LSI Industries Inc (LYTS) 2010 Q2 法說會逐字稿

Good morning, everyone, and welcome to the LSI second quarter investors conference call. Today's host will be Mr. Bob Ready, the Chief Executive Officer of LSI Industries. During the presentation, all participant lines will be muted. Participants will be allowed to ask questions at the end of the presentation. As a reminder, today's call is being recorded.

Now without further delay, I will turn your call over to Mr. Bob Ready.

Thank you. Good morning, everybody. I appreciate everybody attending this morning's meeting. I must apologize that at our normal schedule we usually are on Thursday afternoon. But because of scheduling problems here, we couldn't fit it in from an appropriate scheduling time.

So in starting off this morning, I would like to go through a little bit of history that we shared with our shareholders on November 19. And I think it is very pertinent to the level of what the market is like.

As a reminder of the folks that are online today, LSI as you all know is around 34 years old. The backbone of our Company started with the petroleum industry, moved into the fast food industry and ultimately in the automotive industry and then when we became a public Company, we officially started going after the retail segment and then soon after that commercial industrial.

Now that is history that most people know. But what you may not be aware of as we moved through 2007 which was our largest and strongest year for a number of reasons and that was obviously with the big programs that we had rolling out and we were really poised to start pushing our Company into a very aggressive direction.

But soon after our strategic planning meeting in February, we started to see this cloud move in based on the economic conditions and within 18 months and I'll share with you what literally happened to LSI as a Company, starting off with the QSR market, the fast food industry, our market declined 88%. Now we didn't lose market share. It is just the market shrunk in an 18-month period by 88%.

The petroleum industry shrunk by 60%. The automotive market by 40% and the retail market by 66%. Now that is the backbone of this Company and has been for all the years we have been in business. And I think it's important to realize that with that tremendous hit in the market what this Company did to survive and to continue to invest in its future I think is a very important part of the future of this Company.

We went into a tremendous cost-cutting program. We made a tremendous effort to reduce our inventories. We did shrink our employment group by a number of people but not people that are key to the continued growth of the Company. So the heart of the Company is still in place. And really started focusing on, as you all well know, to a more aggressive development process with LED lighting.

With that also said, the recognition that the domestic market because of the economy and really the condition of the financial part of the economy, we started looking elsewhere to develop new markets because really the future of this Company really I think for the next 24 months or so will depend on new markets and obviously new customers. And with that said, we started structuring a plan for the international market.

Now all of that has been discussed in the past but I think it is worth mentioning again as we look into the future of where we are. And as a result of that tremendous shrinkage, this Company came through a very, very difficult time in not only maintaining our market share but to some degree we started making more penetration in the commercial industrial market certainly with our LED products as the spearhead to do that.

But the most important thing is that during that 18-month transition our balance sheet continued to be strong and to this date we still have no debt. We still have approximately $14 million in cash --

And we do have the mortgage.

-- and, we have -- yes, Ron just reminded me we have a small mortgage which we decided to keep with the ADL purchase because it was the right thing to do. We certainly could have cashed that out but based on the structure of the mortgage, it made a lot of sense. And I think that is somewhere a little north of $1 million. So in essence, we really are pretty much debt free.

The discussion this morning we have on board with me obviously Ron Stowell, our Chief Financial Officer; Scott Ready, the President of the Lighting Group; David McCauley, President of the Graphics Group; and Fred Jalbout, President of SACO and the International program that we are going to venture into in the next few weeks that will be a press release forthcoming on the structure and the direction of that.

And we are very encouraged by the prototype process that we have been working on for about 12 months. In the European market, certainly we have had good success in the Asian market primarily Australia, New Zealand and some other areas of the East. But the process that we have developed now with the product line offering that we have in place now we believe will have a very significant part of the future of this Company.

The disappointment is the traditional market. There is no question that we are still in a very, very soft mode. The commercial industrial market was somewhat of a disappointment but not a surprise. I think in the past we have shared with you our concern that the commercial industrial part of the economy was in my opinion coming in a similar direction as the residential market hit. We've got a lot of excess space out there.

Our architectural direction from the standpoint of the number of architects out there have been reduced dramatically. It is a tough market out there and we certainly are aware of it. But we are convenient -- we are convinced that the structure that we have put in place and all of the development in the new product direction and now the planning process of the international market is definitely going to help us through what I believe to be at least another two years of a very difficult market out there.

I'm not going to go into any detail with that, I'm sure you all have a number of questions. And at this point, I would really like to open it up -- before I do that, Ron, do you have a couple of comments? You usually go through a format so the folks realize some of the numbers that you may want to mention.

