LSI Industries Inc (LYTS) 2010 Q3 法說會逐字稿

Good afternoon, everyone. Welcome to the third quarter earnings conference call. Today's host will be Bob Ready, Chairman and Chief Executive Officer for LSI Industries. During the discussion all participant lines will be muted. (Operator Instructions).

Without further delay, I'll turn this call over to Mr. Ready.

Thank you, Matt. Good afternoon, everybody.

Before I start off with a few comments, with me today is David McCauley, our President of the Graphics Group, Scott Ready, President of the Lighting Group, Ron Stowell, our Chief Financial Officer, and I've invited Sean Tony, who is our Senior Vice President of our Commercial/Industrial Lighting Group. Sean came to us just nine months ago and I thought it would be important that Sean sit in on this meeting in case there was some specific questions regarding the C&I part of our business; and also with me is Steve Brunker, our CIO.

With those introductions, I think Ron wants to make his usual statement that he makes every time that we're on these calls. Ron?

Which is, I would like to refer everybody to our Safe Harbor statements that appear in our Form 10-Q and 10-K and indicate that to the extent that we may be talking about some trends or items from the future, but what we will not have any material non-public information to disclose today.

Thank you, Ron. You should have that pretty well down pat now.

I want to start off by giving you a thumbnail sketch of the quarter. Obviously, it was a difficult quarter, as our third quarter normally is, even in the best of times, but this was even a little bit more challenging for us. We had some very unusual weather that unfortunately shut down a number of days throughout the LSI operations throughout all of them, Kansas City, Rhode Island, North Canton, Cincinnati, even Dallas. With that said, though, obviously it was a -- it wasn't our strongest quarter for sure, but I want to be sure that people understand that during this very difficult economic time, we have been working aggressively to change the direction of our company, and I say that in a way that basically with all the development, new product development, the new marketing objectives, the international program that we set a lot of seeds in place.

I think things now are looking a little bit brighter as we move forward. I'm sure there are going to be a number of questions relating to the major rollout program for 7-Eleven. I know that during the last six or eight months specifically in the calendar '09, as you all know, we were very much involved with a very strong petroleum rollout program. The highlight of that for me, personally, happened yesterday morning at 11:00. This is at that specific hour the Vice President of 7-Eleven had a conference call of which we were invited; and it was a recognition of a job well done by LSI Industries and taking on such an aggressive program and the success of that program and I'm Scott will answer some questions regarding that. But the success of that program, as you remember in prior calls, the interest was what's going to happen beyond that and I'm very proud to say that because of the success of that program, we do now have an order to roll out or continue to roll out a number north of 3,000 sites; not specifically understanding how many.

There's obviously a little bit of a change based on franchisee contracts, but it's going to be a little bit north of 3,000. They are the non-petroleum sites. It is a combination of graphics and lighting. The revenue per site obviously is a little bit less than the petroleum at this point, because there aren't any canopies or canopy fixtures, but the important note is that the success of the program and as 7-Eleven acknowledged on this conference call to a number of their own folks that we were invited, as I said, to participate, is that their energy savings has been extremely important and very successful, which obviously generated the continuation of their behalf to move forward on the existing sites. We'll be cranking that program basically up next month as we're preparing now in getting our production process in place to start the program. We will be involved with not only producing the product, but also installing the product, so at this particular juncture in the economy, for us, it's extremely important and we're very pleased to have it.

Our international program is off and running with Fred now officially leaving. He's over in the Middle East right now, and I'm very pleased to say that with the initial start, we have our first major order out of the Middle East for a rather large parking garage concept with approximately the first order covering about 1,700 fixtures and that's probably one of three phases. It isn't the number as much as it is the importance of starting to get our program in place for people to recognize our capabilities. The direction in Europe is still ongoing with our -- in our last week or so of getting the completion of the KEMA testing process.

As you probably remember just three months ago at this particular time we were talking about the KEMA certification. There were three parts to that. We've now been notified that the first two are in the paperwork process. The third part is about a week and a half away from final certification. The frustration is that the folks over in the Netherlands who are part of the KEMA group, they're not quite as anxious as we are to get this thing going. We've been competing with vacation time and all kinds of different reasons, but through this very arduous direction, we now are in our final stages, and obviously once that certification is finalized we'll have a major marketing push, which we've been working on for months to get all of our ducks set to kick off this program. We'll certainly let you know through a press release once that final certification has come about. Fred is over setting up the final stages of his office and his employee direction with our main focus working, I believe, Fred out of France as his corporate center with an office in the Middle East and, obviously, he will still participate strongly with our ongoing program as it relates to SACO. That pretty well covers the international market.

What I'm going to do is start off this morning or this afternoon and turn the meeting over to Scott and talk a little bit about the lighting side, and then we'll finish up with David and then open it up with Q&A. Scott?

Thanks.

