LSI Industries Inc (LYTS) 2009 Q2 法說會逐字稿

Good morning and welcome to the LSI Industries second-quarter earnings conference call. Today's presenter will be Mr. Bob Ready. During the discussion all participants will be muted. (Operator Instructions). Now without further delay I will turn your call over to Mr. Bob Ready.

Thank you. Good morning, everybody. As you're probably aware of the fact, we really don't have any slides this morning. We felt that the conference call this morning should be really more of a Q&A. But as always, there's a lot of information on our webpage and the financial results are there as well, later today, so that you guys can -- people can follow up on that. And as always, we'll be available as well.

I'd like -- I think somebody just jumped on board there. We were having some international technology problems with Fred out of Canada. Fred, are you on board?

That was his line with the hold music. One moment.

Okay. Well anyway, as an opening, my comments are obviously very, very straightforward as it relates to the economy. It's obviously a very, very tough time out there. No surprises to anybody. LSI is in a very, very straightforward direction. We've really battened down the hatches, so to speak, and really structuring our business plan around the expected volume as we understand it today.

The automotive industry, as we all know, is in rather dire straits. The trade show that we have coming up in February will give us more indication of how the dealers are really faring, but there's no question that for the time being we'll see a very, very slowed down direction in the automotive industry.

The retail economy, it speaks for itself based on the results of Christmas. As we all know, Christmas season is the area that the retailers depend on most for their year. And as we all know, it was a very, very tough year for the retailers.

Our national account business, all of our primary customers are more or less on a wait-and-see attitude. It is just tough out there. The Commercial/Industrial business continues to shrink, that's certainly an indication by the announcement of some of our competitors and the directions that they are taking.

For LSI, my guidance to our management team and to the rest of our employees is to really focus in two areas. The two areas obviously are the continuation of keeping our balance sheet strong; this is a commandment here, has been for 32 years. Everybody understands that that is our goal. We can accomplish it in many ways and certainly the efforts that are in place now to align our company to the existing markets and the volume of those markets is in place.

The second part of the direction is obviously to do the best we can to improve the bottom line and we're doing it in a manner that will not cut the heart out of this company. It's my personal opinion, based on history, that with our large customer base, and certainly the efforts that we have put forth in the years to build that relationship, build that confidence with our large customers at LSI is the kind of company that can handle the best and the diverse -- the diversity that comes into an economy like we're experiencing now. And we've proven that many times before and we'll prove that to them again.

What's more interesting I think about some of this is that we're beginning to see some of our competitors fall to the wayside. Just a couple of weeks ago one of our larger competitors in the graphics business filed Chapter 7. Those are indications of, I'm sure, still what's to come.

And from our perspective I think it does open opportunity, even more so than during our best years, of increasing our market share and developing a direction with our customer base like they've never seen before -- the ability to supply lighting and graphics and influence that with technology and, last but not least, our ability to install.

It is important to note that, even as tough as the market is out there, there is a lot of dialogue going on with some of our larger customers. I'm not in a position to share by name or even by market because things would obviously be put together two and two, but it's encouraging that people are now starting to look at things and look at things a little bit differently.

And if history proves itself as it has in the past, when this starts to come back this pent up need will break out and it's so important that LSI maintains its capability, its financial stability to react to those needs and get our company back on a strong growth direction as we were prior to this.

It's also important to remember that we're in the last quarter now of all those major rollout programs that were successful in the latter part of '07 and '08. That will be behind us. And as we start to move forward that ability to match that obviously will be behind us.

What we're going to do this morning is I'm going to turn the meaning over to Scott, Scott Ready is the President of our Lighting Graphics Group -- excuse me, our Lighting Group. And then we'll talk to David and if we can find Fred we'll even have -- Fred's on board, good -- we'll have Fred bring you up-to-date on what we're doing on the international plane.

So with that I'd like to turn it over to Scott and, if you would, Scott, kind of bring the folks up to date on where we are with all of our LED technology.

Sure, good morning. Second quarter was really not a great surprise in any area for us. We continue to see the shrinkage not only in volume opportunity translate into some tougher pricing in margin pictures. We absorbed really I think the remaining part of the inventory that carried a little higher material cost through the second quarter and we look forward to some hopefully favorable conditions as we move into the third quarter on that front.

What's really exciting about where we are today with everything that we have in place is the degree of acceptance we're seeing in our solid-state lighting. Our day-to-day business will continue to be fought in the trenches, as it always has been, and again, we see no reason to believe that we won't see a very similar level of volume at this point in time and a similar level of margin.

However, the improving environment for LED lighting, both improving from a customer perspective as well as from an LSI perspective, given the work that we've done to develop and translate the original platform that was introduced a year ago is really very, very encouraging right now. We have not only finished designs, we are in manufacturing now on several new products, product models.

We've talked about those in the last quarter in terms of introducing to you the direction that we were going and the types of markets we were going to pursue. Happy to report that those products are now in manufacturer status. We have introduced a number of these products to a great range of folks over the last 30 days in face-to-face meetings all over North America, not only in the United States but in Canada as well and are preparing to do that overseas.

The response that we're getting to our designs, to our technology initiatives has been very, very encouraging. It's exciting to see the platform that we develop for the petroleum industry -- which does continue to grow, our volume there continues to move forward -- is being recognized as a successful platform, a credible platform as we move into these other market applications. And frankly from a design perspective and a patent perspective, we're doing things that nobody else in the marketplace is doing right now.

So that is tremendously encouraging. Obviously it's going to take some time for that volume to grow to the point that it's significant on a quarter-to-quarter basis. But I'm happy to report that things are moving forward well and as expected. Bob?

