LSI Industries Inc (LYTS) 2009 Q3 法說會逐字稿

Good afternoon, everyone. Welcome to the LSI Industries third quarter investor conference. Today's conference host is Mr. [Steve Brucker], Chief Information Officer of LSI industries. (Operator Instructions). This call is being recorded. Now, without further delay, I'll turn the call over to Mr. Brucker.

Good afternoon, everyone. And welcome. Today's presentation is being supported with visuals that are available on the LSI web site. You can reach it at www.LSI-industries.com. And by clicking on the Investor Relations button at your lower left. If you don't have easy access to the Internet right now, you'll be able to observe these supporting materials later this afternoon. We'll post these and a replay will also be available for the audio portion as well. Now, I would like to introduce Mr. Bob Ready, the Chief Executive Officer for LSI Industries.

Thanks, Steve. Good afternoon. With me, I have Ron Stowell, our Chief Financial Officer, Scott Ready, the President of the Lighting Group, and David McCauley, President of the Graphics Group and Fred [Jabout], President of our Technology Group.

To start off, obviously, the results for the third quarter were extremely disappointing. Not surprising, based on the fact that the third quarter historically has been our toughest challenge and with the economy the way it is-- it is -- it was certainly a challenge like nothing that I have seen in all of the years I have been doing this. However, there are a lot of good things that have been going on. We have addressed the challenge of this economy by putting our company into a very straightforward approach as we're trying to get a good feel of what the real market opportunity is out there. It has definitely dropped considerably. When you look at the major markets and certainly as you're probably all aware, LSI is a market driven company. We supply a lot of products and services to many different markets. None of the markets out there are what you would say encouraging. I think the biggest challenge, obviously, is the automotive industry. We spent 33 years building that industry. And it has been a very viable part of LSI's growth. The situation that exists there is obviously extremely important as it relates to the financial revenue responsibility that we have to that market.

However, as you take an economy like this and the types of programs that we've implemented within the company itself, those being primarily internal, we've done a great job of really improving the different parts of our business. Some of this you will see with the slide that Ron will show. I think the important thing is that LSI is very financially strong. We have no debt. We have somewhere close to $13, $14 million in cash. All of our operations have been streamlined, not cut to the bone, but certainly have been changed to the conditions of the market. And during this difficult period, we put a lot of effort into what we look at as for the future of the company and obviously that is in the solid state, in the LED technology. The strategic plan is simple. We will work as hard as we can to maintain our traditional business which is the area that's been hit the hardest. While at the same time, making every effort to bring new products out to serve new markets and that is really the strategic direction of where we are now.

It is very difficult to forecast what is yet to come. I think everybody pretty well feels the same as we do that to look forward is almost impossible. We're getting really no kind of direction from our customer base. These folks aren't making any predictions, they're not giving us any forecast. And we're almost at the point where every order is definitely a challenge based on the way the market has been changed as a result of the economy. But on the good side, which we're going to get into a lot today is to really show you what is going on. I believe that the third quarter right now from everything that we can see is our lowest quarter. The fourth quarter is going to improve dramatically. Beyond that, it is very, very difficult to forecast. But as you probably saw in the press release, certainly a number of things have happened based on the direction that we have taken. The cost improvement program is absolute. I can tell you that every employee in this company today understands the severity of containing costs and improving costs and really providing a much higher level of quality of service to our customer base. We're not losing market position. In some cases, we believe we're gaining market position.

We made a direct -- took a direct direction to moving into the International market. We mentioned that in our last conference call. Scott will talk about that a little bit with Fred in reference to the sites that we have now received orders for. Which are really prototype sites in the U.K. There are other -- some other options that we're not ready to really get into a discussion yet in another country. But obviously we recognize the need to move into the International market with their energy costs so much higher than the North American market, our products will well serve that customer base as we're developing it.

We've been very successful in one of our larger customers to literally get back into the internal fixture process as far as one of the major retailers. We just received notice that we now are back in both the outdoor and the indoor which is certainly encouraging. But at the same time, we're not getting a heck of a lot of direction as far as what that will mean in volume. The important thing is that we're there. You also remember from the comments that we made in our press release this morning. That we do have a pilot run with one of our largest customers that have taken -- we will be converting over the next 60 days. Scott will go in a little more detail with that. With the full LED package which includes area lighting, site lighting if you wish, a canopy lighting, it is in the petroleum convenience food store market, soffit lighting and it is a true package combining some lighting and some graphics for this customer. We're going to do a little over 100 sites which is really a pilot run for them. That will be reviewed as these start to roll out. That is an encouraging part of our business as well.

We've made a lot of stride in our opportunities and the visual graphics area. Digital visual graphics, if you wish. We have now some billboards that are on order that will start moving into the market place soon. We have moved into a much stronger direction on the sports side of that business. You heard a little bit about that last quarter and that has grown significantly. We're getting more and more interest in that. Which, again, is encouraging. The most disappointing and challenging is our graphics business again, as you fully understand, it is project-driven rather than product-driven. This is an area where it is still very, very soft. However, David will highlight a few areas that are definitely encouraging and where that is going.

The bottom line is that we are really hunkered down here as a company. We're going to get through this with a strong financial condition. We will be probably in the best position of most in that turnkey capability. We honestly believe at least with the dialogue with all of our customers out there, that eventually as the economy starts to return, there will be a pent up demand and LSI will probably be in its best position it has ever been in its 33, 34-year history, depending on how long it takes to really roll this out. Those are my opening remarks. I am going to turn it over to Ron Stowell now to touch base with a few items then we'll move into a discussion with Scott, David and Fred. Ron?

Good afternoon, everybody. We'll remind you of our Safe Harbor statement and as we filed it in our 10-K and 10-Qs, we'll say that today we don't have any material nonpublic information to be discussed. You've seen this slide before. Some areas of focus for us, financial areas of focus. Keeping costs down. Working on accounts receivable, to reduce them and improve our DSOs. Working on inventory reductions and debt, Bob mentioned that we had still no debt on the balance sheet.