We've got a pretty exciting quarter looking forward to the April, May, June timeframe. We're certainly glad to get out of the winter doldrums. As you are all familiar, a significant part of the product mix of this company has always been outdoor products. The third quarter was especially challenging this year with the weather, but we spent a lot of time in the last six months really getting ready for the final release of a new technology platform that we are calling the Crossover Generation III, incorporating smart tech technology which is -- which features some technology opportunities that relate to energy control, lighting control, and the whole aspect of promoting the greatest performance out of LED products at the lowest energy consumption. This is a platform that will be introduced formally in the petroleum market in May, with follow-up introductions in related products through the commercial/industrial markets and the rest of our niche market opportunities. We've already begun to see demand for the product. We've been, certainly, talking to some of our close customers about the technology advantages that this platform will provide. It really does enhance and take to a whole new level the crossover LED platform. We're very excited about that. The prototype work that we've done in the last couple weeks and, frankly, the orders that are currently in house for this technology are giving us a great deal of confidence on this particular platform.

I use the word confidence and I'll make a reference right now to where we feel the general confidence level is in the marketplace. We really do, as you know, serve a number of different markets and those markets do all have different attitudes about where our economy is and where their immediate prospects are. I would suggest that we are seeing more upticks than we have in the last six months. It's very difficult at this point to determine how sustained they will be. We are encouraged by some of this activity. We're encouraged by some of the confidence that the market -- that we've enjoyed for so long, shares in the products that we're bringing to market, but we do remain cautious about the overall economic activity level. We see, frankly, opportunities in many areas, but again caution overall in terms of where the sustainability of that positive action will come from.

I'm going to go ahead and take a moment now since Dad referenced the international KEMA testing and what we've done recognizing the market situation here in the US to expand not only in Europe, but our activity in Canada, our activity in the Asian market. With Fred's departure we've realigned some of the responsibilities out of that operation, and we're going to take a new focus on how we can take that operation into a proactive marketing mode, really serving the Canadian market with the kind of showpiece experience that the customers have been kind of a customer to in Cincinnati at our headquarters and preparing that same type of experience for a more internationally-based customer. As we move beyond Canada into the other half of the world, the other hemisphere, I can report that the LED products as well as our traditional product mix continue to gain a lot of attention, and while challenged with soft economic conditions there as well, we still see some very, very favorable growth opportunities and, frankly, maybe more so there than even here in the United States.

I will take a moment now and introduce Sean and allow Sean to make a few comments about the general outlook in our commercial/industrial base. Obviously that represents still the most significant growth opportunity for this Company and we certainly have not ignored our base product lines, Metal Halide, Fluorescent, and certainly the important activity that occurs in our agency base. So with that, Sean.

Sean, tell the folks a little bit about -- a very quick -- about your background. I think that's important. A lot of the folks on the phone, on the conference call, haven't had a chance to meet you. You've been with us nine months now, so you've got your feet well planted on ground.

Tell them a little bit about your background and what your observation is for us in the C&I market.

Be happy to.

First of all, good afternoon to those on the call, and Scott and Bob, thank you for the introduction. It's been nine months and a very exciting for me personally to join LSI. It's a terrific business. We are certainly driving ourselves through, what I hope and pray, is the challenge of a difficult economy. Personally I spent the better part of the last 20 years with and employed by General Electric and then most recently to joining LSI, with Cooper Lighting heading up the US portion of sales.

What I'm sensing in my nine months of employment with LSI and most recently would be optimism. We have have seen indications of projects that have been holed up, being released. It certainly is encouraging. We have felt ticks of our quotations activity increasing in double-digit range for the first time in a while. We've seen increases in architectural work, in specification work. Specifically in the C&I market, we have chosen to utilize the better part of the last six months to, with our agency sales base, really re-define how we go to market together. The markets changed around us. We are developing a uniform growth approach in each market. That certainly includes training. That includes education, how to sell in a retrofit or a reconstruction market versus new construction.

We're doing our part not only in the innovative new technology that you've seen and heard of on prior calls, and that Scott and Bob both alluded to, but also tools, whether it's energy calculator tools, Fifth Edition Buyer's Guide, help on a specification side or something as straightforward as website enhancements to help not only our agent partners, but the specifiers they serve make better, more well informed buying decisions. We have along with that top graded some of our talent in the field and we have -- let's see. What else am I covering off on here? I think that pretty well covers it on the C&I side. Training and education with agents, selection tools, creating or enhancing our presence with the specification side of the business; and I think the result has been expansion in backlog and a pickup in quotations activity as of late.

You might explain a little bit about the direction that you brought to LSI, and focusing on our sales efforts and raising the bar, so to speak, out in the field and making the appropriate changes to upgrade our level of sales efforts. I think that's a real important part of the optimism that you now feel based on what you've brought to the Company.

Sure. I appreciate that.

We go to market in two ways. We are primarily on the C&I side, an agency serve model. We have approximately 100 sales agencies and a smaller direct sales force that trains, mentors, coaches, manages, and makes sure we gain adequate mine share out of our agents. What Bob is alluding to is we measured how are our folks in the field spending their time? We certainly do our part as an employer to train and educate our direct sellers but I would say productivity matters now more than ever amongst our direct sales force. So monitoring, directing, where our direct folks spend their time not only with agents, but also with specification personnel and developing demand with end users, matters now more than ever and I think that's what Bob is alluding to.