I'd like to follow before I turn it over to David. I think one of the things that's important to remember as far as we're moving forward is the fact that -- and again, Scott reminded you, but I'm going to remind you again -- is that about a year and a half ago when we really started to talk about the LED and solid-state technology, the direction was to seed the United States or the North American market with as many canopy retrofits, taking off the old and putting on the new technology.

It has now given us an opportunity where we have thousands of fixtures hanging on canopy decks in all kind of climate environments and and nobody else has, to my knowledge has that ability to disclose that kind of information. It was the attempt to really establish, as we call this, a platform. It's an education for ourselves before we started to move out these new products. Now that we have a tremendous success and we're beginning to build more history and the reliability of the product and the marketing team that was in place, seeing is believing is working.

What we didn't do and have held in a close to the vest direction was the Commercial/Industrial market. This was only directed toward our niche market. But as Scott mentioned, within the last three weeks we are now blanketing the US, having regional meetings with all of our C&I reps. We've done three of them and we have two more to go and what is so encouraging, for me anyway and I've sat -- I sat in one of those meetings -- is the attitude of the agent toward the technology and the excitement of our design.

As Scott said it's going to take some time, but I believe now that we have really established what we hoped to establish is a leading direction in the lighting business and I am very encouraged that this kind of technology and the investment that we made into that technology is going to pay off to LSI and to our shareholders on a long-term basis.

I also will set us up, as Fred will share with you when he comes on, our launch into the international market. So I read with very earnest this morning an e-mail that came from one of our agents in Toronto, Canada. They had just completed their meeting and there were something like close to 90 people involved, had a mix of architects and designers. And as I quote the rep, he said, "Congratulations, LSI, thanks for all your input." We think basically his words were, you hit a home run. So those kinds of words I like to hear, but time will tell and we'll keep you up to date as we move forward with that.

David, you're in the toughest position. I'll let you take the meaning on from there and share with the folks some of your optimism.

Sure. Thank you, Bob, and good morning to everyone. Let's break it down into three little segments I'll touch on today. The first being the most positive areas that we're looking at right now; secondly, we'll talk about the stance that we're taking to right size and contain cost; and then lastly I'll touch on the video board market.

As of recent, different from November and December, which in November and December we've seen a stall, almost a freeze in order entry/activity, quote activity, in the QSR and the petroleum convenience store business. It seems like that pattern has been broken. Shortly after the first of the year we've seen a lot of the programs that were put on hold -- not necessarily activated, but temporary or supplemental programs have surfaced now and we're very encouraged about both the two industries I mentioned there.

Following that we know it's just a matter of time until the economy eventually turns around, that the programs put on hold will be breaking loose. But as you know, some of the major QSRs that we're dealing with have programs, they're public and same way with the petroleum convenience store -- the two largest convenience store chains in the petroleum. They're healthy with the money and they have needs for programs. So we're excited about that.

Secondly, I said we'd touch base on what we're doing to keep this balance sheet continually strong here at LSI. We're right sizing the Company. We're not carrying extra employees, like Bob said. The heart of the Company is still very strong. We've had some positives in a patent settlement that last year cost LSI about $250,000 per quarter. That's all behind us now, that has been settled. Moving forward we expect zero cost there.

In terms of inventory, we're working extremely hard on moving that inventory, turning that to cash. And those are some of the positives in that arena.

And then lastly, I said I would touch on the LED video board market. As you know, the billboard portion of that market, the two giants of the industry, they're down considerably and they've had large layoffs and their programs are on hold. Yet we are still doing a small amount of billboards at this moment and then we continue in stronger markets of like convention centers, spectacular, similar to what you see at Times Square, the sports and entertainment market, which Fred will address down a little later.

Lastly, I will add one more item. As you know, the graphics has a division called Adapt. Adapt is kind of like the point of the arrow, they're a group of engineers who pre-survey and help set up rollout programs, whether it is an LSI built product or if it's something just gone to the restaurants or the petroleum sites and working on their identifications or in some cases on their fryers or their dispensers, whatever. We manage that. We're getting some strong hits in that area now.

And keep in mind that, even though there is not a lot of new construction going on, there is a lot of need for remodeling. And in the graphics arena the remodeling programs have always been our stronger suit. With the exit of that one competitor we're very encouraged because we've had a number of phone calls where we -- for lack of a better word, shared a portion of the account. And accounts that we were trying to gather, put in our basket that are now prospects -- we'll we've got their attention now. So we're very encouraged in that arena.

And in closing, with that strong balance sheet, and speaking for the graphic portion of the LSI business only, many of our competitors are not even close to where we are financially. And in this type of economy it takes them down. We've experienced that before in 2001/2002. And we picked up a lot of market share and that's exactly the position we're in now and we expect to do the same. And Bob, I'll turn it back over to you.

Thanks, David. I'd like to add one more comment to that that I think it's important to remember is that when LSI made the decision back in 1987 to really look into this graphics business, based on my research it came certainly to light that the graphics industry is a very fragmented industry, lots of smaller players, people that are throughout the United States servicing all kinds of the large accounts as well as the small ones.

Now that we're going through this kind of an economy you have to wonder how many of those smaller companies are really going to make it. And it was our intention from the day that we made the decision to move into this industry and through the acquisitions we have three great companies. The folks in the Rhode Island market are doing a phenomenal job with CVS and Stop-N-Go. The folks in Houston obviously have more specialized working toward the petroleum industry with some of their capabilities and certainly North Canton brings to play the entire capability based on the investments that we've made and the printing at both digital and ink.

And what I love about the potential -- it's a very difficult time, I know a lot of people don't have a lot of patience in today's economy. But patience is something that we have and as long as we keep that the balance sheet strong we're going to get through this and we're going to be able to come back with a capability that I believe will be unprecedented in the graphics business.