Here are some results, graphically, that you can see. First on the DSOs, we can see a sharp reduction over the third quarter. We're now at about 55 days. And that could even be lower if we had customers with extended terms, they're current but if they had not been extended, we would be even lower than this. And by the way, the yellow lines on these graphs are fiscal '09. The blue line is fiscal 2007. And the -- I don't know what it is-- the magenta line is fiscal 2008. And here is the accounts receivable, I mean, we've improved the quality of our agings, we've improved the DSOs, obviously some of the reduction as compared to prior years is a result of our lower volume of business. But we're pleased with the progress so far, in improving and reducing the receivables.

The next chart is on the inventory. And you can see a clear reduction. We have eight months consecutive of inventory reductions. We're at just over $39 million now of inventory. And I think this chart will, as you see it again, will see some additional reductions as time goes forward. And then finally, cash flow from operations. We're doing a little better than last year at this point and certainly with our working capital needs throughout the year, there are pluses and minuses in gains and in the cash flow from operations. But visually, you can see kind of the progress we've made in some of these areas. Our balance sheet remains very strong. Bob mentioned the nearly $14 million of cash on the balance sheet. The $39 million of receivables and no debt on the balance sheet.

The board did take a cash dividend action of declaring the $0.05 per share as a regular quarterly cash dividend., payable on May 12th. And that's an indicated annual rate of $0.20 per share. And then there is the chart on the dividends which obviously reflect our policy and reflect that we're working on a lower earnings than in years past. I'll turn it over to Scott, I think at this point.

Thanks, Ron. I think I'll take my comments and characterize them in the three and four areas that Bob's already referred to. That is how we traditionally look at the lighting business. We have always discussed what we do in the retail market, our national account work, our niche market place, our growing commercial industrial influence and adding really a fourth reference that Bob alluded to in terms of some of the International business. Financially, the company and specifically, the lighting segment is doing, I think, what we expect to see in this kind of an environment.

We are working very hard on the income side. But certainly, we're doing that in an environment that is affected tremendously by the volume potential that's out there and our volume is not uncharacteristically down as compared to some of our competitors, that are also publishing numbers right now. So, but we look at specific results within specific markets, we're showing some really high -- or some bright spots, if you will, that aren't necessarily reflecting itself as we look at the cumulative results. Specifically, when we look at the niche markets, starting there, the environment continues to be difficult as Bob mentioned. The automotive industry is certainly one that we've expected to maintain this kind of performance. It will remain flat. There's no doubt about it. The petroleum market place on the other hand is one of those areas where we're starting to see the impact of our product introductions in the crossover product line have some real favorable influence.

The market place itself is not extraordinarily active although the programs that have been developing now for the last several months with the introduction of the new technology are beginning to move from prototype stage into more of an adoption phase, I'll call it. And we're very pleased with some of the results we're seeing there. Bob mentioned specifically, an account within that petroleum market space that we've had a long-term relationship with that's now moving to a 100 store plus roll-out pilot phase. And it is simply having a evaluated all of the technology available to it in the market place and selecting LSI's crossover product line is simply going through the exercise to prove out the return on investment calculations that they estimate but we're very, very pleased that they've selected what we feel is the market leading and industry-leading technology to support their efforts.

The national count perspective remains mixed. Certainly, their overall volume is down but again as Bob indicated, we're not losing market share there. We're not losing position with any of the accounts that we traditionally have done business with. In some cases, we've actually gained again. We have been awarded recently an additional contract to one of the primary national accounts that we have done business with. Yet it is difficult to see exactly what those dollar contributions will be and when they will get because of the limited visibility we have on their construction schedule. Thirdly, the commercial industrial market place, that is one area that has been a shining -- a light for the company in the last six to nine months but as I'm sure everyone has seen from some of the other numbers posted by the competitors, it is one of the markets that is also significantly impacted by this economic condition that we're all facing. Our market share there, I feel is improving.

Our reduction, if you want to call it that and certainly look at what we had hoped to achieve in volume at this point in time, is not to the degree that we're seeing in some of the competitive numbers. And again, I attribute that to the enhanced product offering, the aggressive sales promotions and relationships that we've developed in that commercial and industrial space and lastly, quite a bit accomplished this quarter although it is not showing in the numbers yet. In terms of the introduction of this new solid state lighting technology product line, beyond those niche markets and beyond some of the national account work that we had done, now, into this commercial industrial market space. And, that is going to have a tremendous influence in terms of our position in the market. It is having a tremendous influence already in terms of our relationships there, our identity there. And we're seeing -- our quote activity and our specification activity is very strong. It is yet to be seen how that will translate into actual orders in volume as the strength of the overall economy will have a great bearing on that. We're very excited about what we're doing there.

We're very excited about the new markets that are related to that business but are unique such as street lighting, such as some of the infrastructure market opportunities that exist, that are very, very excited about the crossover solid state lighting technology. There is a tremendous amount of interest, again, although I caution not a lot of clarity at this point, but a tremendous amount of interest in how stimulus dollars may affect spending in that area. There are some very, very active evaluations going on across the country in street lighting and LSI's participating in most, if not all, of those. The fourth reference that I'll touch on is what we're doing Internationally. As Bob mentioned, we've had a great deal of focus looking at primarily the need that exists in high-cost energy regions of the world. We have experience and models that work for us. We've done this in Australia. We've had some great opportunities in Asia.

Primarily driven in the petroleum market and the petroleum market customers and we've also seen some commitments made to us now in terms of multi-site roll-outs in those regions of the world that frankly give us a very strong base to now launch into a more aggressive mode in Europe. Europe has a very, very high cost of energy as compared to the United States. The credibility that we've established with our solid state lighting products in the petroleum industry in the US is translating as a very strong story there. We've received orders for prototype work in the UK and we expect that the visibility of the LSI product line on those prototypes will create a tremendous opportunity for us as we move forward. Last but not least, very proud of the work that the folks have done here and in all of our operations to control the kind of metrics that Ron shared with you. We understand fully the need to manage our business, to do the right things, make the right decisions. Reduce in areas where it is necessary to reduce. But maintain a tremendous amount of capability and tremendous amount of frankly development work that we are not pulling back from specifically in the solid state lighting area so that our product introductions will continue, our product enhancements will continue and those will certainly spell some great opportunities for us in the short and long-term future. Go through some of the slides. I'm sorry. I should have done that as we were going along. I'll introduce to you a couple of slides as we look at the monitor here. This is -- an example of the marketing effort. One thing I really didn't touch on is how we're taking the marketing effort into all of the different markets now with the crossover product line. The slides that you're look at here demonstrate how we're -- we've created a tremendous educational program.