Yes, Bob, thank you. I think I want to just reiterate something that was in the press release. We traditionally have not been big on disclosing or talking about non-GAAP financial numbers. However, in this case and you saw it in our first quarter press release as well as this quarter's press release, comparability with last year is very tough when we had the large amount of goodwill impairment that we went through.

So in the press release, we tried to get a better comparison of taking out the goodwill impairment from last year and then comparing that to our performance this year both on a net income basis and an earnings per share basis. And I will just say for the first half in last year we had net of -- these numbers are both net of the income tax effect -- we had $12.6 million of goodwill impairment. And when you take that out of play, we reported $1.9 million or $0.09 per share last year.

This year we have singled out the acquisition related expenses. Unless we make additional acquisitions in the future, they are kind of an unusual expense that comes through and that was almost $700,000 or $0.03 a share. That would bring our earnings to 3.8 -- I'm sorry $3.9 million this year or $0.16 a share versus $1.9 million or $0.09 a share last year.

And sales were almost level but slightly up in that first-half period. So I think that is an important comparison to keep in mind as you consider that was the first half number. We did a similar thing on the second half.

Reiterate what Bob has indicated on the strength of our balance sheet, we have got over $14 million of cash on the balance sheet, good strong working capital. I think our current ratio was 5.4 -- almost 5.5 to one. The $1.1 million of the mortgage is the only debt we have on the books. So we've got a very strong balance sheet with almost 100 at a little over $146 million of equity.

Capital expenditures were higher this year at $2.3 million compared to about $900,000 last year and of course, dividends are at a $0.20 indicated annual rate. And we had reduced that some time last year.

Thank you, Ron. Okay, Julie, we would like to open that up to Q&A right now. So, folks, if you would, fire away and I will channel the question to the appropriate folks and if you would open it up, please.

Thank you, sir. (Operator Instructions) Glenn Wortman.

Yes, good morning, everyone. Can you just update us on where things stand with 7-11 and the potential for additional work?

Sure, I will turn that over to Scott.

Good morning, Glenn. As we talked about in the past we have been developing work with 7-11 in phases and the first phase and commitment really concluded as of the end of December. Half way through the third quarter it became clear that 7-11's intent was to enter a new phase, if you will -- half way through the second quarter, excuse me -- enter a new phase of the project that would incorporate some non-gas facilities as well as commit themself to completion of the gas facilities.

So as we look forward through this quarter, we are in active participation right now, cleaning up and finishing the remaining gas locations. These were sites that were not committed to us prior to last year and not part of that first phase so they're in addition to that first phase. And we are now also beginning to get active on what we call their non-gas locations. So it is -- this ongoing work that we refer to is happening.

And if I may add to it, Glenn, what is so difficult about this is that in today's environment, we are not getting a heck of a lot of forecast or real direction from any of our customers. And as we went through the 7-11 program, obviously the roll out and the success of it was certainly showing results. And I think what is going on here is these folks start to see tremendous energy savings that are being incurred now. The excitement of moving forward with the additional sites is definitely on their minds.

With that said, we are very conservative on the basis of sharing information because until we really have a commitment or a purchase order, with the state of the economy I think it would be a huge mistake for us to try to float information out there that we really don't know whether it is going to happen or it isn't.

So -- but we are excited about the fact that the success of the first phase, as Scott said, showing the results that 7-11 was hoping for and that we knew would happen given the opportunity and from there and finishing up the rest of the gasoline sites, which I will tell you is somewhere around 390 to 400 in the first quarter of calendar 2010, our third quarter.

And then as we look at as a combination we feel again without really understanding when they are going to release what the numbers will be, I think what we will start to see because we prototyped five or six of the nonpetroleum sites with them that we'll start to see releases. And as a result of what the prototype showed. So we will see a combination of the finishing of the petroleum and also the beginning of the nonpetroleum. And as we get more information, we certainly will release it to the market.

Would you be able to provide us maybe with a comparison on the revenue opportunity on a per store basis for the nonpetroleum versus the petroleum stations?

It is a little difficult to do that now. We will be able to do that as we get into the program. As we start doing surveys and certainly you can appreciate the fact that just basically most of these stores are all unique and different in their own way. But until we actually get into the field and do the actual surveys on these nonpetroleum sites, it is a little bit early to really guesstimate exactly what that cost will be per store.

And, Glenn, part of the uncertainty really comes from the fact that 7-11 is still flexible on their scope per store. They are developing, they are trying, they are trialing certain concepts, they are measuring those concepts and then they are making adjustments to the scope of the facility itself, the project. Whereas the gasoline sites, that scope was probably pretty well nailed down as we got half way through the first half of our fiscal year. We are really just in the early stages of the non-gas stores, so that scope will creep either up or down depending upon the reaction of the customer.