Exactly, yes. Thank you, Sean.

David, why don't you take a couple minutes and give the folks an overview of the graphics and then throw it back to me and then we'll open up for Q&A.

Sure will. Thanks again, glad to be talking to everyone today.

On the graphic side of the business, here, we're seeing that same type movement that Sean and Scott referred to. The requests for quotation, demand that we have out there per proposal is surely an uptick of where we were 90 days ago. In fact, it's kind of surprising that we had this much in the queue to be looking at and if our percent of closure rate remains the same, that speaks good for potential in the future.

There's some real dynamics going on in the certain segments of the market. The ones that are strongest right now, our market segments, is the grocery and drug and, of course, we've been involved with those for many, many years now, but even though there's not the acquisitions going on that there were, especially in the drug chain that we deal with, there sure is a lot of activity to upgrade those stores whether be it a department for photographs or the food portion of their business. Those programs now have become more of a necessity. Before they were convenience items and that's where we got clipped real hard during this economy of not having the orders that we used to get for convenience; it had become necessity only.

Well, necessity only got to the point of almost zero. It was scary, but now because of pent-up demand and because some of the fear of the economy has dissipated, not that the economy is good -- don't get me wrong -- but some of the fear has. People have took the shock off, put it a little bit behind them, and then moved on with trying to make some money in their business here. And we're seeing that, like I say, in the grocery in a jug, the convenient petroleum in the QSR market.

Speaking of that QSR market, that's the one that's re-inventing itself. It used to be that in the QSRs, they'd have a luncheon menu and then a dinner menu. Well, now it's gone well beyond that. It has the breakfast, a brunch, a lunch, a dinner menu and then a late night menu. What does this mean to us? It means the expansion of what they have to have for an indoor and an outdoor menu board offering; and because of the dynamics of the way those are built with the light source changing from THT5s all the way now to the LED portion and the whole perfect storm is aligning. There's many a tired and old menu board out there, especially with our customer base, and we built some prototypes for the customers and have also modified and are getting ready to open a new line of offering in the LED lit boards.

Also our LCD boards, liquid crystal boards, that are helping to close this dynamic event of the menu changing that is so large now, the need for advertising and marketing rather than just a static sign on those boards, along with this new demand for healthy offerings, caloric information, it's really playing into our hands. So that being such a huge and large market for us, we're very encouraged there.

Another thing we're noticing out there with our customer base, they, like LSI did, they have cut back on their number of employees. Business is down for them. They scaled back and they're in no hurry to re-hire or add staff. They're in a hurry to start making some money, but the good news is we're seeing demand for our services that they outsource. Normally, they would do themselves, but whether it be project management or install, that type of thing, LSI is getting a lot of requests before and hopefully they never replace this business, that they do continue to outsource. So that's kind of an update of where we've been and what we're seeing out there in the near future. Thanks, Bob. I'll turn it back over.

David, as a reminder, the last conference call I had shared with our folks that we had taken a very aggressive approach to evaluate our production process and starting with the graphics business to evaluate the needs and working with outside suppliers that build the kind of equipment that we need to build product for our customer base and we did make a major investment for both Rhode Island and for Houston with some new equipment. Please just spend a couple minutes sharing with the folks about that and where that stands now and what your personal feelings are as a result of that.

Sure, yeah. That's right. I did want to mention something about that today.

LSI made the capital improvement in the graphics division of purchases in the $2 million range. This included eight pieces of equipment, most of it print or print cut type equipment, some of it metal forming, bending and painting type equipment, but the battle cry out there is to get the customer a faster, better, cheaper. Get the product to them faster. Eliminate any inventories that you can. Run in smaller batches, produce it cheaper and have the quality be better. Well, because of the again technology moving, whether it be print technology or metal forming technology or coatings, whatever the case may be, because of this technology moving our ability to have the money at this time while the market laid dormant, we're geared up for that pent-up demand, and, like we said earlier, we're seeing those quotations and we like the position we're in.

We know that our competition during this downturn in business has not gained any strength. In fact, we don't see them purchasing this type of equipment, not because they don't want it, because they just didn't have the capital; and we like the position we're in. As you know, we're program driven and even though we might not see a lot of new build business, LSI from a graphics standpoint loves the remodeling business more than the new builds. That's where the real program driven opportunities are, and this equipment again fits our game plan going forward.

And if I could add on that, David, one of the reasons we took that direction was, as you pointed out, a tremendous change in the industry and what the requirements are now by the customer to provide a higher resolution print and to do it quicker, as you have pointed out, and do it without having to have a high demand of inventory in order to satisfy their needs. We had very sophisticated equipment with the economy being the way it has been over the past number of years, but we saw a shift in that. Because of our strong balance sheet we went out into the market, and we defined the equipment that we needed; two things have come about as a result of that. We now have a much higher level of capability than most in the business and certainly doing it in a way where we can drive our costs down and also keep our inventories at the lowest level. More importantly, now to provide our customers both existing and new customers with a product that is much better quality and we believe will be in higher demand, as hopefully the economy starts to return to some kind of a normal direction.