We are supplementing certainly our prototype work with strong marketing material support and have generated a lot of very favorable experience now with products that are in the market place, they're actually producing and performing as advertised and creating, helping to create frankly a much, much (inaudible) identity now for the lighting group. We really have raised, if you will, the perception of what LSI is, what we can do, what we're capable of. And the sophistication and quality of the product. It has been a very, very busy third quarter from that perspective. Bob? What I would like to do is add to that before I turn it over to David. One of the things that we've accomplished is a direction that is going to definitely open up new markets. The recognition of the state of the economy has certainly put the pressure -- we have put the pressure on ourselves that we know that the traditional type of lighting that's out there now is certainly under a great deal of pressure. There isn't a lot of new construction. The products that are out there obviously come at a much lower price. There is a lot of pressure on the pricing because it is truly a buyer's market. We started to see this obviously a number of months ago. We started setting our goals in a little different direction and simply to say that our goal right now is to maintain our market share and do whatever we can to grow that market share with what I call traditional lighting. Lighting that is supported the growth of our company for all of the years we've been in business.

While at the same time putting a tremendous amount of effort and certainly investment in dollars in bringing out new product lines using this new solid state, very, very low energy, low maintenance type of products that we call LED. We effectively looked at our markets and in the first five or six products that came out, which are now in full production, are really driven toward the retrofit market. Recognizing the new construction is basically not there, but there is a tremendous amount of lighting products out there that are high energy use, low maintenance or I should say high maintenance and that's what this new technology brings into the market place. We have developed an architectural look that's a lot different than what our competitors are doing. It is cleaner. We have a number of patents, both in design as well as mechanical. And we are really setting the course for the future of this company as it relates to lighting.

Our goal is very, very simply, to just put that focus on that very, very high opportunity with these lower energy products on a complete market direction both domestic and International. And we are extremely pleased with the results. As a matter of fact, there was a customer visiting us here just a couple of weeks ago. A customer that had taken the time to go out into the market place, visit some of our competitors and looking at their technology, looking at what they had done. Came to us and the same kind of direction as a part of his education and at the end of his visit to us, he said to us "I want to tell you something, he said, I'm so glad that I came, and I'm quoting him, I came to visit LSI. He said, in my opinion, you guys are heads above anybody in the industry as it relates to its architectural design, its performance and its technology in the solid state driver part of our business. We're excited about that kind of a direction. And this is really -- what we're doing now is really establishing the foothold for what's yet to come.

The unfortunate part is we're in an economy that people are being very, very careful and holding their cards to their chest, if you wish, and that makes it even more difficult to see where this is all going to come. But with that said, I'm going to turn it over to David now because David, as tough as David's business has been, being a project-driven part of our business, there are some very, very interesting highlights there. David?

Thank you, Bob. Good afternoon, audience. I will first comment in our fourth quarter, our goal is to raise that revenue and lower the cost and as Scott and Bob both told you earlier, we surely have got our cost controlling elements and program in place. As far as raising the revenue, we've seen a lot of activity in proposals to the market. Mostly in retro fitting programs, remodeling and not in the new build. Although there are programs out there with new concepts. And that is because some of the areas in the graphical end of the world are very strong. Grocery, QSR, convenience, and even the banking because of the mergers and consolidations going on. Activity, although it may not encourage lighting in most cases, signage and need for advertising is still strong.

In spinning off that, an actual program that you're all aware of that's going to take place and starting here in our fourth quarter is our large conversion of the Long drug chain into the CVS. Again, that will start in our fourth quarter. That was an acquisition that happened in the summer of 2008. And is finally getting traction now. And it will be posting in the fourth quarter. We have some convenience petroleum sites that are activating the food portion of their business and the interior identification and there is a lot of company-owned stores that are being sold to the dealers to franchisees, that are going to show conversions in cleanup in programs that we have forecasted for again, the fourth quarter. We've already talked about the convenience store chain that has the prototyping going on on 100 plus sites in graphic opportunity is involved with all of those.

In the video board market, this is the strong season now as we enter football has to be the -- the orders have to be placed. Those stadiums have to be ready prior to September and in basketball, those have to be ready prior to October. So, this is the busy season for the proposals and build activities and we're encouraged with that. I'll turn it back over to Bob and Scott.

David, thank you. I think that the emphasis that David has made in reference to some of the video boards is definitely on our target list. Our sales force has been very aggressive and we're very encouraged with the products that we have already started to ship and the ones that are pending out there that we believe we have a very good chance of getting. It is not anywhere near what we had hoped it would be. Because of the economy.

However, we're taking one step at a time. We're moving into that market. Very, very strategically. And I think it going to have a big effect in the next few years as we start getting our product out there and showing the market, the quality of the product and the type of product that we have the capability of producing. Last but not least, Fred and Jonathan are in Montreal and if you guys would give us a quick update on reference to the activity that you're involved with and certainly even mention some of the new product -- the very new product that you guys have been working on and we'll be talking more about that in the next month or two.

Okay. Thanks, Bob. Well, we'll talk about the technology. The company currently, we are working on a new product development. That we're in the process of finalizing. We cannot announce today the type of this development. But it is in the LED video board that's going to change the way LED video board will look like. And it is going to be unique technology. Will be really something very important related to the market of entertainment and sport again. And they are both large market and large application.