But from our perspective, I think the excitement is that it appears that they are going to start moving forward with the non-gasoline which we were certainly hoping for as we were rolling out the petroleum sites.

Okay. And then finally in your last press release, I think I remember you alluded to some increased activity on the graphic side with the fast food restaurants. Can you update on the progress or any progress on that front?

I will turn that over to David.

Thank you, Bob. Good morning, Glenn. On the fast food side, we are more encouraged than we are on the retail side. On the retail side, well let me start with the budgets that are being set by the customers. We worked with them in the last 45 days to get their budgets in. And on the new build side of the world, there is not a lot of new build. A lot of budgets were submitted for remodel and of course I use the word gently there, submitted. We don't know what they will approve, if a particular vendor has 300, 500 and 1000 submission for remodel sites, boy, we would like to see that 1000 number. But the point being is that there has been a lot of large budget numbers that we worked with on these customers and prospects.

Now going specifically to the QSR, that is the stronger side of the business in terms of need for remodel and in many cases rebuild. Because some of these stores, some of these fast food outfits that have been out there, some of these stores are 35, 40 years old going back to the original buildings almost.

Raze and rebuild isn't out of the question. But that is the most encouraging sign of potential to turn loose is the QSR side versus the rest of the retail market.

Let me add one more thing to this, David. I think that from our perspective as we look at that market, one of the areas that we really have been working hard on is to develop a retrofit capability for the outdoor drive-through board converting it from fluorescent to LED. It is not as easy as it sounds with all of the success we've had with LED technology. But it is a market potential that we feel is extremely important. And if we can find the right mix of cost and light distribution to replace the fluorescent, I think that market is absolutely a huge opportunity.

But as David said, until we cross those bridges and come up with the right product, it is very, very difficult in this economy to forecast because we are not getting a whole lot of help from anybody as it relates to their intent.

Glenn, spring boarding off that comment, as we in the past years have developed LED lighting and have taken to various trade shows and then finally traction and orders, that is where we are at with that menu boards. With the new offerings in LED and the retrofit that Bob talked about, mid to late spring and early summer is when the bulk of the QSRs have their tradeshow and of course 60%, 75% of their business in that range goes through that drive-through and those boards they burn pretty much 24-7.

And this new LED low maintenance cost savings and the green effect is the words they want to hear. So we are optimistic about the trade shows this year with that group.

And to add to that, David, if we find the right product from a cost standpoint and a light distribution standpoint, we have an ability that not most have and that is the installation process with our turnkey capability with as many boards that are out there and the energy savings that we are striving for and the most important ingredient of that story is the long maintenance that we can provide with LED lighting. But it is a difficult task because we are working in a lineal environment but that being -- as the width of the product and the way that the LED operates.

But we are getting close to we believe a very, very successful option for that fast food marketer. And as David said, the tradeshow market is starting in the next 60 or so days and it is our hope that with some of the products that we have developed that we show the market what we can do with that and then we'll go from there.

Okay, thank you for your time.

Jim Ricchiuti.

Thank you, good morning. I had a couple of follow-up questions on the 7-11 business. Can you help us understand a little bit about how the initial deployment worked? Were these mostly company-owned stores?

I will let Scott answer that, Jim.

The arrangement that 7-11 has with their franchisees is somewhat unique in that every oil company has slightly different contract and slightly different responsibilities that fall either on the franchisee or the company itself. The motivating factor in this program was whether the store was a 7-11 store or a franchisee operated store. 7-11 was responsible for the equipment and the energy bill that went into support that store. So that was the driving motivation behind 7-11's entire rollout program.

Okay. So, Scott, it's not an issue where you have to really pitch this to the franchisees to make the investment?

Correct. In this case with this particular customer, it was a much more cut and dry 7-11 corporate driven program.

Yes, to clarify, Jim, 7-11 pays the energy bill and that was the driving factor for this. And that is the continuation of the interest that they have on their remaining nonpetroleum sites.

What you may be getting at is how do we judge the rate of adoption or how do we judge the rate of acceptance of a program like this specifically with 7-11, how does that affect the interior? The interior will be the same; it will be a driven program from the corporate perspective. But what is a variable at this point in time is the scope, exactly what is going to be accomplished in each store.

Okay. Are you having any success at least that you could point to in the quarter just ended in penetrating some other retailers with your LED lighting products?