I think it's really important that as we look forward, that that investment's behind us. Most of it's already installed. Most of it's already now in a working process and if based on what I've been told, I think that will be completely finalized in the next three to four weeks; and then we'll have all of that in place and hopefully as people are starting to indicate things are starting to show a little bit of improvement, if that turns into apps to orders, we're going to be in such better position than most of us -- most people in this industry and it's all because of a strong balance sheet that we're able to do that.

I think the only other item that I thought that's worth mentioning before I turn it over to Q&A is that, I'm sure you saw in our press release, we did finalize the completion of the sale of Marcole, down in Tennessee. I think we discussed that the last time we were together that we were really looking at closing that operation. That was all driven by the fact that the wiring harness industry has more or less turned toward the international market for lower labor costs. With the downturn in the volume because of the economy, it didn't make sense to keep this fine little company as part of LSI when the word got out that we were -- we made the determination to close it, there was a tremendous interest by a couple of businesses out there to look at it. We completed the sale, and I can only tell you by all the efforts of everybody involved that the loss that we incurred with the sale of the unit was much, much lower than had it been if we had closed it. Ongoing now we have no carrying costs. It's all behind us.

I think those are the main items that we're -- that we really want to touch on today. There's no question in my mind that the economy is still really rough. There's no question in my mind that the directions that we've taken have kept LSI on the right direction and I can tell everybody online that the continuation of the strong focus on the balance sheet is absolute, so the relationships through our vendors and our banks are all in good stead; so now it is execution with what Sean had indicated, Scott, and David, and certainly the international market, and with just a little bit of luck now that the weather is improved, hopefully the fourth quarter is going to be a much better quarter. Certainly, the 7-Eleven program is going to, certainly, assist on that, but I want to tell you right up front the 7-Eleven program is extremely important, but this company wasn't built just to handle the rollout programs. We've been very successful in the rollout programs, but we're now back to a basic direction to strengthen our traditional and our day to day business with the ability to execute a program such as a 7-Eleven or anything else out there that may become available to us. This is a continuation of the strategic direction and we will maintain that strategic direction.

With that, Matt, I'd like to turn it over to Q&A, if you would, please.

Certainly. (Operator Instructions).

Our first question will come from Glenn Wortman. Go ahead, Glen.

Yes. Good afternoon, everyone.

Hi, Glenn.

David, had you were talking about just, you know, some higher quota activity on the graphics side, are we talking about major programs or are you talking about smaller-type programs?

Yes, both, Glenn. We have some majors that are in the prototype stage now and then in the smaller range of just day to day items. In both cases, it's more than double what it was 90 days ago.

Okay. Okay.

And then on your second quarter press release you guys had referenced a global oil company in which you were an approved supplier for LED lighting. Can you just update us on where that stands?

Sure. That's in reference to what we've been doing with Shell. We mentioned, Glenn, the KEMA testing is such an important element of that process to require certification that was part of the bid process.

We've been awarded, based on their confidence with the product and based on the prototype work we've done with them, we've been awarded business already even without that final certification, but there's been no real contribution towards the revenues from that program at this point. We see all of that forward-looking. Our award is certain elements of the national -- or the globe, I should say on the international front.

We continue to do business with Shell US in this country, and we'll continue to use new product innovations. Specifically, I reference the smart tech Generation III Crossover as a means of expanding our opportunities with that account.

Glenn, let me re-emphasize something about that because it's critical to our international plan, is the KEMA testing process which is very similar in some stages to the UL, but it has taken us a tremendous amount of time to get through the program. It is nothing like the US and our frustrations are that we've accomplished all the goals that were set for us, but it just -- it's just a reaction by the KEMA folks to get that certification in place, but the important thing to know is that once that's done, we can sell this product basically anywhere in the world.

So it's an aggressive testing process and certification process, so that the patience that we've had to live with to go through this I think at some point in time is going to be well worth it, because that's all going to be behind us and then we can start moving forward with a marketing plan. It didn't make any sense to put an aggressive marketing strategy in place when you couldn't put out the product with the proper label on it to accomplish the goal of what we're required to do from a testing standpoint.

We were allowed to do prototyping, a lot different than getting aggressive in a sales effort; and it was kind of timed for us to go through this process and with Fred's involvement to get a program and a marketing strategy and a service capability set in place and it was all designed to fall in place together. Now, Fred is gone and Fred is working on that, and here we are -- and we thought we'd have this KEMA testing done by January of this year and here we are now into April and coming into May and we're still going through the process and it has nothing to do with any failure of the product. The product through the testing process has met every objective that has been set by KEMA. It's just that they just have a little bit different attitude on getting things done than we do here in the US.

A little different pace is a good term.

Okay.

And then just the final question on the new 7-Eleven work. First would you say that the size of this non-petroleum opportunity is larger than the work you performed on the petroleum stores?