In the meantime, because of the type of the products and stage where we are on it, we're not able to announce this development but in the near future, we'll be able to give you more information. We are lucky on this development that we have potential application for it and I'm hopefully very soon, we will be announcing that. In regard to the International market, Scott has touched a little bit on it. Again, I would remind you all that we are working in Europe and Middle East to open this market. As we say before, the main focus is to find the company that we will be partner with where they are good company, solid company, they have the local contact. And we want them to take over the responsibility, not only selling the product to the client but again, to support, engineer and maintain LSI product, that will save lots of costs on LSI since we will be producing the product in the state and ship it out and our partner will take care of the rest of the work in each country. Two of those type of partner we have defined already. One of them already in UK has the opportunity was a three-year purchase order. To really install a new LED product from LSI as a prototype unit right now.

The advantage of this is that as soon as they are installed, we will be inviting lots of clients to see that on site. They will see the product in real time and that will offer a big opportunity for LSI for the future. We did a presentation last month again in France and we invite almost 40 different consulting engineers from different company and potential clients from Middle East and Europe and the feedback we got from that, it was that LSI product is the best that they have seen up to now in LED. We're well advanced on everybody else in the world. LSI's strength and credibility and the position that where LSI is, it gives lots of comfort to this company to be able to choose LSI as the main supplier. Not only as a supplier, they look for long-term relationship because this product is more industrial and commercial product. It is not a product that they buy into it for a house. It is a product they buy for like the city light for the whole city. They need company that can stand behind their product. LSI, is the company that this kind of a client will be looking at.

We will be announcing more good news about the International market in the near future. There is a lot of other application, we're negotiating right now with them. Especially on the street light because the street light is going to have a large market Internationally. Again, that's how much we can to date talk about this market and hopefully in the near future, we'll give you more information and more update. I turn it back to Bob.

Thank you, Fred. One thing I failed to mention and I know it is in the back of a number of folks' minds is the material side. One of the things to remember that we are now in this quarter, going to start seeing a much more improved material cost rolling over from the prior six months or so. Certainly, we had a fair amount of inventory at higher prices. We had vendors with a certain amount of inventory specifically in the metal side, at higher prices. We're going to start to see that now start to fall in line in the fourth quarter and beyond.

Our purchasing group has done a great job in renegotiating a much better cost structure on the materials side. The only concern I have about that is, of course, the competitiveness that exists out there and where the pricing will continue to go based on the situation within the market place. I think what we'll do now, I would like to open it up to any questions that you folks may have. And then my last final comments will be made in reference to kind of putting our whole picture in place for where we believe we're going in the next few months. If you would, please, open it up to Q&A.

Yes, sir. (Operator Instructions). We have several in the queue. First one comes from Mr. Glen Wortman. Go ahead. Your line is open, sir.

Good afternoon, guys.

Hi, Glen.

It looks like your SG&A expense came down rather considerably, sequentially and year over year. That a good number to use going forward here and can you just give us a little sense of what was behind the drop?

Glen, you're right. It did come down sequentially. We have to adjust that analysis slightly in that a part of the SG&A expense is the commissions and the commissions are certainly dependent on the volume of lighting sales. So, as those lighting sales come up, that will certainly bring our SG&A costs up.

If you adjust out, Glenn, the commissions and the impairment expense which is included in the operating expense, maybe that was broken out separately on the press release. In any event, taking those two out of the picture, we were about a 15% down from the second quarter. So, that's good reduction. I think to some degree, that is a good model going forward. Just consider the commissions will go up as our sales are up in the future.

Ok. Thank you. And then on lighting, do you guys -- can you guys provide a breakdown on the impact from lower volumes, lower prices and perhaps any change of your mix in products, do you guys have that type of information?

Without getting into the specifics, as you know, we really don't, is the impact obviously is definitely in place based on the competitive pressure that's out there. But I think when you look at the lighting part of our business, and Scott, correct me if I'm wrong, but our commercial lighting business is off about 6%. Closer to 8%. Yeah. And based on that, obviously I've been working or watching some of our competitors who are much larger and their percentages are off quite a bit more. I think the emphasis there is the fact that our sales force is really working hard in order to bring some of our products into some opportunities out there. As limited as they are and is helping. But we really don't know what is yet to come.

I think that the commercial lighting business has lagged some from some of the national accounts and certainly the petroleum and other niche markets. Those are pretty obvious and pretty evident. This is why I think we've kind of hit the lower part of that one because we've been experiencing that for a number of months. But where the commercial lighting business is yet to go is really a hard thing to say. We're hoping that with some of the new products with some opportunities in the new markets that we're going after like street lighting, again, it may take some time because the cities that we're working with right now are basically taking our products and others, and doing a test. And how long those folks will be in the testing mode, I have no idea. But obviously our approach is to start bringing product into new markets where we have what we believe to be some of the best technology.

Ok, thank you. And then, can you just give us maybe some more color on the potential timing and size of some of these graphics programs that you've alluded to?

David, if you would like to try to do that. Because, again, it is forecasting without a tremendous amount of input from our customer. David, again, you correct me if I'm wrong, but based on the number of conversations we've had, it is the interest that exciting us and the fact that we know that some of our competitors have fallen by the wayside. So, there are some doors that are opening there. The one thing that David didn't mention that comes to mind is that we have one of our major oil companies, Chevron, has started to put in play a little bit more into a reimaging, he alluded to it by a comment. But how big that will be is yet to come. So, David, that's the best I can do. If you've got anything else add to it.

Well, I'll add a couple more comments on that. Of course, as we talked about the long CVS conversion of Long Drug, that will go beyond our fourth quarter into our first quarter of 2010. Fiscal first quarter of 2010 and part of the second quarter, almost to the end of the year. And then as Bob said, the Chevron program, we won that contract for oh, roughly 500 sites and that's going to start again in our fourth quarter and continue into our first quarter of 2010. The QSR market, some of our customers, one in particular has started a national concept program. I don't want to get into too much detail of it.