The retail market is still, as David alluded to, probably the softest of all the markets at this point. We are working in penetrating our existing customer base as well as a new customer base, yes. We have had successes. We have had successes for some of our interior LED products as well as our exterior LED products. Those successes at this point I would categorize as prototype and performance evaluation successes. There have been a couple of programs that don't typically rise to the level that we talked about and identify individually that have moved past that now into adoption phases for some of those products.

So, yes, in a short answer, we have had successes in new retail opportunities.

Jim, (multiple speakers) I think this technology is so new that folks are really taking their time to really understand what the end result can be for them. And I think the importance of the direction and the change of this industry will continue to be derived around these energy costs. And from my opinion, perspective, the future of our Company will definitely see more and more LED tech improvement in the market opportunity but like anything else based on the economics, I think most of our folks -- and we have had a lots of visitors who have come in here to understand where the future of this technology is going to go.

The investment that we made in this iZone, as you probably all have read our press release, this is a very unique facility, very, very unique. To my knowledge there isn't another one like it in the industry. This was a major investment that we made in order to be able to really teach the attributes of the LED and really what the future of LED will hold for the customer.

And based on that, the acceptance of the product is slow but I think in a long-term basis as the costs come down and they will, we will see more and more conversions happen.

And you guys had some success (multiple speakers) --

Jim, I would like to add, Jim, this is Dave McCauley speaking, in regard to LED lighting. In calendar 2008 versus 2009, 2009 was tenfold in products built with LED lighting in the graphics portion of the business. So a lot of signage that had fluorescent or some other light source was replaced by LED and the amount of LEDs we used in 2009 was tenfold that of 2008. That does not include any just lighting products.

Anything you can say about the LED displays for either digital signage billboards or some of the efforts you have made in the past in the sports market? School market?

We certainly are going through the typical sports market cycle at this point and really won't see the active time of that market until about 30 to 60 days from now when the projects begin to be bid and let. We continue to improve our product, Jim. We continue to test and evolve not only the displays, the chips, the modules themselves but the mechanical structure that is built around it to get weighed out to increase survivability in harsh weather conditions.

So we are making progress there. I would not necessarily expect anything monumental in the short term other than our steady progress.

I think if I can add, I think we have learned a lot in the last 14 to 16 months about that product and about that market. When we invested in SACO, as these folks were really just beginning to get into the billboard market, I looked at that as an exciting market because we knew that from a lighting standpoint, it was going to be a longer drawn out fact.

But once we got into that, boy, I tell you it was an education for sure. We started out, as you all know the story, with Clear Channel and the hope was that things would continue on. But when we brought that product back to Cincinnati and started reviewing the production process, we felt very strongly that as good as SACO had been that they didn't really have the production capacity or to some degree the production understanding of how that product should really have been built to bring costs down.

So we went into a very, very cost effective design study and the one thing that we did learn, before you put any kind of a product like that in a new design out you got to test it. And testing takes time. Our approach now for the -- and we reviewed our marketing direction.

Certainly we have the capability of providing billboards, but as I have said before, we really believe the market for LSI makes more sense in the high school market, the smaller college market, certainly some of the larger colleges because we have been successful. But the real future of that product, in my opinion, will be the redesign that we are working on now and as Scott said lightening up or taking weight out of it, giving the schools more options -- and that comes with software as well as the mechanical part.

As we enter a new market -- a new schedule from a weather standpoint, as we move into the spring and into the summer, I think you will see a very active marketing direction with a new product, a new direction for a very, very large market that we feel has some success. You combine that with what we are doing with lighting -- and that is another part of our cost study is that obviously buying components, drivers, and the LED chips and so forth as we are driving more volume through our company that is giving us an opportunity to drive some of those costs down.

Maybe more so than even some of our competition because our competitors aren't in the lighting business; they aren't in the graphics business to the degree of these digital boards. So there is definitely a strategy in place with our company. It has taken a longer period of time than I even thought, but time is of an essence right now and I feel that we are really gaining on the type of product.

One of the reasons that we set up the iZone room is to bring people in and show them our capability. That board -- if you looked carefully at some of our comments and so forth, we have a screen, to my knowledge it's the only one of its kind. It's a 4 millimeter, 1.4 million chips in one screen and that screen isn't any more than eight inches deep. And it has got some of the newest technology that has ever been developed.

The reason for that is to bring folks in and show them what our capabilities are. If we can do a four millimeter to the degree that we have, perception wise when we move up to 20 millimeter, which is more of a standard usage, I hope that people are going to begin to see and understand that LSI has a capability that most folks really don't realize.

Great, thanks a lot.

[Jim Stone].

Good morning, gentlemen. I wonder, could you give us some flavor on the some of the other areas? And that is all I'm really looking for is to get a fast flavor. Wal-Mart is the first one.