That is really the strategic direction and all of these companies were built by entrepreneurs, they remember the days when the money wasn't there, the sacrifices, the multiple hats. And to be honest with you, that is the strategic direction that's in place right now. And the presidents of these companies understand that because they were the entrepreneurs that built the businesses and together we are working in a realm that basically puts us into that position and we will continue to do so.

That will allow us to continue on with the development of our R&D center in Montreal and then move into the international market and with that I'd like to turn it over to Fred.

Thanks, Bob. Good morning, everyone. I would like to talk about the international market where we said previously in other conferences that we are in the process of identifying a company in each country that LSI will deal with. And that process takes time because the strategy of LSI is to identify the Company in a way that those companies, they are able to service and install, not only just to present and distribute.

Because those companies are far away from LSI and we want to limit the responsibility of LSI into this market by supplying the materials and honoring the standard warrantee with those equipment and get paid as soon as it ships. So the responsibility of servicing and installing and communicating with the client locally in each country would be by the Company who are going to identify.

We are well advanced and already in the three different countries we are on the final touch with those companies. And we did present a product to many consulting engineers in those countries. The answer from and remark from consulting engineers was very, very positive. But product is unbelievable. It's well made, it's high-tech, it's the latest technology inside those products.

And at the same time, we are right now in the process of getting the approval for those products for a different country in Europe because it needs certain approval. Again, well advanced was getting the approval on the product. As soon as all of this is done we will be launching officially the product internationally, especially starting and Europe. We have many meetings coming on with different applications. Again, it looks very, very positive and we're looking forward to in the near future to give you more information about the markets in Europe and Middle East. Now I turn it back to Bob.

Thanks, Fred. One of the things that is driving the international potential that is a requirement is certification of the products. There's a general certification, they call it a CE and then it's by country. And we're going through that process now. It's a little bit more intricate and a little bit more, how do I say, a little bit more detail is required than the normal UL process that we go through here in the North American market. But we understand what has to be done.

The fact of the matter is the products we've introduced here are all aimed toward high-volume retrofit capability. The same potential lies in Europe. We believe the potential could be even greater based on their energy cost. So the bottom line is things are absolutely in a very controlled direction with a lot of emphasis obviously on the sales side, that doesn't even have to be discussed.

I mean, most of our products, as you probably recall, are sold through agents. These guys work on commissions, commission is their lifeblood. So you can be assured that they are out there doing everything they humanly possible can do to survive as well. Giving them this new program of multiple LED solid-state products that really fit the retrofit market, real energy savings, long life, is going to be a stimulant for the agent to really put his best effort forward to improve his commission structure. So all the tools are in place and all the directions are in place.

Last but not least, Ron's going to make a comment, before we open it up to Q&A, on the direction of the balance sheet and the reasoning behind the dividend.

Good morning, everybody. And I'll take this opportunity to also indicate that we have not and will not have any discussion about any material nonpublic information today. And I'll refer you to our Safe Harbor statements filed in the 10-K and 10-Q's.

We do continue our focus on balance sheet management. The last quarter I identified a few areas of financial focus that we were working on and one of those certainly is managing the collections on our receivables. We're making progress. We do, however, have a slight increase in our DSOs for the balance sheet that will come out for December that is of no concern. We have some markets where we've gone with little longer extended terms. And that's very understandable then with the impact on our DSO.

Our good news in managing the balance sheet is inventory. Inventory during the quarter was reduced $3.6 million. So we're at, I think it's about $43.9 million now and heading south and improving our turns there. So that's been good. In terms of the dividend, in the file that we'll post on the website later there will be a graph that shows the dividend. And obviously we have been in a period of increasing dividends.

With the reduced guidance that we have issued reflective of the markets that we serve and the business that we have at hand, we did adjust the dividend rate to an indicated annual rate of $0.20 per share. So that reflects the $0.05 dividend that will be paid in February as announced in the press release. We do think that's an important part of shareholder return and we think it's very important to continue the dividend payment because it also does not cause us to add debt, it does not cause us to change the way we guide the Company for growth in the future. So the dividend is continuing at the $0.05 level.

And it also reflects the confidence that we have in our company and the strategic direction that's in place in order to get through this economic turn down. Ron, you might make a comment or two on the impairment charge.

Sure, Bob. The impairment, as those of you out there that have followed us know, we had an impairment in the fourth quarter of fiscal '08 and in part that was driven by a reduction in our stock price of LSI that went into the mechanics of the impairment testing. There was continued softening of the stock price, but also combined with our revised business guidance it produced an impairment in our lighting business primarily, a little bit in our graphics totaling, between the two, $12.7 million.

This is following the FASB guidance and the economic views that are taken on impairments. But I can assure you that we view the business as still fundamentally strong. We view, as Scott was talking about, the LED technology and solid-state in our lighting business as strong and getting stronger. So we have just followed through with what we had to do with doing the testing on the impairment and we still then have about $2.8 million of goodwill on the books at this point.

Thank you, Ron. Before we open up to Q&A I've got a couple of other comments as reminders. When you look at the heartbeat of this company from all the years that we've been doing this, and those who know us well really understand that the direction of LSI has been a very straightforward approach to what I've reviewed to the 80/20 theory. 20% of your products do 80% of your business; 20% of your customers do 80% of your volume. And over the years we've built a great company, we've added companies, great entrepreneurship, great strengths and I am very encouraged.

Nobody likes to go through what we're going through now. The important thing to me is that our market share is still there, if anything I think it's going to grow. I think if we understand what it's going to take to ride this through, which I believe we do, we made money when we were at $200 million, we made money when we were at $250 million, we made money when we were $300 million. And you reorganize, restructure your business plan.