It is a whole new look for beyond the concept but also for their stores, there will be more national news on this type of thing and we've had a fine past history with this and we expect to participate in the future. When that kicks off. Whether it is June 1st or October 1st or whenever, we can't set that date but they'll make their public announcements at their various earnings calls in the future. And then, again, speaking for all of the QSR and the grocery, those industries haven't been hit near as hard as the clothiers out there and some of the other jewelry retailers, that type of thing. Some of them do have -- are in a good cast position and some of the programs have to go forward because of the competitive nature of the market . They might not be building new stores but they sure need to get their new brand of coffee or their new food offerings out or their whole new menu offering. So, we're encouraged in all of those areas

If I could add to that. I think the encouraging part-- this is the way I look at it anyway. Is the fact that we have this kind of relationship with these larger companies and we have worked hard over the years to develop that relationship. And there are certain things that are happening. They're not big things but they're things that are keeping our people employed and keeping the heart of this company in place and it is up to us now to find better ways to improve the bottom line and to reduce the overhead and the cost without cutting the company, And I'm encouraged by that because we have some great opportunities with this new technology. One of the areas that we're looking at very hard, we don't have a full answer yet. But is really an LED menu board system. We're working on that because we have customers that are very interested in that kind of a direction. And if anybody has the ability to do it, we do. Versus anybody else that's out there.

Our major competitors that were in that business over the past years, two of them are gone. So that when and if these companies start to look at a stronger investment and in these lower energy, better maintenance products, LSI is going to be there and be able to provide them with that-- with that capability. Certainly, last but not least, one of the impacts on the impairment was our [Adap] company which is installation. Those folks, of course, are feeling the slowdown as well as others. But again, those folks, given the opportunity, with this 100 store pilot run that we talked about, we can't mention the customer's name at this point, if that turns into a program where they want to roll out the rest of their stores or a number of their stores, then the Adap folks would be there to be there to help and do that. So, LSI sitting here today with that strong balance sheet, even with the unfortunate results of the third quarter, certainly are not acceptable but we understand them and the fact of the matter is that I think in the long-term, it is going to make this company a better company, a stronger company because we're doing a lot more with fewer people and we're not only -- improving the cost structure and you'll see some of that in the fourth quarter.

The third quarter was, again, that quarter that a lot of this just dropped on us. With the brakes completely put on. But we've been through it. We're here. Our balance sheet improved. Then we moved forward from that. So, if that answered all of your questions, Glenn, we'll turn it over to the next person, please.

Thank you.

The next question in queue comes from Rick Go ahead, sir.

Am I on?

Hi, Rick.

It is Rick [Dotay] I didn't know if there was more than one Rick on the line. You mentioned billboard orders. Can you elaborate on that?

They're not big. They're not a clear channel or one of the bigger companies. What we've done is taken an approach to go after some of the smaller opportunities out there. It's like anything else in building the market, we have to get our product out there and we're doing it in a way where it is very specifically designed and it is starting to get boards out there. We've got some in production now that, I believe, will be shipped in this quarter. And hopefully from there others will be stimulated.

There is definitely a lot of dialogue going on now with some players that could make this thing a much bigger opportunity than we have today. But again, it is -- the proof in the pudding is in the eating. It is direction that we put in place to develop what we believe truly is a better board. Our standards are higher than the competition. Over the years, we've learned the only way to break into a market is we have to give that customer a better value for the dollar. That's what LSI has done well for 33 years. I'm convinced with the designs that we have and just the overall capability that we have, it is going to work and it is going to take some more time, unfortunately, we were on that cusp before the economy really fell off, Rick. But it hasn't dissuaded us from keeping our pressure on and putting more effort into place going after some of that business. Only time will tell, of course.

You did do unfortunately. You tripped right out of the gate on the billboard side. Can you talk about how the ones you have out in the market are performing?

Yeah. Actually, I can.

Boards.

What you're referring to is the unfortunate red LED problem we had on the first five boards in Memphis for Clear channel. Obviously it wasn't a design problem or any part of the manufacturing process. It is like anything else, an LED chip is like a light bulb and in all of the lighting business we've been in for all these years, periodically, you run into a quality issue and we did with that red LED. If you recall, I made the decision. That was the Seiko original design.

And there was nothing wrong with it but with LSI now being part of that program, when we discovered that, we went in and changed all of those boards with some of our new technology. And they have been running absolutely, to my knowledge, perfect. And we've had, knock on wood, absolutely no problems. The boards that are starting to find their way into the market place, I think will be in the same position as the Memphis boards and we have a high degree of reliability now.

We're very convinced that the products that we're making and our ability to produce them the way that we believe is the right way to produce them will start gaining some momentum. And certainly, some acceptance in the market place. We will continue to promote that. Our goal now is to get more boards in the Cincinnati area. Obviously for the reason being that we are going to be bringing more and more customers to see our capability and then have those products that we can take them to very quickly and show them the quality of those products. We know that the resolution of our products based on the standards that we have established and we've been told by our vendors that, of all of the people that are out there producing boards, LSI has the highest standard for the LED chip of anybody else out there. That's done for a reason. Because our name is on it and this is the way to effectively get people to recognize this, recognize that and it just takes some time.

Yeah, but you would think enough time has gone by where if the boards with clear channel in Memphis are actually performing well, that they would give you another shot and yet we don't seem to be there yet.

Well, I don't know that it is because from what I understand, their business has fallen off dramatically. So, from what I understand, there isn't necessarily a lot going on in that area. Whether they were giving us a shot at it or not, we're not spending a lot of time wasting our time going after the bigger companies when we don't feel that we're getting the right time available so we're going into other areas that we can start to create that. We will get there. We will get those boards and get that reputation. It might take another year. It might take another two years. We're not putting our -- the future of our -- of that technology on the billboard market alone.

We put a lot of emphasis into the sports package and that is doing quite well. We're not at liberty because of competition, I'm sure listening to this but we do have a number of -- a couple of big schools that are really looking hard at our product now and I'm hoping that over the summer, we'll be able to make those announcements.

Then, I think when I was in New York, you said something about the New York City area for street lights. Is there anything to report there?