Jim, Wal-Mart is maintaining their forecasted schedule to us. It's obviously significantly different than it was at its high point. But we are currently under contract for Wal-Mart to supply interior lighting, exterior lighting and developing LED solutions for them as well. And we continue to supply product for their stores.

And if I can add, Jim, to try to make it -- the picture a little bit clearer. I think it is fair to say that from our perspective that we are pretty much on course for what we expected and the conditions of the market. There is nothing out there that really is exciting. We are very fortunate to have the kind of commitments that we have from these larger customers. But none of our largest customers, such as Wal-Mart, are really being aggressive like they were three or four years ago.

Yes, understand that. In terms of the 7-11, maybe I missed it. But did you give us a flavor for the number of sites that non oil sites potential?

Well the potential is in excess of 6000 sites, Jim. We certainly would not expect them to do that all at once and not expect them to commit at that level. As I said earlier, the stage that we are in right now is similar to the stage that we were in last year this time looking at the gas -- gasoline locations. They are prototyping. They are evaluating, they are adjusting their scope, they are trying that new direction. And they will funnel that work down to a very solid in my opinion scope that will then begin to roll out at a pace that is still yet to be determined.

But realistically what is the order of magnitude? Are we talking 1000 sites, 2000 sites?

We really don't know yet, Jim, as Scott said. If my numbers are correct, in the breakdown of 7-11, there are approximately 2200 petroleum sites and about 4000 nonpetroleum. Is that right, Scott?

Well I think there's actually depending upon what regions you are looking at and the countries and so forth involved, I think there is a little more than the 4000.

Okay, a little bit more than that. But we have completed most of the nonpetroleum or will by the end of the hopefully third quarter or the first quarter of 2010. And then again, we are going through that prototype process. We haven't done the surveys on the nonpetroleum. We really haven't been given a final direction.

So we are being very careful as far as giving any kind of a guesstimate of what is out there. And until we really know, we really can't even guesstimate what that is going to be.

Got you. What about regular oil companies?

Well, we continue to make progress, Jim, on the conversion to LED technology in retrofit applications. There is very little new construction. And so all of the effort and the attention right now is as it was with a 7-11. How do we drive energy and operating cost out of these facilities and assist in our product development to provide product at the right price point that will really begin to accelerate the adoption. That remains the challenge. The product is expensive.

We are having increased success every quarter and our activity and opportunity I would suggest to you continues to increase. We have had some great success with our international efforts. Recently we mentioned a major oil company had formally notified us that we were awarded some work that will take place outside of the US involving some of our newest technology, our newest options and features available in LED, which frankly haven't even been offered to the market yet in general.

We were working on a confidential basis with this company and developed some specific features that they were looking for and have successfully prototyped and been awarded work there.

Okay. But I gather from what you are saying basically even if we back up a year or so it's just not happening as fast as it you would have expected?

Well, I don't know that I am saying it -- I wouldn't say that at all. I think it is happening pretty much as we expected. I think we knew that it was a challenge again in this economy. I mean if there is anything that wasn't expected it was the depth of the pressure that this economic condition has put on the entire market. But given what we are operating in today, I think we are seeing things progress more as we expected than as we did not.

Jim, from our perspective, this is Bob. I am extremely pleased with where we are as far as market conditions, prototyping with numbers of customers, certainly the tremendous change that has come about from the standpoint of technology change is so rapid the success that we are starting to feel in the international market, as Scott said, this is a very large major oil company who we have been working with for almost a year. And their requirements were different than any of the oil companies here in the US. And we have developed that product, it is in test.

The only thing we are waiting for now is the final approval similar to UL. It is called [KEMA]. Those are fixtures are in their test labs. They are going to that process. We were hoping to get final blessing from them at the end of January. They notified us that they are behind in their testing so it will be late February now which was kind of a disappointment.

But we are comfortable with the fact that they are going to give us that certification because of the process and the way we develop the product. We believe that once that happens there is going to be a huge opportunity in that marketplace because they -- the international market, really hasn't come anywhere close to the prototyping and the testing of these products as the US market has. They are kind of falling behind.

I personally believe that that market is going to be extremely important for this Company especially over the next 24 months.

Okay, next thing looking for flavor. I expect you had spectacular wins on the bridges. Has that type of lighting and whatever helped? Is anything happening in that type of areas?

Well, I think what those projects did for us certainly provided us the specific opportunities on those bridges. But more importantly they have created a much higher awareness of LSI and its capabilities both in the LED arena as well as the traditional lighting technology arena.