And then second, is there also an opportunity on traditional graphics with 7-Eleven?

Well, there are two parts to that. To answer your first one, there's over 3,000 stores even though per store it's less. In essence, I'm sure that the dollars there will be a little bit more on an estimated level. We'll get more and more of that information as we go through the surveys.

The second part to your question is that certainly there's an ongoing interest on behalf of our customer to look beyond this because of the success of the LED, but at the same time I'm sure they're evaluating some of their own imagery, as David has pointed out. Other customers are doing the same thing. That's some of the optimism that we're talking about. There's a lot of interest, now, because this has dragged on from an economy standpoint and these folks overall haven't been doing much of anything, so there is that interest and that concern that they're starting to move forward.

I think that we're in the right place at the right time and in my personal frustration is I want to see some of these programs start to really roll out. The 7-Eleven program is very, very important, but from a production standpoint, we can handle anything that it can throw at us. The real challenge, of course, is the installation. That's something that we're doing that nobody else -- I think -- as a combined manufacturing process and an installation process could even attempt to do. So the goals that we're setting for ourselves is that while we have this downturn is that we're going to put every effort we can into a program to get this done as quickly as possible for 7-Eleven as well for ourselves, because if there is some kind of a return to any kind of an increasing economy, we want to be ready to take on anybody else.

It's a very big program, obviously, when you're talking 3,000 units and it's a very aggressive one. We want to get as much done during the good weather. The big challenge and some of the hurt in the third quarter was that we didn't finish the petroleum sites until just in the last week or so. I mean the weather really hurt us and when you look at the fact that areas like Florida and Dallas, Texas, and there was snows in Houston. I mean this is unprecedented weather and all of this stuff has been outdoor, obviously, the crews couldn't go in there and accomplish their goals.

I'm hoping now with the program it's a lot more complicated to install canopy lighting than there will be area lighting and security lighting, which is truly part of the lighting portion and it's interesting to see that when you look at a revenue stream, as compared to the first rollout program, about 60% of the revenues generated were for the lighting group and 40% for the graphics group. In this rollout it will be about 70% for the graphics group and 30% for the lighting group. The end of the day it's all for LSI at the bottom line, so obviously it's extremely important to the corporation.

Okay. Thank you very much.

Thanks, Glenn.

Thank you. Our next question will come from Jim Ricchiuti. Go ahead, Jim.

Thank you. Bob, just following up on that, that change in mix between lighting and graphics, does that impact your margins on this business at all?

Well, not really because some of that, Jim, is in the installation process, which is going through the graphics, but there are graphic items on it. The reason I brought that up is that that's a nice little bit of a help on the graphics side because of the revenue recognition. Obviously, we had to be extremely competitive on a cost direction and the success of the program we're hoping that will even be a little bit more profitable for us. We've got a lot of trained crews out there now that can go into the field and do this quicker and -- hopefully quicker -- and do it more accurately. There was a learning curve. We went through it because it's all new technology. Area lighting is going to be a lot easier to install than canopy lighting.

As the program rolls out, as we always try to do, depending on how volume improves in some of the other markets, as you well know, our production process is so volume-oriented and the more volume we can create and push through our plants, the better off we're going to be. So there's a little bit of hope that the economy will start picking up. We'll start to see some of our other customers and there are other customers out there that are taking on a real strong interest because of what's happened with 7-Eleven.

There's a lot of information now flowing through the industry with the energy savings that 7-Eleven's incurring and folks are now saying, "Hey, you know, there's a giant out there. They took on a tremendous program and now they're talking about the success."

This has got to be a real world and that's going to help us dramatically as we're talking to more and more customers that have fewer stores, but certainly have the same costs, the same involvement with energy and we have the success of doing them.

Can you quantify the energy savings at all so far on the project?

I can, but I can't do it. 7-Eleven shared some information with me yesterday, which I didn't know exactly what it was, but I can tell you this. They're happy as can be.

Jim, I might mention that from a return on investment standpoint it's falling well within the lines of the parameters we've talked about before. So, they're saving enough energy to make the program pay for itself and I think that's what's important to them.

Okay.

Just on the subject of margins just given your -- the implied guidance for earnings for the fourth quarter, it would appear that you expect your gross margins to get back close or maybe a little better than where you were in the second quarter. Is that right or will your selling expense and administrative expense just be lower?

Actually, selling expense will go up as we incur commissions as our lighting sales go up.

So your margins will go up just with the higher volumes?

That's correct, they'll go up with higher volumes.

Okay. And last question for me.

You haven't talked a whole lot about the LED signage market just from the standpoint of other retail customers, nor have you said much about just some opportunities in the scoreboard market in the schools. Any sense of any update you could provide there?

Yes. I did and it wasn't that I left it out purposely. We were going to touch on that and I'll let Scott address that because he's been very close to that.

We turned that direction over to Scott to get a lot more involvement into that program as it relates to the scoreboard market, and we're very pleased with some of the things that are going on, especially, just recently, we received an order, subsequently a pretty good order, for Xavier University here in Cincinnati and, Scott, why don't you kind of touch base on it.