Yeah. I'll let Scott but it is not necessarily street lights. Go ahead, Scott. Tell him what's going on. As you know, Rick, we've talked about the relationship we've had with some of the influences there in the New York City area and the New York state area. With our production facility in the state of New York, we have a great opportunity to produce New York manufactured product for that market. That is something that's held in high value. We have received orders for our bridge lighting products. We received another order during the third quarter for the third bridge. Why don't you mention the three bridges so folks who live in New York. The George Washington, the Verrazano, both bridges are in the midst of installation, various stages of that. The third is the -- I'm going to say the RFK bridge. I believe that's correct. Will be the installed sometime here during the fourth quarter. We've gone beyond that into several conversations on roadway lighting. Now, the roadway lighting projects we're looking at may not be necessarily in the city but they are New York-related. They're the same -- using the same relationships, the same folks we've been working with and there is a great deal of interest in finding the right technology to begin converting some of the roadway lighting from metal halite in high pressure sodium to .LED and we're participating in some evaluations there.

Ok. Thank you.

Thanks, Rick.

I have four more questions in the queue. The next question comes from Jed Dorsheimer

Hi, thanks. Just a couple of questions. I guess in the lighting market, what's the weakest area there? I think you had mentioned that you were seeing some stabilization in the petroleum. Is that to assume that the automotive parking lot, is there any other area that you saw, you know, weakness in that segment? Thanks.

Yeah, Jed, understanding that LSI's strength in the lighting market as we've developed it over the 32 years is focused on select niche markets first. The focus primarily in outdoor lighting and in the last ten years, has gained a tremendous amount of strength and capability in the indoor lighting. But when we look at the market mix and then the product mix that affects -- that's affected by the activities in those individual markets, certainly outdoor lighting, traditional outdoor lighting in today's economy is challenged. New projects are the ones that traditionally run a lot of that new outdoor lighting requirement. We have gained a lot of following now on the market place with our indoor and our fluorescent product lines.

We're participating in many energy-driven retrofit programs that are primarily driving indoor lighting sales and that's really what you see in an economy like this with a lack of new construction, you see folks taking a look at their facilities and when they do that, they're spending more on interior lighting than they are on exterior lighting. And that certainly has its implications from a product mix perspective and a profitability perspective. But having said that, most of the interest in solid state lighting is on the exterior as you well know. So, we're seeing a variety of things occuring in all of those combined to provide the kind of results that we're seeing. But from a market perspective, the automotive is definitely the softest and I'm sure we'll continue to see it that way. The other thing if I can add to that, Jed is on the LED. we're -- within our industry today, the availability of types of products and size of products just isn't there yet . Many of us have much smaller LED fixture heads in the 60 LED anywhere up to maybe 150 or so. And looking at the replacements for 400 watt and down, are much more effective today. A thousand watt and down, a little bit more difficult because of the cost of that product. What LSI is doing is effectively looking at its market, taking into play the ability to put a product out there that will answer the question and show the kind of energy reduction that the customer needs to see and give them an ROI that makes a lot of sense to make that conversion. Lacking the new construction has certainly affected the outdoor part of the industry as Scott has said.

I'm confident though as we're moving forward with -- the rapid improvement and energy that we're going to cross that bridge very soon and the ability to bring the type of products to the customers and the big customers that are really interested in finding a way to reduce energy. And we're not there yet as an industry but I don't think it is that far away before we'll get there that it will be an affordable method to take those old HID fixtures off and replace them with LED. The other thing that's happening that maybe most of you are aware of the fact that the government and one specific individual out of California that forced the issue on incandescent is now on record saying that there's going to be a bill prepared to start moving the lighting industry more rapidly away from -- didn't specifically say HID but move the lighting industry away from those which she said energy wasted type fixtures. That's going to be an interesting direction on what's going to come out of the government.

So, what we're doing is we're looking at our markets. We're looking at our customer base. We've got a lot of outdoor fixtures out there of the old metal alloy type and it certainly behooves us as a starting point to bring to that customer a new idea where we can reduce the energy and improve the maintenance and that-- and from that point, hopefully, we'll start influencing the opportunity with other customers out there that we're not presently serving. At least that's our strategic

Thanks, that's helpful. Scott, the -- who do you often see as your biggest competition in the -- in the next generation crossover type solid state products?

Well, Jed, that's always been a difficult question to ask even before we got on the solid state technology, because it really depends upon market. There isn't another company out there that does what we do.

Let's take outdoor street lights because that sounds like that's where you're really -- where I guess the most immediate impact and opportunity is, given what you just -- what Bob just mentioned. So, in the street lighting market, who do you often bump up against?

You know, it is so new that you're going to see the traditional lighting companies in that market. You're going to see a variety of new entrants to the market or to the industry. that are competing. There isn't anybody, Jed, I can honestly say that is the leader in that market, that, frankly, we would point to as somebody that we are concerned about or somebody that we feel is close to us on a competitive product as anyone else. I think it is going to be a very wild ride, to be honest with you, initially, because there is going to be a typical industry cleanout or clearout as a number of new entrants frankly get filtered through this process and arrive at a much smaller collection of competitors. And I think they're going to be the names you're familiar with. I really do. I don't think there will be anybody that we're not familiar with and there's going to be several players there. Well, two things are going to happen. If the government puts a stronger direction in place, we'll see all kinds of competitive directions. Number two, based on the cobra head replacement, as you well know, Jed, that is a very down and dirty product. It is very, very inexpensive and the street lighting and there are just millions of street lights out there. It is our approach based on a new market and we personally feel that there is nobody, including ourselves that are quite ready for what the market is going to demand.

I think we're closer than others. That customer that I referred to, that little story I told you about, had visited other companies, that was a customer that was interested in street lighting. The encouragement is he looked at our product and he said you guys are way ahead of the rest of the pack. Are we there yet? No. But we're getting very, very close to an affordable product that will hopefully penetrate the street light market. And I think that if any of this stimulus money ends up in some of the cities and some of the states, that is an area right away that they're going to look at based on energy reduction because there is such a dramatic ability to reduce that energy. We're very encouraged with our product and the acceptance of that. I think the proof of the pudding again will tell with the samples that are -- the tests, the prototypes now being shipped into the different cities that have requested that and we'll start to see where the fallout is going to come from there.