The competition has always been there. When you grow a market like we have done in all the years we've been doing this we understand that. It's structuring yourself so that you can react quicker, higher degree of customer service, bring the personality of people dealing with people back into the formula, it's the communications with your employees, the message has got to be loud and any growth business goes through a period of time where there's a certain amount of waste.

We are identifying every single area. We're getting back to that entrepreneurship of what it takes to build a business. And the encouraging thing is that we've got a great customer base. And we're not going to let that customer down. We are going to be there, we're going to be able to support that customer. When a customer does start to react to the economy change it will take a little bit of time for that customer to react, we will build accordingly.

Yes, we're downsizing our business, but that's appropriate in today's times. How long is this going to last? I am structuring my plan for a year or better. And if it improves sooner we're going to be much better off. If it doesn't we're going to be able to weather the storm.

The important thing to know is as shareholders and as investors that this company is in a very, very direct strategic approach to not only survive, but take advantage of all the years that we've built a great company and developed a great customer base and keep that attitude in place so that our customers have a company to turn to that they can respect and that they can respond to as they need, as they roll out these programs.

So with that I would like to turn it over to Q&A and, please, who might be the first one?

(Operator Instructions). Glenn Wortman.

Good morning, guys. Can you just talk a little bit more about the pricing pressure you're seeing in the lighting business, maybe level of magnitude, are you seeing it across all your markets?

It's not fair to say we're seeing it evenly across all the markets. Certainly the Commercial/Industrial market is the most competitive and our market position there would logically dictate that we have less impact or less influence, if you will, on the overall market level. The competitors, as you have well, I'm sure, reviewed their announcements and their results, are all fighting, as we are, for a smaller pie. The natural reaction is going to be that the prices are going to be subdued because of that.

So in order of magnitude it's not horrendous; it's not something we haven't seen before. And frankly it's not something that we are unprepared to deal with. We're working very, very diligently, as Bob has mentioned several times this morning, on sizing the Company appropriately and structuring the Company appropriately to make sure that we can remain competitive regardless of where that pricing goes.

Where we have a stronger market positions in some of the niche markets we certainly maintain much more influence on the overall market price levels. But in those cases we have probably, as we've mentioned, in the automotive industry, petroleum industry has certainly been soft and certainly the retail side of the business. There's just a lot less volume opportunity regardless of what your market share is. Again that's how I'd characterize it.

If I could add to that, Glenn. This is nothing new to LSI. We've been in this position before as a smaller company. I think we know how to handle that. The fact of the matter is that we've done a great job in the last year and I'm so glad we have in bringing in a new procurement direction and working with our vendors and creating new opportunity and working on price reductions. Those guys are feeling it too.

So this is a big pond that we're all in and the survival of the people in this pond I think really belong with a strong balance sheet and working on that bottom line as we are doing in many different areas. And then give the reps the unique products that they need to go out and create the interest. And a lot of it of course, as we all know, is based on energy and certainly maintenance. And those are two key areas.

LSI has positioned itself well with this new product introduction to create those opportunities. It's not going to be an easy ride, but we're going to be here and we're going to be actually when we come out of this, in my opinion, a much stronger company than we are today.

Thank you. And then just given the pricing pressures and the -- obviously volume pressures as well, off balance by the falling commodity prices. Do you think your gross margins can hold here or do you expect some slippage there in lighting?

I'll answer that one. I think it's a reaction day-to-day, Glenn. And when I'm looking into the future I cannot tell anybody what that crystal ball shows. I mean, you know as well as most, our backlog is less than six weeks as an average, it's even less than that today. I think that putting my company into what I call a reactive mode is be able to react to that customer's needs quicker, better and a constant pressure on our engineering group, not only for developing new products but obviously looking for ways to cost reduce.

The investment that we made in our manufacturing process, that new piece of equipment that we acquired, is definitely going to help in that. So in essence we've got to set ourselves up to handle the competitiveness and do it anyway that's more cost effective than we've ever done it before and that's people wearing more hats and just doing things a little bit differently. And I think that's how we're going to be answer that question.

Thanks for your time.

Thank you.

[Dick Piachek].

[Dick Piachek]?

Yes, hi, Bob. I want to comment, not so much a question, but comment on a few things to corroborate your and Scott's messages. We recently -- can you hear me now? Was it better before or is this better.

You're just fine right now.

For the interest of some of the investors -- I'm, by the way, an investor as well as a manufacturer's agent for LSI, we're based in St. Louis, we have offices in Des Moines and Kansas City so we're Midwesterners. I want to comment on just a recent order regarding the LED solid-state technology.

One of our salesman, [Rich Hayden], just put a lighting package together on a convenience store car wash service station type thing to the tune of $80,000 in LED equipment. Typically that would have been a $25,000 -- maybe $25,000 order -- lighting order with typical HID equipment. So you talk about excitement for the reps. That's exciting. And it's exciting for the growth of the Company.

A little in history, Bob and I go back -- I want -- his feet are to the fire all the time, I understand. Of course we all wanted to see this stock go back to where it was and I'm sure it will be with Bob's leadership. The buck stops with Bob. But let me just reiterate a few things. My history with Bob, we go back -- we were young sales managers for a major company, they were the leaders in the petroleum industry at the time. They were fast-growing in the C&I business.

Bob was insisting on HID, most people didn't know what HID stood for, it was a fluorescent [power groove] lamp that we were selling. He kept insisting to the President of the Company. Finally, the President relented and designed a canopy fixture with a 400 watt mercury vapor two by two fixture. We were the first with an HID concept.

A year later we get a letter from [Herb], hey, you too dumb bunnies, we only sold 100 fixtures. I'm going to take this thing out of line or you prove to me this is going to work. Well at Bob's insistence we end up selling that fixture. He convinced me. Two of our territories sold that and we ended up selling those fixtures by the car loads.