So our business in that region, if you will, has increased significantly in the last two years, in the last year and a half especially. So again, an opportunity where in a very, very tough depressed market, we are making some market share gains and we are very happy with those gains.

I think until the stimulus dollars really find their way into the market, if that happens, most of these cities are in such tough shape financially. And the New York situation, remember this actually started two years ago. We were in the development process with the state or the city of New York prior to the economy hitting the road the way it did. So that was more or less of a direction and a commitment.

The disappointment is is that you take the street lighting market, which we are very active in now. We have got a number of prototypes. I think all of these cities and communities are waiting to see what kind of money and using Cincinnati as an example, the news yesterday was the mayor of Cincinnati was in Washington meeting with the President and trying to get some of these stimulus dollars into the Cincinnati market.

I think all of us in this business are waiting to see what kind of money is going to be made available to the cities. Most of these cities are running at a deficit now. So to expect them to be going out and starting to change a lot of lighting even though the benefits are there, I think it is really a lot of wishful thinking.

As you know, I have been pushing you at large displays for a while. Can you give us some more flavor on what is actually happening there?

Well, Jim, I will just reiterate some of our earlier comments. We are focusing on driving a quality design specifically geared towards a price point that we think is important to hit in order to accelerate the volume opportunity there. We have good product designs in process, we have some remaining testing we have to complete. We have an active marketing program pursuing the high school sports arena. We feel that that will be our best immediate opportunity, the cycle of their buying process really starts to accelerate now into the spring to make sure that the projects are completed by August.

So it is -- it remains an active focus for us. We believe we are doing the right things to get the product developed to the point where we can meet a price point that the market needs in order to start moving some of the orders.

And then last and I will stop. You were working on lighting for under the counter or display shelves, etc. Have those areas materialized into any significant sales or activity?

They continue to increase in volume. Some of the comments I made relative to new retail customer penetration is directly related to that product in those display product efforts. I can't comment on specifics with regard to volume and timing of that volume but I will tell you that our -- again, our visibility within those accounts is much higher than it has ever been and we have the right product, we have the right level of interest. We just need some more commitment on releasing dollars to be able to take the next step.

Yes, I think the market as they start to see these types of products and really start prototyping and see the success, I had a situation last week where a local jeweler, jewelry store who took a number of his cases and retrofitted them with the -- he called me and he said, I can't tell you how much better my jewelry cases look with this product. Then I found out yesterday that he's going to complete his store.

Now that is just one small retail facility. But the bottom line is that these guys as they start to see what the benefits are and they weigh the cost -- and the problem with this is, guys, is understand that traditional lighting, I will just very quickly give you an example. You are working with LED chips that on the high-quality end, the high-quality end of the LED chip itself, you are looking at a chip that costs $1.25 or maybe even more depending on the quality of that chip.

And when you look at the price of a single fluorescent tube and if you look at the number of chips that it takes just to replace the light distribution as compared to a fluorescent tube and you add all the other components, the electronics, the circuit boards, it just drives the cost of that fixture way out of proportion compared to what the community is used to in traditional lighting.

Now the benefits obviously are maintenance and energy. But when you are in an economy like this, there are very limited dollars, the energy costs are not driving it enough so we can create high volume. And when things start to improve a little bit and that will take some time in this economy, we all know that. And as these costs come down because we are building volume, yes, limited volumes than -- slower volume than we all would like but LSI has positioned itself with its investments to do exactly what the strategic plan was.

And that is retrofit market, protect the markets that we built over the 34 years, take that experience and exposure and move into new markets and then expand into a world wide direction. And I think that again under the limited situation of not risking more and more of our balance sheet, we have been very, very strategically cautious to move our Company, continue to move our Company into that direction.

I know the results are disappointing when you look at comparisons but from our standpoint, keeping our Company sound I think is absolutely the right thing to do and I can tell you now that this Company is working as hard as it has ever worked in order to try to improve the revenue stream, get more volume where we can, take it away from somebody else, and that is the name of the game, and try to market a product that we will show the benefit of retrofitting and hopefully in the next 24 months, we will slowly see this return to a stronger domestic market.

With that said, we are going to put a hell of a lot of effort into the international plan because their costs in energy, their payback is a heck of a lot quicker than it is in the US. Their return on investment with their energy costs being almost double what they are in the US.

Okay, thank you.

[Dick Ryan]

Good morning. Bob, I would like to circle back on the graphics comments. I'm not sure if I caught them here. The comments were on menu boards. Are you talking about participating inside the QSR or are you bringing the product just for the outdoor menu boards?

Well, Dick, both and I will let David elaborate a little bit. But from the outside of the drive-through that is a huge market and that is a market that we've approached first. From the inside, and David will expound on that, it is a combination of LED but also LCD. And David, why don't you pick up on that?