All right. Just a housekeeping question, I'll jump back in the queue. Ron, on the cash flow, I guess, you don't have a statement of cash flows yet, but just looking at the limited details we have on the balance sheet, I would assume that payables actually grew during the quarter to generate about half of that cash flow, is that the right way to look at it?

Actually, no. Payables decreased reflective of our lower production efforts during this third quarter. We had a very nice inventory reduction and we had an even larger reduction in accounts receivable.

So, where did the -- so your cash grew from $8 million to $14 million so a $6 million delta there.

Correct.

It looks like your assets declined by about $4 million. So, where did the other $2 million come from?

Let me look here at some information if I have it with me, Jed.

We can take it off-line if you don't have it available.

I probably should.

All right. Great. Thanks.

I'll give you a call.

I'll jump back in queue.

Thank you.

The next question I have in the queue comes from Jim Ricchiuti.

Thank you, a couple of quick questions. On the billboards that you announced, that you have with some -- (inaudible) tier two, tier three players, are the bulletin size or poster billboards and are they in Cincinnati or is that where you would like to see some boards go?

No, Jim, they are definitely billboards. They're 14 by 48 which are pretty much the standard size. They're in the surrounding areas, they're in Indiana as an example. And what we're working on now is to work on a local program. It makes so much sense because the folks that are coming to visit us, we want to bring product and make it easier for them to see it. Not like our competitors who get them all over the place.

It is my goal to just put the pressure on where we have the best opportunity. What we're trying to do is stimulate a concept within our own manufacturing areas. I've written letters to different political -- folks in reference to saying it makes a lot of sense if there is any money being spent, spend it in your own backyard first. That keeps the people employed, that keeps your tax base stronger and we're going to go to work on that. We've got a tri-state area between Kentucky, Ohio and Indiana and we've got plants as you know in Kentucky and Ohio.

So it makes a lot of sense to put the marketing expertise and direction into our own backyard first. And from there, I believe that once we get these products out there and people to see them, that we have time and grade on them, if you wish, that we'll start opening the door. We have a great product and we're making new design changes in order to make the product more cost-effective for the market. That will be coming into play here by July. Based on the next element of board that will be coming out. So, it is part of a strategy in order to get as many products out there as close to our own home base and build off of that.

This 100 site pilot program you have with the C store chain, that going to be installed in the current quarter? Is that something that rolls out over the next couple of quarters? How long is the evaluation period?

60 days.

Ok.

60 days when the pilot run will be finished.

Final question, just on the national retailer that you now won -- been awarded the interior business again. I was just wondering if that retailer is looking at the crossover product line. Is any of that product line potentially going with that retailer?

Absolutely, Jim. They've adopted some of the product line already for their petroleum facilities. And they're evaluating other product applications as well.

But not to confuse things, Scott, this is I'm assuming -- I'm talking about the WalMart business. Have they taken on any of the crossover product?

Just as I stated, yes.

Ok, appreciate it. Got it.

For the applications, reviewing others.

Ok. Thanks very much.

Thanks, Jim.

We have one more question in the queue and it comes from Jim Stone.

Good afternoon, gentlemen.

Hi, Jim.

Can you tell us a little bit about the competitive situation on the short list when you get down to that. Typically how many folks are on it and are you seeing different folks or is it the same folks you're seeing on each of those short lists.

You're talking about the new technology, Jim?

Right. When you're going after the bids.

I think it is fair to say that it is the same group of people that are out there. I think everybody realizes-- certainly all of major manufacturers realize the future of where LED is going to come into play and I think it would be fair to say that based on the announcements that have been happening periodically of different acquisitions of smaller companies, that these -- all of us in the lighting business are going to get a lot more active and in products using solid state and LED technology.

I'm thinking particularly in some of the projects you're going out for bid, typically how many people are physically bidding? Is it three people? Is it eight people?

I think it depends on the market. The niche markets, we only have one, maybe two on the broader scope, depending on who it is and who has contacts with whom. The reps and so forth come into play. I think it comes down to the type of product that's available through that manufacturer. I think, this is my opinion, based on what I have seen and the web pages that I've looked at, I think LSI has a broader line of fixture-- LED fixture types than anybody else out there at this point. I think there is an active role throughout the industry to enhance that type of product offering. Our next phase-- you look at our product line today,

Everything that we did was designed around a specific market. The parking garage market, site lighting, street lighting, canopy lighting, soffit lighting, all big market potential as far as high volume fixtures. The next direction that's well in place now from a design standpoint with all of the education that we've developed in this technology is to roll out the next line of products which would be more in the architectural design. The higher end, if you wish, as a specified type product. So, we're doing it in phases. Based on market potential. Recognizing a low -- very tough economy. With a lot -- with not a lot of building going on. The retrofit market seems to be the most obvious way to go and that's what LSI did first and now with the basic driver and certainly the technology that we have, we're moving very rapidly into the next type of product line. Hey, Jim, one of the things, one of the points that I think would be helpful to make is that in addition to the advantage that LSI has by strategically focusing on those high volume retrofit market opportunities, and knowing that there are competitors in the market place, the one statement that I will make is that there are few, if any, that are providing product today in the market place at an affordable level. And that's really what stands us apart in the customer's eyes today is the way we've developed the technology, the way we've developed the product design has allowed us to enter the market place at an affordable level and the number of competitors is not significant as much as the number of competitors that can compete with you at that same affordable level. That's where the number dwindles very, very quickly.

In terms of some of the larger markets, larger sizes that you say will open up when the pricing is right, what sort of pricing do you think LEDs have to get to open up that market?

I think it is really ROI, Jim. It is not necessarily a price itself. We're look at a type of lighting product today that, in essence, can last ten years or more. And so we combine the maintenance and then we look at the energy and we look at the-- obviously the cost up-front and it is LSI's goal to try to develop a product line that basically is looking at a return on investment of three years or less. And if we can achieve that goal in the major markets with the type of products, when you're looking at a ten-year plus lighting fixture, with a fixture that could reduce energy 40% to 80% based on the range, then that's really the direction that we're taking the designs and the manufacturing process.