So Bob's intuitive nature makes things happen. LSI would not be here had it not been for Bob's intuitive nature. That particular company fought the growth of HID. Bob says, hell with it, I'm going to start my own company with HID. Well that's where we are today. So I just want to bolster Bob's -- I'm going to say image, but his leadership. As reps we own easy 85% of our market share here in the Midwest and without the products that Bob has given us over the years we would not be here.

We're good, we have a nice strong organization, but our growth has been only because of the products that LSI has given over the years. Just for an example, he came up with a upgrade kit for these canopy fixtures by that time there were thousands and thousands and thousands of those two by two canopy fixtures. Well, it was efficient but they were getting dirty, they came up with what they called a UPK kit, it was a universal upgrade kit. And we must have sold thousands and thousands of those upgrades to upgrade those old fixtures that were in the canopy.

Those are initiatives that only Bob has provided for us. Now we come in to this LED thing and, I tell you, they're going to be there. And Bob is the guy to take us there. So I just wanted to make some nice comments. He gets chewed on a lot I'm sure. And Bob and I have our problems. Of course we'll argue over things. But I just want to say that without Bob this company would not be here. So, my comments.

Dick, I didn't know you loved me that much.

I really don't, but things have to be done.

Hey, I really appreciate those comments. I really do.

Well, Bob, things have to be said sometime. We lived it, we lived the growth of this company with you. And as reps, you said it before, we don't eat unless we sell something. And you've given us -- the Company has given us the ability to go out and have a very successful business. And we're fast growing in the quick serve restaurant business, that's our growth particularly.

And we happened to have a pretty darned good year in the car lot business last year. In fact, one of our better ones. I'm not going to say what it's going to be this year, but that's a big growth potential for us, too. So anyway, I wanted to make those comments. And keep up the work, old man.

Well, it was nice of you to do that. For the rest of the folks, that was really a surprise to hear Dick on the phone. But you know Dick, and really do appreciate those comments. What really has happened over the 32 years is we've been so fortunate to have a group of people come together to build a great company, certainly with the support of agents like yourself and certainly with our employees that work so hard to give our agents the products.

This is a tough time. I'm paid the big bucks and what's said out there doesn't really ruffle my feathers. We take everything to heart. But what's important to me is that this company has a tremendously strong root system and with that strong balance sheet. We're going to continue to give you the products and the services to do the job that you have done for us, and I know other companies that you represent as well, to keep your agency alive and hopefully thriving in the months to come.

And for those comments, I thank you for your comments. And it's nice to hear that agents out there do appreciate some of the works that manufacturers really try to do to help them survive. If we could turn it over to -- I'm sure somebody else has another question.

[Rick Dasool].

Mine probably won't -- my comments will be less commercial for you.

How are you, Rick?

I'm doing all right except for this cold. Just a couple of things. I think on the last call there were some comments about a program in Stop & Shop, maybe you can update us there? And then people have been thinking about the CVS acquisition and what it means for you. Do you have any concrete information on when and if they're going to do the new stores?

David, I'll let you handle that if you would, please.

Sure. Speaking first to the CVS comment and that would be the acquisition of Longs Drug in California. Our revenue stream will be active in the fourth quarter, and the first quarter of 2010, fourth quarter 2009 and we'll finish it in the first quarter of 2010.

As far as Stop & Shop, yes, we did the initial rollout, as Bob mentioned in his earlier commentary. And of all stores with the freshening and now we continue to do I'll say batch orders, nice size orders -- total remodeling for their stores. And as you know the grocery business is healthier than it has been compared to the rest of the economy. So, good.

But was that a meaningful program or really kind of --?

It was in the upper quartile, very bottom of that. About the 75% level, if that helps you.

One of your dealers was on the call just a few minutes ago. But is there any thoughts on the inventory in the channel? I don't know -- I know these guys generally aren't stocking, but is there anything that they're paring back from what they might have in the channel right now on the dealer side?

Let me field that one because it reflects both on the graphics and the lighting. There really isn't a channel of inventory for the lighting. It's all reactive to the moment and we ship most of our traditional product within 24 to 48 hours. It's the 80/20 theory, Rick, in its purest and we monitor that and that's the direction that we've taken with our reducing our inventory. That's one of the major emphasis is to turn inventory into cash. It's working closer now with vendors for them to be able to react to us quicker so that there isn't inventory sitting on the floor.

From a graphics standpoint, I know that David could answer that as well but let me just throw it out, and David you throw anything else in. From a graphics, as you know, it's a project driven business, there's a certain commitment to inventory. What the edict is coming out of LSI, has been for numbers of years is that we're not putting inventory in without a purchase order.

Sometimes that takes longer to get that inventory out; we're going through that process now, we're keeping our customers' feet to the fire. We're not going to eat this stuff. But obviously there is a drag as it relates to inventory being pulled based on the economy. I think we're very -- we're in a very good position because months ago, as we started to smell this change, we started working very effectively on that inventory number.

The numbers -- anything that's in there now is all usable inventory, it's inventory that the customers will continue to use. The area, if they change their direction from the image they have to a new one they'll be responsible to either take that inventory or give us a purchase order to pitch it, which in some cases these folks do. That is already built into the process. David, if you'd like to add any more.

Yes, I think I will. In that some of that inventory with the petroleum convenience store type people, those run two- and three-year contracts. And as these contracts mature, if there's obsolete inventory at the end of the contract, sometimes earlier depending on the customer, we can invoice that.

Now inventories have been moving slower because of the downturn in business. And the contract, when the contract expires it gives us time to renegotiate and sometimes pull inventory from other competitors because we have the ability to price that in, finance it and have the ability to warehouse it and fulfill orders better than the rest of the industry.