Sure will. Let's talk about the inside. Currently if you go to the QSR, most of the boxes in there have fluorescent tubes. Their new option is they can continue the way they are, they can go to boxes that contain LED and show static images or they can go with a much greener trend that shows LCD. And what it does obviously it allows them to provide an active image versus a static image.

Right now we at 10.30 between 10.30 and 11, a lot of our restaurants are day parting on those LCD screens monitors dropping the breakfast menu and their lunch menu comes up all done without any action from the store. That seems to be the trend because they can sell advertising space on there, change prices throughout the day, push items that need to be moved in inventory without climbing up on a step stool, changing the slot in the board.

But if they do not go to this active LED has a large market out there for the static signs inside because of the energy cost, the green effect, the thinness of the boards that can be built. So I think I have answered your question there, Dick.

Well, to add to that, David, Dick, the outdoor drive-through is where our main focus is on the LED technology. Because it is a simpler system or a simpler product to get into a retrofit design. And looking at the change of what may be coming on the interior as David just explained, we obviously once we finalize our design for the exterior, obviously there will be opportunity -- it's a little bit different product, a little bit different design -- but same idea that we will start looking at the indoor as well.

Dick, one other thing on the outdoor, that is not to say that the LCD won't be outside. In fact, it will. They have the mit power the brightness power to be up to 2000 mits which is sufficient for outdoor viewing during the daytime on a drive-through menu board. But you won't see a lot of the menu boards themself with the LCD, the reason being they don't want it forever changing, they need to move automobiles through there quickly.

Where you will see it is in the presell board where they can change the ad as you are waiting to get to the order placement section of the drive-through.

Where do you think your warrantee has to get to for outdoor kind of broad acceptance?

In terms of time, four years.

Okay.

Now you are talking specifically LED, Dick?

I'm talking LCD, Dick, on that --

Well, LCDs I think are going to move to that four or five year kind of warrantee period. Is that the same with LEDs?

Yes, basically. We are talking 60,000 hours as a starting point depending on who you talk to there are all kinds of numbers being thrown out there. That is one of the reasons and you have been one of the few that have seen the iZone center is to really clarify what the potential is. Because this new technology hasn't been around -- in the lighting side -- been around long enough to really verify what the real long-term aspects will be.

With our testing process, we all as an industry I'm sure have a pretty good idea that it is going to last more than 50,000 or 60,000 hours. But as a starting point, that is where we have locked in.

Okay, good. I appreciate it.

Dick, they certainly love the idea of not opening those cans, changing those bulbs out. If you can go six years with never opening them and changing a bulb, that is a hell of a savings.

Yes, good, good. One question, Dave or Bob on the international side. Where is the low hanging fruit? What markets are you going to try to go after first there?

Well, we have got Fred on board because he is our main horse. He is the guy that is going to with Fred's international background, I think Fred you speak three languages. Fred actually will be moving to Europe to start this program in a direction. And I will let Fred -- he just returned from Europe, he has been over there now for the third or fourth time getting the market started.

Fred, why don't you share with Dick a little bit of the direction that is going on there?

Yes, after a long study and investigating into the international market especially in Europe and the Middle East area. And the acceptance of the new technology, they are faster than our local market. And because of the price of the energy and all that, it gives us the ability to penetrate that market faster than anyone else. We did longer study for the market, a lot of visiting and tradeshow and presentation of the new LED product of LSI to this market. And the feedback during the last 12 months was great and they accept the product because of the quality of the product and the history of LSI in the lighting.

In the European market for some reason, they have so much respect for American made products over the Far East product because they tried LED from different manufacturing in the Far East and they didn't like it because of the service and the (inaudible) of the quality and all that.

So LSI has a greater chance to penetrate that market very fast. For that reason after meeting with many consulting and looking at different application and project and LSI has a prototype in four or five different applications, the feedback from the clients they were A-one feedback. So we are ready to move into this market right now.

We are putting the final plan and like Bob mentioned in the beginning, we will be doing that very professionally and we will make a press release to issues the detail of that movement.

What I can say the outline is that we will be -- we will be working with a local company in each country in Europe and Middle East. And those companies, they have experience of installing and servicing the product to avoid any liability on LSI or any cost of the transporting people for servicing and installation. Those kind of companies that we are looking for, they will be our partner into penetrate the market, distribute the product, installing the product, servicing the product.

We are well, well advanced in our strategy. I don't know how much we can talk about this today. But what I will say we are on the final step of putting that strategy in place and starting doing the sales and getting good revenue for LSI.

