And we'll move on. This has been a setback but it hasn't been anything but a setback and it's one that we couldn't control, based on the environment and what happened to it. However, we're ready for it and we'll turn it around.

Okay. I appreciate that additional color. That's also a great segue into my last question here. The SG&A is as I think a couple callers earlier alluded to, is up on a year-over-year basis by, I don't know, $5 million here. I guess $6 million for the full year. As we go into next year, given that you -- you want to be ready for the turnaround when that does occur, does that mean that we should assume the SG&A is up again into next year or do you have cost cutting programs under way that you think you can bring that down?

Well, I think everything is volume related and certainly product mix. I think what we've done -- and let me break it down by segment. From a lighting standpoint we've invested in more automation over the past year that really will help, as the volume grows, to become more efficient in the production process. And on the graphics side, equally so, we've invested in some very, very sophisticated printing equipment that gives it the ability to handle any kind of volume that we have. From an installation standpoint, which is a critical part of the success of these roll-out programs, we have the people, have the management skills. It's a matter of just hiring subcontractors and managing them from an installation standpoint.

So I guess as I look at it, from the standpoint of looking at how we're going to improve the profitability, it's a combination of many things that we're very good at doing and we'll continue to do so. We certainly have a commitment on our R&D as it relates to the type of expense that we have involved with the R&D expense. And a lot of that information or much of that information can be -- actually tonight or when you have some time on our webcast you can pick up that additional information. We didn't push publish all of that today because of time. We felt that you folks would have a lot more questions to ask and so we cut that part of it short.

You'll find the R&D expense -- and I hesitated to answer the question earlier because I didn't have solid numbers in front of me, but the R&D expense is up about $1.6 million year-over-year. And that's -- we can look north to Montreal, to our LED initiatives. We've really put that into gear, to come out with the products that we are coming out with. And another large amount of the increase is in our marketing sales effort. Now, recognize that we report our sales commissions there on our lighting products. And with increases in lighting, there's going to be more commissions with a program to try to go into a soft market, to try to introduce new products, like the Crossover. We've tended to use a little higher commission on that.

If I might add, it's very important for us in a soft market to grow market share. This is our opportunity to do so and our commitment to R&D and our commitment to growing market share as a percentage of commission or a direct result of commission expense is a very deliberate strategy that is working and it's an investment in the future that we feel is very important.

Got it. That's it for me. Thank you.

Thank you.

The next question comes from --

I think that -- if there are no other questions, I want to thank you for your time. As always, we're available to answer other questions that you may have. As a wrap-up, certainly we are not happy with the results. We understand what has happened in the marketplace. I think that we have shared with you a tremendous amount of information that relates to the direction that we're taking the Company and it is our goal and certainly our job to take on this adversity in the economy and turn it into a direction that will improve the bottom line and get our stock back and win back the confidence of Wall Street.

These are not fun times when you run into a direction like we have, but to be quite honest with you, this Company is probably in the best shape it's ever been. We've done a lot of work in getting certain things ready. It's a shame that the economy kind of tanked the way it did. But certainly from my perspective, this is a challenge and for those who know me, I love a good challenge and we've got a good a challenge ahead of us. The rest of my staff recognizes that as well and we're going to work and try to turn this thing into a much positive approach, more positive and when the economy does turn around, we're going to be in a better position to do a lot more things that we've ever been in a position to do before when a downturn has come about. So with that, I want to thank you for your time. And give us a call if you have any other further questions. Thank you.

And that concludes today's conference call. Thank you.