So he who has the inventory isn't a loser, is the winner. And again, we go back to the balance sheet, especially in these treacherous times, the majors, the Chevron's, the Exxon's, the BP's of the world, they don't want that inventory tied up in some bankruptcy court. We always seem to get stronger loyalty during these treacherous times. Okay.

I'll emphasize the fact that we do that as long as we have legitimate purchase orders. I want to be sure to emphasize that.

It's not our inventory, it's their inventory that they're contractually obligated to and we help manage it.

Okay, you mentioned cost cuts to get in line with reduced revenues. I'd like you to quantify those.

Well, Rick, I'm not going to get into it, there are a lot of people listening. Obviously it starts with, as most of you probably are aware of, LSI for 32 years had worked with a percentage of our employees to be what we call agency people, we're a cyclical company. That percentage could be as high as 25%. Obviously that's the first place that you start.

The second area is looking at the change in the climate and the conditions of the market, that's the second level that you look at. You consider to look at second shift, third shift, you look at all areas. We're even looking at subscriptions if you want to take a chuckle, but we're looking at every single penny and we're putting that plan together as it relates to them. And there are two words in this company right now; it's the word called "convenience" is out, "necessary" is in and then "necessary" is reviewed.

So it goes back to the basics of when I built my company in the early years when we didn't have the money. We didn't have anything in place. It's a culture that's being developed here with obvious emphasis with a continuation of new research and development on new products, a strong marketing direction on the 80/20 theory, the consolidation obviously of inventories and reduction of inventories, the continuation of working with vendors to come up with better pricing, better inventory flow. All of those things are part of the formula of cost reduction.

Okay. And then my last one is, you put out a press release saying that your prior acquisition fell to the wayside and you were poking around another technology or LED-related deal. What's the status of that?

Simply the acquisition that we had a letter of intent, a nonbinding letter of intent, is that when we started to see the economy change and the evaluation of companies change, the company that we were looking at was quite slow to react and giving us information because we had a very, very deep due diligence program in place.

And as things started to change in the economy and the environment we went back to them and said, you know, guys, your company isn't worth today what it was worth in the early months when we started all of this. And so we went back with a different structure as far as an opportunity and they didn't feel it was in their best interest, so we parted ways.

The second company that we are still looking at and still have a very strong interest in is on the technology side. A company that we walked away from was on the lighting side with a product line that we felt would fit the package better. To be quite honest with you now, the direction that we will take in that direction is to be more select on some of the products that we really feel we could have in our product line, our package line. But it will be developed around the new LED technology rather than traditional.

In essence it may have been a blessing in disguise that things went the way they did. Because now the emphasis is to fully go after a solid-state technology with this type of product line.

And just on the technology one you're pursuing. Is that still alive or not alive.

Yes, sir. Yes, it's alive, yes.

Very, early stages.

Early stages of due diligence. But it's not a big company, it won't impact our balance sheet with a big hit. We're very, very wary of any debt. But it is a company that we feel has the kind of technology that can enhance what we've already developed and we'll be sharing that with you as things progress.

Okay, thanks.

Thanks, Rick.

Jed Dorsheimer.

Hi, it's Josh Baribeau for Jed. Just a couple questions. Can you remind me again what the actual cash balance was?

We have about $8 million dollars on our balance sheet at December 31st, Josh. And no debt and today we remain debt-free as well.

Okay. Could you give us a sense -- I know you don't particularly break it out, but can you give us a sense of what the LED revenues looked like in the December quarter, maybe order of magnitude or just quantify up or down from the prior quarter?

I'll take that Josh, this is Scott. From an LED perspective we are continuing to see growth there. Without getting into the actual volume it's double-digit growth.

That's on the lighting slide. Josh, you had a little bit of a decline in that quarter, especially in December, on some of the other items that we had sold in the sports package in the first quarter. It's based on time and development of the type of business.

What's encouraging is that the efforts that are put forth now with our sales direction has created a lot more interest. I think I made that statement in my press release. There's a lot of interest in our product line now. And specifically we're seeing more interest because of the success of the Ohio State Project that we put into the Schottenstein Center, which has created a lot of interest from a higher level.

And we're putting still a lot of effort on a more reduced scale on the billboard market, more in our own backyard because there is some opportunities out there. And we want to keep that alive, we want to keep our program going, we're going to continue to work to try to create more of that interest to build that part of our LED technology.

Josh, if you divide that LED business the lighting, as Scott characterized, is the white light LED solid-state, one of solid growth and the entertainment sports side of it is going to be more of a lumpy structure as large projects come through in sales and then there may be some lumpiness until the next large project comes through.

Perfect, thanks for the clarity. Just one last question. You did maintain your guidance. I assume that we'll probably see a little bit of seasonality in Q3 as is fairly typical. And you also mentioned that you're winding down some of the large national programs. Can you just comment a bit upon your -- not necessarily your confidence level in this guidance but maybe what you're -- what that is based upon because I know there's not much of a backlog either as is traditional at the Company. Just a little bit more color on the backlog -- on the guidance, please?

I think I'll answer that, Josh. I think from my perspective that it makes sense that we put a very conservative direction in place. It's a very difficult obviously with the economy the way it is. There are certain things that are hopefully going to stimulate that and that is that we do have a lot of -- or a number of prospects out there that show some potential volume.

We're not at liberty to say who yet because we just don't know what's going to happen. None of that estimate is in our guidance. It is really just day-to-day business, it's monitoring our agents and monitoring the market on the basis of what traditionally we think we're going to do.

In conjunction with that, some of the things that we're working on as it relates to the international market, certainly it all depends on the certification of some of our products. We think there's a pretty good opportunity there once we get certification because of the interest of what we have.