Housekeeping, when you were talking earlier, you said you expected a strong fourth quarter. Is that fiscal or calendar?

Well, I didn't say a strong fourth quarter. I said an improved fourth quarter because we're living day to day, week to week, month to month, but it is the fourth quarter, the quarter we're in now. We feel that there will be some of this rolling over into the next quarter or the first quarter of 2010 but it is -- believe it or not, it is so difficult to forecast, really, what is yet to come based on all of the -- I guess just -- the uncertainty of the market place out there and the economy, it is very, very difficult. We're not getting any -- even from. our biggest customers, not giving us any real good forecasts. It is a very difficult position so what we're doing very, very carefully is we're moving more and more of our traditional inventory out and putting more money into the LED and solid state inventory where it makes sense based on markets.

And certainly looking at the International market. That's where I have one of my higher hopes because their energy costs are so much higher than the US and we've got a great product line that is already established in these niche markets in the US, and, we're going to build off of that and those folks that have been over, that have come from overseas to visit us know it. They've been around. They've seen the different sites that we've done. I think it is fair to say that today, LSI probably has more LED. product in the North American market than most companies if not all of them.

We have done a great job in getting our products into the petroleum market, everybody buys gasoline, it is a visible product. It gives our reps an opportunity to bring anybody who's interested in LED to a canopy. It shows the light fixture. It shows the quality of light. All of the things that a lot of people still today don't fully understand. And last but not least is every day that goes by is another day that we build on the time side of it to prove that the warranty that we're making available, we've got a limited warranty now of five years. We've never had that with HID fixtures before. So, as days and months go by, we're just building a stronger, a better story and the more volume product we get out there, we're going to have more people available to see it.

Ok. One last question. Can you comment on how LED type products went from second to third quarter, were they flattish, up, down, whatever?

Ron, you want to verify my statement here before I say anything. We're going to get to you accurate information. Clearly, a lot of work has been done in the last two quarters. A lot of these products have just been introduced in this quarter. The higher volume product would be in the crossover canopy fixture because that is a growing product acceptance.

I do know that we sold the most we've ever sold in the month of March. I don't know how that works on a quarter to quarter basis though. I guess very similar numbers quarter to quarter, but when you take that in the context of a January and a February I think we're very, very happy and again, as I said, we sold more in March -- we set a record if you want to call it that, for LED lighting sales for the company's efforts over the last two years.

The third quarter is never really a good quarter to base anything off of. Historically, it is the slowest quarter, a lot of budgets aren't out. We just traditionally -- so people don't know what money they have to spend. I think the real comparison will really start as we move into the fourth quarter and beyond, Jim.

Reality is we're selling outdoor lighting in January, February and March. Pretty good to show some improvement in that quarter over the second quarter.

I think really, what we're seeing here is a real exposure from our customer base and more and more companies are trying it. The old marketing direction we have in place is seeing is believing. That takes time. People are working, really a lot of folks still don't understand the real true direction of LED and solid state and it just is going to take some time. But what I'm encouraged about is that more and more of our customers that have started the prototype process are beginning to say this is the way to go because we're -- and costs are coming down. These material costs are coming down. We're making that product more and more affordable. And really focusing on that ROI.

So, there is a number of things that are coming into play here to set the direction for the future. All of us would like to see it come quicker. Unfortunately, I would love to have seen this continued direction coming with our traditional sales at the normal level of what we've been used to for so many years. So, the impact of what we're trying to do is we're putting a lot more pressure on ourselves and certainly our sales force to get more of this out there. Not necessarily just to build a revenue side but that marketing direction of seeing is believing, having folks go out there, see and say you know, it is time for us to start to look at that. If some stimulus dollars come into play in different areas to help, that is all the more power for us. But right now, we're not depending on that. We're not living by that. We're really developing our own market and our own direction.

Ok. Thank you. Let's hope for a good quarter.

Yeah. You and me both. I think that's all of the questions. I want to thank everybody for their time. Very, very quickly, just as a recap, the simplicity, if you could put it in that word, the direction of this company is number one, we will continue to maintain a strong balance sheet. It is important to this company that we have the reliability of our vendors and certainly the assurance of our customers that we're a company that's going to be here in the future. We will continue to invest in the proper product offerings that we have talked about today.

We will continue to put more effort into the sales approach with different creative programs and do anything that we can to improve the revenue stream without hurting the financial structure of the company. Last but not least, the tremendous cost reduction effort that's in place -- and I can assure every shareholder out there that may be listening to this that LSI has done everything that we possibly can to look at every single cost in doing business. The most important thing to me as the CEO of this company is to keep the financial strength of the company in place and our people employed. The toughest thing to do is to cut people. We have had to do that. But not at a level like some companies have had to do. The balance that we have in place and certainly the tremendous effort and I really believe the support of our employees to find better ways to make our company a much stronger, cost-effective company will help us in the long-term. I think this is a -- you got to look at the good side of all of the bad sides-- of bad things. I said yesterday to my board, believe it or not, there may be some good out of this economic turndown. You got to look at the best of this. This is going to make LSI a much stronger company. It is a tremendous training process for the next generation of management. I can tell you in my 48 year career, I've never seen anything quite like this. As the next generations coming through, they are going to really learn what it is like to go through a tight economy like this.

I believe it will set a structure, a state of mind in the years to come of the next management team to remember these kinds of days and how they operated their business and how this company got through it. So, the bottom-- the end of the day, nobody's happy with the quarterly results and certainly the stock price. But on a long-term basis, I think LSI has taken all of the right steps, made all of the right investments and certainly putting this company into a stronger financial position as it relates to an improved economy. And only time will tell with that comment. With that, I would like to thank you for your time. Of course, if there are any questions, give Ron or myself a call. Or even David or Scott. Or even Fred. Our guys are available to talk to you a little bit about what their thoughts are, how their cost improvement programs are working and we'll talk to you next quarter and hopefully it's going to be a much better day. Thank you for your time.

And that concludes today's conference. You may disconnect your telephone lines at this time.