Sure, Jim. A couple things to note, as you recall, specifically, the sports side of the business is a very cyclical business, so depending upon what time of year you're in, where the activity peaks and drops. We've known for some time now that where we had hoped there would be a little more activity beyond the sports industry, that has certainly been squashed by overall economic situation. So we focused our efforts really on improving our product, generating new designs that will make us more competitive in the remaining market that does exist.

There's no doubt about it that right now the picture has changed 180 degrees from where it was four years ago when we got into this business as a result of the purchase of SACO. There was a lot of demand and not a lot of supply. Today, that's completely flopped the other direction, not much demand and a lot of supply from the existing suppliers that were in that market prior to LSI.

Where we have a great opportunity we still believe is in the ability to design and produce cost effective value driven products and supply the kind of service levels that we've been able to do in our core business, for 30 years. We have to have the right product at the right price. We understand that. We're currently developing those solutions. In the meantime, we are participating in that cyclical sports business in securing some orders. So that pretty much characterizes where we are right now.

But from a demand standpoint, Scott, if things are still soft, particularly, as you get into this heavy part of the selling season for the fall?

Yes. They really are still soft, no doubt about it.

To remind you, Jim, as you'll remember, when Scott brought up the four years ago, when we bought SACO and we went through the due diligence, if you remember my comments, I said, what really came to my mind is that we invested in SACO for the technology to start building our lighting products. I had no clue about what they were doing on some of the digital boards and so we looked at that and we said well, they're already doing that. Let's get into that market right away because of the timing it would take to get our lighting products going. Well, obviously things -- we were trying to get into the billboard market.

Obviously, we all know who the competition is out there and then the sports package market started to show up, but in the meantime as we were building the technology for our lighting products, we've shifted a tremendous amount of that effort now because our lighting products are starting to roll off. We haven't walked away from that market, but as Scott said, we've changed our whole direction. We're looking at that school market. We have a product that's viable. It is a lot more competitive. So we remain very careful how we approach it, being very selective. It's an add-on rather than as, it was two or three years ago, as one of our main focuses because of a timing issue and getting into the lighting side of it.

Okay. Thanks very much.

Thanks, Jim.

Thank you. (Operator Instructions). And our next question --

I'm sorry. Do we have one more?

We do. Our next question will come from Rick Natel. Go ahead, Rick.

Did you think you were going to get away without getting your question from me?

We were hopeful.

I was looking forward to you. How are you?

Mine's an easy one. So, pricing is highly competitive. Do you expect when you're looking at these RFPs, is it really kind of down and dirty bidding or is there opportunity to make a little bit of money, too?

Well, it's a buyers' market out there. We know that. Where the money is going to be made is we're continuing to downsize -- not downsize, but reduce our cost of doing business as a Company. We're becoming more and more efficient. Some of the things that we shared with you three months ago was the investment in some technical equipment to improve the efficiency and drive the costs down. We've been very successful in that. That equipment is either installed or in the process of being installed. It was a timing issue that I wanted to be ready. Within the next few weeks all that will be in place.

What we're trying to do now is obviously be as cost effective, but more importantly to me right now is maintaining market share on what we built this Company on and subsequently driving with this new technology into new markets, expanding into a worldwide market. All of those things that you are fully aware of have been implemented, are in the process or just weeks away from a full marketing strategy.

The interesting story will be coming out in the next six months or so as far as how effective all of this work will be to the Company, but nobody is more driven than my management staff to keep this Company on the strong side of the balance sheet and start to work on the profitability, get our Company back into a profit direction for our shareholders. Obviously that's our number one goal.

Probably the head winds -- I'm sorry -- the tail winds was lower commodity costs and lower transportation costs are starting to reverse. What are you seeing on that front, raw material costs and freight costs?

Right now we're okay. It's pretty flat. We haven't seen any increases at all that concern us, but we certainly are on top of it, as you are. We're watching this very critically. Our purchasing group is staying on top of our major vendors and obviously doing everything we can.

Forecasting becomes the real challenge based on how we can drive the volume, but with that said some of the things that we're doing, we are hoping, and in using 7-Eleven is a great example, when you're talking about the LED process, obviously with a program of that magnitude it certainly helps us across the board. The key to that is to build off of that and start developing more business with other customers to continue on with that volume.

LSI is very, very volume oriented based on driving that bottom line. We've done a great job of reducing costs. The balance sheet shows that as a continuation. We're not drawing from that. We're generating our cash. I will give a tremendous applause to our credit group, our DSOs last month were down to 48 days in an economy like this.

46 actually, Bob.

46, excuse me. 46 days. Everybody's got a focus in this Company right now to drive and improve those margins and it's not just from the sales side. It's obviously generated from the inside going out. So those are all targets that are part of the LSI strategy.