Our agents, as they are beginning to understand more and more of the LED, you heard one of our agents, Dick, making some comments about how enthusiastic he is as a result. Remember, these guys work on commissions. And certainly in a competitive market, commissions are unfortunately very, very tight. So you give an agent an opportunity to sell a product with a higher price, his commission in real dollars will go up with the sale of those products.

So there are a number of small things based on traditional methods and traditional history that we feel pretty good about our guidance. But, of course, if the economy continues to tank, those things are obviously under very, very tight scrutiny right now. There is some hope; I don't know how much, but there is a little inkling of hope that Obama is going to put more pressure on the energy that could create opportunities with the LED. I think you folks realize that as well. And all of those things go into our guidance to the best of our ability.

We have never had a big backlog anyway, so it is very difficult and has been for all the years we have been doing it to really pinpoint that guidance. So we do the best we can with what information we have. Backlog doesn't really drive guidance as much as customer relations and dialogue do, and that is what we build our guidance on.

Great. And just lastly, could you give us an indication of the LED products, either lighting or the digital boards; the margin profile, if it is above the Company average, below or roughly at the Company average for margins?

From a lighting perspective, it really falls into what we consider our average margins at this point. We certainly expect that to -- well, I won't even say moderate. There is opportunity both up and down in that area. But right now, it really is about average.

Josh, I think it's really fair to say the way we have structured our pricing, understanding that LED technology is a multiplier by two plus as far as over traditional lighting; it is our approach to seed the market with more and more examples. That was a successful using the model of what we did with our canopy fixture program. If you recall, we actually allocated X number of units per agent throughout the United States with a special pricing direction to get it into the market. That drove the interest.

We are taking the same approach by agent in the Commercial/Industrial to get more and more units into the field for people to see. As we build, the volume of product costs are coming down. And we can adjust as it relates to the profit contribution, as it relates to the material costs, and certainly the volume that we believe are going to start to come.

These are months away unless somebody comes in. And of course, your hope is always that some large marketer will come in, for example, the petroleum industry with a big re-energy plan. I think a lot of that is going to be stimulated again by state and government, federal government.

So all of those things are in play right now, but the direction we have taken is a very straightforward, is get our product in the field, get people to see it and build on that, and price it accordingly for people to see the affordability. A lot comes into the design as we are working and learning more, and their ability to produce and drive those manufacturing costs down to improve the margins on those products as well.

Well, great. Thanks for taking the questions. I'll pass it on.

Thanks, Josh.

Jim Ricchiuti.

Good morning. A couple of questions. I just want to make sure I'm clear on this. And David, maybe I'll direct this question to you. It sounds like you do have the CVS business in hand?

No, we don't have the purchase order, we expect the purchase order. We're in review of those on a weekly basis. And like I say, unless something backfires the billings will be fourth-quarter 2009 and first quarter of 2010. It would take a real shock to find out we weren't receiving that order.

Okay. Is any of that business in the current fiscal year guidance?

Yes, the CVS. And keep in mind, that's a nice program. That's not the monster though that compared to our past experience with Dairy Queen or Chevron or the 7-11. If in fact we catch one of those in the near term that will be on top of the guidance.

How would this latest piece of business with CVS perhaps compare with previous conversions, say maybe the Albertsons stores?

Well, Albertsons was probably three or four times that size.

Okay.

A lot more stores, a lot bigger stores, a lot more complex conversion.

Okay, that's helpful. Just with respect to expenses. Specifically the SG&A expense and maybe, Ron, maybe I'll put this one to you. There was fairly significant sequential decline in revenues in the December quarter from September, yet your SG&A expense remained fairly level. It sounds like you guys took some cost containment initiatives in the quarter. How should we think about SG&A going forward?

Well, as Bob has said, Scott and Dave have said, we're going to continue to look at all aspects of costs and reduce wherever we can. Dave mentioned the [mini board] patent suit that's now behind us; that will have an impact of reducing our legal fees going forward. And of course that has been built into our guidance that we've issued. Sales commissions is a big part of our SG&A cost and that's going to follow sales, it's going to follow sales incentive programs and so on. With that I really can't be too specific on any single line item there.

Again, this may be difficult to answer as well, Ron, because it depends on the mix of business. But can you give us any feel for what your quarterly breakeven might look like or (multiple speakers)?

No, I would not answer that question.

Okay. And just on the lighting side -- given that it looks as if the graphics business is -- if it's not close to a bottom maybe it has bottomed for you and from a revenue standpoint. What I'm wondering is -- maybe this one is for you, Scott -- how much risk you see to lighting segment revenues over the next couple of quarters, just given the uncertainty in the economy. Or do you feel that at these levels probably a little bit more downside, but do you see much in the way of significant downside from these levels?

Well, I think I'd characterize what we're seeing is obviously the largest lion's share of the volume in the lighting business comes from the Commercial/Industrial market. And there's a little bit maybe lag there as you compare it to some of the other segments in the marketplace in terms of where that decline really got going and got accelerated in the November/December time frame.

As you'll recall, we were able to show growth in that market both in market share and in volume up to that point. So while we felt pressure overall in the lighting group now for several quarters because of the niche market business and the national account volume, the Commercial/Industrial volume, the changes that we saw really have been fairly recent. And I'd love to say that we've reached the bottom there, but I don't think we can make that comment at this point.

I think it's going to continue to be difficult. I think we're going to balance that, frankly, with some gains in some other areas. But it's very difficult to characterize that and I wouldn't want to put a picture in anybody's head that we're completely sure what's going to happen. It really is a factor of the marketplace right now.

Okay.