Yes and if I could follow up with that and we are going to be issuing a press release here as soon as we get all of the Ts crossed and the Is dotted. Fred has an extensive international background. And he knows the different markets, he is very, very well versed. He used to live there. And he has got a lot of contacts. And as we all know, that is where it starts.

LSI has taken a direction and under Fred's guidance and to use a similar model that we did in the Australian, New Zealand market where we partnered with people there, they actually they even use our logo. But we have no investment, no commitment from an upfront cost direction to move into that market. That has been a very successful market for us internationally through the guidance of what is called LSI Hamilton which are based out of Brisbane, Australia.

Fred has taken the same approach as working together with us. The time element has only been curtailed because of getting certification. And that is similar to you well which we covered a little bit earlier ago. We are getting the final certification, we are hoping by mid February so we can open up this market and really start penetrating.

In the meantime, we have had -- we started to develop these relationships with these type companies. We actually, we have a company here today that have been here for a couple of days from England who have been working with us now for the last six to eight months doing prototype work. I am extremely pleased with the results of the prototype. It seems that the products that we put out there with the capabilities of the product, the design of the product has been more than well accepted by the customers that we are prototyping with.

We have limitations on prototyping because we still haven't completed all of the final certifications equal to UL through -- with all of the products. But believe me, that is a very much on our priority. It is going to take a little bit of time. But Fred has taken the commitment based on his people contacts, his marketing expertise and LSI will support it. There will be no cost up front by LSI to do this.

And if it is as successful as we think it will be as it is in Australia with these energy costs being so much higher, the design of our products aesthetically as well as quality wise for light distribution I think the market is just ready for us. And only time will tell.

Okay. Any particular industry segment you're going after first?

Well, obviously, the petroleum. Certainly with all of the experience here and that has carried itself into the marketplace in Europe. People are aware of it. But soon right after that, parking garages, the fast food industry --

Streetlights --

-- and Fred will be able to guide us more on that because we have specifically focused as most of the industry has today on outdoor lighting. And that opens up all markets whether it be parking lot lighting, street lighting, the parking garage, certainly there are fast food stores there. I mean it is a similar market here. We've got a lot of experience. We certainly have the understanding of the product requirements. And we have been spending a year getting ready for this.

We have got a guy that is well suited to do this with his contacts, his ability to speak three different languages. I just think it is a great opportunity for us. It's probably going to take a little bit of time based on -- as any new company coming into the marketplace.

But one thing that did happen in the Middle East and I will -- I will toot Fred's horn a little bit. We had an opportunity -- some of you have seen it with some of the presentations -- to work with a designer and actually build the world's largest LED chandelier. That is in Qatar. And Fred, talk a little bit about that because that is up and running.

Up and running. And it is fully paid to the Company. And it is the largest chandelier. It is the beginning of presenting the lighting in different ways for architecture application like that one.

It is 300 and some fee long, about 50 feet high, I forgot how many thousands of pounds it weighs. But it is in between two new office buildings in a glass atrium. And it is incredible.

Yes --

And it's got the LSI logo on it.

Yes. And the advantage that LSI has that we are not a company just we are selling a few lights to application. LSI can walk in with a big -- a lot of value of a product. We are actually presenting LSI for LED lighting, for video graphic, for video application, architecture application.

So LSI is a unique company between all other competitors. We can come in with a lot of product to offer to the architect, a lot of different products from the streetlight, garage light, videoboard, even graphic. So it is going to be big opportunity for LSI.

Good, good. Great. I appreciate you taking my questions. Thanks, Bob.

And that is the last question that we have in the queue.

Well, I want to take this opportunity to thank everybody for their time this morning. I can only assure you that this Company is hard at work trying to improve the revenue side. But as we all know and certainly in my 48-year career, this has probably been the toughest economy that I have ever been faced with. But I think our Company is lined up to do and to succeed in all of the right areas.

It is going to be a tough period. Our third quarter is always historically tough. But we do have a few shining rays of light in there that is going to help us through this. We have an active program to continue on the cost reduction process. We are trying to drive the bottom line at a stronger level both internally and hopefully as with some of the changes that we have made and some of the folks that we've brought on board, we will start to see some of the top line start to improve a little bit.

So it really is a combination of historic value, tenacity and the way we approach the market. And expanding it in the international plane and hopefully next quarter when we all get together again, we will start to see some of these results. And then looking into the fourth quarter, which I think is going to be an area that we will start to see a stronger expanse because we sure have been doing a lot of work getting ready for that.

So with that, I want to thank you for your time. Obviously if anybody has further questions, you can either give Ron or myself a call. And have a good day.