Our new iZone center has been a grand slam home run. We're getting people in here almost daily, getting a stronger education, showing them the advantage of the LSI products over our competitors. It's really now maximizing on what we've done to create a stronger profit contribution. It is challenged because the market is still very soft, but from a material increase I can tell you right now that that's going through our mind to initiate some kind of an increase to get ahead of it, but we have to be concerned about whether it will hold or not. We're right in that kind of a time frame to analyze that to see what makes the most and the best sense to initiate that direction.

I guess this is probably for David, but the QSR menu business with the healthcare bill that's passed has some nutritional requirements for menu boards going forward. I would think digital is one of the ways to deal with that.

Are your customers being proactive or it's too early and they're going to wait six months where they look more actively at the -- in front of the deadlines that are put out there?

They have certainly been moved to the right of center now because before they were not being proactive. They just thought, "Wait till this gets forced on us." Well, it's at that stage now. There's a timeline.

They've already identified, if you have 20 restaurants throughout the country, this is not a state situation like New York. It's federal legislation and they see no end to that and it's kind of the straw that broke the camel's back that forced the technology to take place and as you know, like in all the LCD screens, costs have been dropping, and like I said, the perfect storm lining up to be a winner for us.

How many people are positioned well for that space and I know you guys have had some wins in space with prior technology, so how do you think you're positioned against the competition?

I think we're positioned well. In fact, a lot of the competition has disappeared or has had to merge during this poor economy and they're left with very few resources. If you look at their financial conditions, we're in great financial shape. Our technology is very good and it's proven and I don't want to reveal how many sites that we have out there, but we have a significant amount at a lot of different locations, a lot of different vendors.

I'd like to add something to that, Rick. You know our Company very, very well and during this very trying time my direction has been to move LSI into a stronger competitive direction for the future and with our strong balance sheet we've made a number of changes and in investing in a number of different production processes; and the objective was when this thing does finally open up, it's going to be a Katie bar the door in my opinion and I wanted LSI to be in a position to take advantage of whatever would come and what that really means is at the end of the day, with what we've done we can take on any competitor.

We can be as competitive as anybody has to be out there and as a volume-driven company, we are in a much better position, believe it or not to, take on more volume than we actually were before all of this economy went south on us. So it's always been my objective to strengthen the business, when the economics are down as a economic condition and we've done that for 34 years and we went to work in the last few months to strengthen this Company with the anticipation that this can't go on forever. Certainly, the results have not been acceptable, but it is what it is and it's always been my direction to continue to build this company for long term and we've done just that.

Okay. Thank you.

Thanks, Rick.

Thank you. Our final question in the queue comes from Jim Stone. Go ahead, Jim.

Good afternoon there, folks.

Hey, Jim. How are you?

You didn't think you'd get away from me, did you?

Oh, yeah. We knew you were going to be there.

I wonder if you can give us some color on the various initiatives you've started, the undercounter lighting, the bridge lighting, the street lighting, what's happening? Which do you think will really be important to you going forward?

All of the above. I'll let Scott handle that one. Hi, Jim.

Hi, Scott.

We certainly got involved in a lot of different varieties of projects early on as part of the technology development phase, I'd say, of this program. Our important markets are going to be the same markets that they've always been and in those markets that offer us the opportunity to translate that technology platform into a volume opportunity, a volume production mode. We are still doing business with all of those product lines that you've mentioned. When we go through them on a case by case basis, the display lighting, we're still expanding our product line there. We're adding customers to that experience on a monthly basis.

We -- well, there's only so many bridges in this country and that's obviously going to be an area that has high visibility, but not necessarily a lot of high volume opportunity. Street lighting remains in a prototype phase through most of the country. There really haven't been any significant commitments on street lighting yet with the exception of a couple of cities in the Northwest and in most of the manufacturers, including LSI, that have built technology platforms to compete for that marketplace are in test and we expect that to continue for a little while anyway. Of course, we go back to our core markets, the petroleum marketplace, the outdoor marketplace. That is where a lot of that early work that we did and those product lines that you mentioned have contributed to the successful technology that now contributes to real meaningful revenue opportunity and profit opportunity. So they're all important. Let me add to that, too Jim, is the fact of the matter is that the US market has been a test bed for some of these new products, which, I believe, eventually are going to offer opportunity in the European or the Middle East or the international market; and the LSI reputation based on that niche market has obviously been very important, but it was time for us to expand the market opportunity, get more experience working in those specific markets like street lighting.

Certainly, the undercounter lighting as you pointed out was a market opportunity. We weren't necessarily in it because it was created by fluorescent lighting, but with our technology and an emerging LED market, it was an obvious opportunity to step into that market. From that we've learned a lot and we're going to expand that on a worldwide basis and that may be two, three year marketing direction before this Company gets into that recognition area, but you have to start where? Somewhere. You have to start at some point and you have to set your goals and we've done that and some of them are going to be winners. Some of them may not be, but we can't build a Company just developing product for a market that we built this Company on.

We've got to protect that market and then we have to expand on that. Since we focused on a worldwide market, we've taken that kind of an approach, getting these certifications for the street lights and for parking lot lighting on an international level as well as canopy lighting, as well as other types of lighting are very, very important for a long term market approach for a Company like us that have to do those things if we're going to grow this Company and build this Company to the size that it's capable of doing.