Jim, I'd like to add one comment to that. I think from our perspective that where we're hoping that things will stimulate that direction is in the retro fit market and the products that we brought on line to address that with the aggressiveness of the agent, and really the return on the investment for the customer in showing that these products are bringing anywhere from 60% to 80% energy reduction is part of the plan.

And of course it's a difficult plan to forecast because we don't really know yet how that customer base in their C&I market is really going to react to our products because they haven't been out yet. The sales meetings are just going on it now. What we did, if you recall, as you certainly know, we spent all of our efforts in the petroleum business because of the tremendous image that LSI has and the great job that the agents did and that's starting to prove its point. And now I'm hoping that C&I will do that.

So that traditional balance of how things are going to flatten out I think is really an unknown and it's up to us to continue to put the pressure on ourselves to get these products in the hands of the agent and the customer and obviously be as competitive as we can working with our vendors and with our manufacturing process to hit the traditional side.

We do realize the guns at both sides of our head and we're going to do everything we can to improve that bottom line and keep that balance sheet strong. Revenues will be what they are based on everything that we've said so far. So it's up to us to squeeze this chicken even harder as it relates to the bottom line and keep that balance sheet strong.

Okay. And Bob, I was just curious -- in the early part of the call you alluded to an agent I believe up in Toronto that had a some very positive comments. Which LED products in particular was he referring to?

I'll let Scott answer that because he's probably already talked to them.

It's really the grouping of all of them, Jim. What's really important in this process is certainly you've got to be able to illustrate and demonstrate the technology that you're able to bring to bear in fixture design. But what's critical is that you have a minimum mass, if you want to call it that, that begins to get the agent excited about his ability to design sites around solid-state lighting as opposed to just inserting one particular solid-state lighting or one LED product in the overall package design.

So we have introduced, and we've talked about this in previous conference calls, we've introduced pole-mounted products, we've introduced building-mounted products, we've introduced in-ground accent products, we've introduced some interior products, some sign lighting products -- it's really a package now, Jim, that brings that level of excitement to the point that the agent is now willing to take this story to his customer.

And that's the threshold, if you will, that I think we have crossed. And I think being in a strong financial position and manufacturing position, given the balance sheet and the way we're able to continue to invest in those areas, puts us in a position not only to tell the story but to deliver. And that's what's critical, there's a lot of competitors in the marketplace that are touting some design and philosophies and some product that frankly can't deliver the way LSI has.

And LSI has a reputation in this marketplace of being able to react and by introducing the kind of products that we're introducing, the way we're building them and the way we're designing them and supporting that with a manufacturing and delivery story and solution that frankly the rest of the market can't touch. That's what really puts us in that position of advantage.

To add to that and LSI has always been the smallest fish in the pond when we start building on that market. The first thing we had to do in this solid-state technology was build the confidence of the agent. The technology that we have out there today has been somewhat bastardized with different players coming in and not being able to deliver what they were selling. We didn't want to take that risk.

And so we took a longer period of time to develop that platform, get it out into the market and prove to the agent that this was the product of the future. We did that with the canopy fixture, even if it was a C&I agent, at least he knew that the product was out there, he knew the results. And the next thing we had to do is instead of giving an agent one product, especially a Commercial/Industrial agent, a CIA agent, we had to give him a number of products so that the calls that they were going to make would hopefully be more productive for him.

The petroleum agent is a little bit different in that they only have one lighting line, they have multiple other lines, but it's all focused on just that oil distributor or that oil user. And lighting is an important part. But for the commercial and industrial -- that guy is selling primarily lighting and that's about all he sells.

So we took the time and we developed the platform, then we took that platform and we put the right wrapper on it, whether it be a parking garage or whether it be a soffit light or in the case of a canopy light that would fit in a bank, a new area light. All of those are high-volume items that the rep knows there's a market for. Given the energy story but also given the confidence in the Company behind its technology.

We invested, and it's well known, a lot of money into the technology by acquiring Saco. Now what we've done is we've put the proof in the field, and what came out of that meeting last night -- now I did not talk to the agent, I read it first thing this morning before we got on this conference call, is the agent sent a letter to me and it was sent to Scott and basically saying this was a great meeting, LSI hit a grand slam home run because we introduced a line of products that really have an opportunity.

And we'll see how it all comes together, but two years have gone by, as you well know. Not as many results as we'd like to see, but as we have said so many times these products now have LSI's logo on it, we're responsible for the driver. Certainly to some extent we're responsible for the LED diode. That package now is an LSI package because of what we've invested in.

I just feel good that we're in the right place at the right time. I just wish the economy was a little bit stronger, as we all do, but we're just forging ahead and we're not going to turn back. It's up to us to keep this company lean and a strong financially and we were that, as I said earlier, 100 million, 200 million -- we can be at whatever it's going to be.

Wall Street doesn't like to see any kind of a status quo level but in today's economy I think everybody understands that the strength of the future of our stock will come based on the strength of how we ride this out and the work that we've been able to do before and during and now after. And I think that is LSI's strategy and we're just going to stick to it.

Okay, thanks a lot, Bob.

Guys, I think that concludes. I really appreciate your time. If anybody else has any other questions give us a call. We'll be letting you know more about these new products as they unroll. It will be our job this year to do a better job of PR work, if that's the right word, to keep you in tune of what's going on. It's never been LSI's intent to hype the Company, but just factually give you information.

We have touched on a number of items that are now in place, we will continue to inform you as we see these items roll out. Be patient with us. We do appreciate your patience and certainly your interest in the Company. But for the shareholders that may be listening to this, the institutions who have invested, this is a company that understands its role, its market position will continue to work in their behalf as we always have been to turn out or continue to build a great company and eventually get our stock back up. I thank you for your time and have a good day.

Thank you for joining the LSI conference call. It has now concluded. Have a great day.