And can you share with us any numbers in terms of new industry that you penetrated say on the canopy type of lighting? I mean what can you share with us that has some numerical background to it?

Well, as you know, we don't get into numbers as it relates to any market. I think that I can share with you the fact that if you remember how this all started, we started developing platforms. We selected the oil industry because of our tremendous market knowledge and it was, obviously, not only a market opportunity, but it was a test bed opportunity. The 7-Eleven afforded us a great and a much quicker entry into that and from that we've learned so much and the ability.

I'll tell you what. The technology of this stuff is incredible. As I've said to our folks here, and I say it every day, we no longer build lighting fixtures. We build lighting computers. The effectiveness of weather and climate and humidity and water have a tremendous effect on the viability of these products. The process of building them is so incredibly different than traditional; and I think we all in this industry are learning this technology in a new way. That's where this Company and I'm sure others out there will be expanding their market opportunities.

Obviously, every company that's in business today has certain market strengths. We have certain market strengths in the automotive -- strengths in the automotive and the fast food and the petroleum and others that you're all aware of, but we cannot continue as a Company who have grown through this to just focus on that. We've got to expand that. We're doing that. We've got to test ourselves. We'll go through a learning curve by market.

All these things are going to be new, but over the last 34 years that's all I've done is taken this Company one step at a time finding new markets to expand to and creating products that really work for that customer base. That mission is not going to change and what we're going to do with the continuation of investing in better people, we're going to look at more opportunities and push our Company, push our R&D harder than we have before because we've learned so much. The next go round is going to be better. It's going to be more efficient. It's going to be more cost effective because of what we learned in prior years. That is always what LSI has done and we're going to continue to do that.

Jim, this is Ron. A numerical-based input related to your question was for the nine-month period, fully 25% of our -- of LSI's sales have been related to the LED products or the installation thereof, a little less than that in our third quarter, but 25%. And last year it would have been a fraction of that.

Just take a couple minutes toke pound on the bridge lighting and some of the other unique things that Scott mentioned and you guys are aware of. These have been test beds for us. We've learned a lot. As Scott said, there might not be a lot of bridges out there, but we learned a lot about vibration. We learned a lot about the climate controls and so forth that go on and the maintenance factors and from that you build other products that give you, hopefully, more advantages as you move into these new markets.

There's a basic market out there. We're in the commercial industrial. We're certainly in the niche markets and all of those markets have opportunities and it's now up to us to selectively pick what the next major step will be and then work toward that objective. We've created the basis to do that and certainly the platform to do it with our operations and our balance sheet and now the investment in our technology and as a combined effort.

As you've all heard, in the last three months, I am not focused on acquisitions. My focus right now is to take this core that we've invested heavily in and build on it. The disadvantage to that is the economy fell short of where we were going. We've got to get through this financial disaster from an economy. I think we've shown we can do that and now we're into a new era and we're going to build on that and the results will probably be a year to two years out, based on the effectiveness of the decisions that we're doing, but I can tell you right now we're not backing off.

We're going to push and push this Company as hard as we can to penetrate these new markets and start building higher volume. That's what we need to do and that's what we're going to do.

Okay. Thank you.

Thank you, Jim.

Thank you. At this time there are no further questions in the queue.

I'm sorry? No further questions. Thanks, guys, for hanging in there with us today. It's going to be an interesting summer to say the least. This program with 7-Eleven is certainly an exciting one for us, but we're looking beyond that now. We're looking for the next one, if there is one out there. Sean's goal is to get our C&I business on a strong footing. Certainly with the conditions that have existed the commercial part of our business I think is going to be slow to return. If we see signs of the economy returning, I can tell you right now, from the construction side that's always going to lag.

That's history and what we have to do now is find other opportunities and that's other markets. We got to go after a stronger market share on a competitive level and we're going to do a lot of -- take a lot of direction toward that international market. I think it's out this. How big it is yet, I don't know, but I think our products can more than handle themselves in that environment. The investments that we've made in the production side I think are going to start to show results as our volume goes up. This year and a half of this economic has been a great educator for our company and the folks that are on board. Hopefully it won't repeat itself after we get through it.

I always look for the best out of the worst, and I can tell you right now that from my perspective as a major shareholder and as a CEO of this Company, I have high hopes for the future of this Company as long as we execute what we say we're going to do. That's up to the group of folks here that are part of this team and I think they know their mission and I think they know it well. Now it's a matter of making it happen.

With that I want to thank you for your time and look forward. If you have any questions beyond, that give us a call. We're always available to answer them and last but not least, if you're in the general area, come see us. We'd love to show you some of the new technology, show you our new marketing center, all the good things that we've been working on over these tough months, and how we hope to put those to work. So we would love to have you come by and say hello.

With that, Matt, I think that concludes it. Thank you.

Thank you, everyone, for joining today's call. It's now concluded. You can disconnect your lines.