LSI Industries Inc (LYTS) 2010 Q4 法說會逐字稿

Good afternoon and thank you for dialing in for the LSI fourth quarter conference call. Today's host will be Mr. Bob Ready. During the discussion, all participant lines are placed on mute to prevent any background noises. (Operator Instructions). Now, without further delay, I will turn your call over to Mr. Bob Ready.

Thank you. Before I make opening comments, [Steve Brucker], our CIO is on the line. Steve, you have a couple of comments, please?

Yes. I want to welcome everyone today and let you know with today's call there will not be supporting visuals on the website as we have sometimes done in the past, but after today's call concludes, some supporting visuals will be available on our website that you can reach at www.LSI-Industries.com. And now we'll proceed with the conference. Bob?

Thanks, Steve. Good afternoon, everybody. It's nice to have you on board this afternoon. With me today as is our normal process is our CFO, Ron Stowell is with us. Scott Ready, President of the Lighting group, David McCauley, President of the Graphics Group, and today I've also invited Shawn Toney, who is really our Senior Vice President in charge of our C&I Lighting sales. I thought it would be very appropriate to have Sean on board, based on the Q&A session, because of his tremendous involvement in what we have done in accomplishing I think a very, very important turnaround in our C&I business.

We put out a rather extensive press release as I'm sure you're all aware. So I'm going to make my opening remarks short. We've made a lot of statements in there, in the basis of giving you some direction of what's happened. When you look at the comparison of 2009, as compared to 2010, certainly fourth quarter, there was a major turnaround.

A lot of things that are going on are obviously self-developed. We talked about those in the past. I'm extremely confident on the basis of the changes that we made. We've gone through a very strong reorganization, both inside and out. We made a number of major changes in strengthening our sales efforts, specifically in the C&I part of our business plan.

The direction for manufacturing, we made major investments in both the Lighting group as well as the Graphics group. These new pieces of equipment are fully automated pieces of manufacturing equipment, that gives us an opportunity to reduce our costs. We have a very straightforward approach in the manufacturing process and we made a considerable improvement on reducing our overhead. We have reduced our inventories and as you can see by the strength of the balance sheet, the Company is in really in a very good position as we start to move forward.

The exciting part of 2011 is obviously the continuation of the 7-Eleven program. We're now really well ramped up now as we go into the second phase of this initial conversion, going from not only LED Lighting, but there is a major improvement as far as their graphics utilization. We have some prototypes that we're working on and we'll get into more detail on this in a few minutes for the interior store package as well.

The overall condition of our markets are very, very mixed. This economy has still had a major impact on construction, so our whole objective is obviously directed to do whatever we can to go after market share, improve our place in the market. The petroleum industry is a little bit more active. We're very pleased with some of the results of our new Generation III product which has been very effective in showing our customer base that we now have a very great -- let me put it another way. We have a great retrofit product to take the existing Scottsdale down and replace it with a new Crossover III which we call an LED Scottsdale. This product now is in the samples -- are in the hands of all of our reps, they're going out with great success, creating more and more interest for this product as we move into 2011.

On the video board side of our business, we're continuing to be very proactive in going after schools. We have a new product that we've been working on that will be shown to the internal folks sometime in the next week or so. It's a new design, take cost out of it and improve the visibility and the overall direction of this new visual board. We'll talk more about that in the months to come, but we have spent the last seven or eight months kind of redesigning the whole product line as it would relate to the kind of markets that we feel that we have the ability to penetrate.

Our international market is well on its way. Fred Jalbout, as you all are aware, has actually moved into the European market. He has spent the last few months establishing the roots in both the Middle East and the European market and we'll be talking more about that in the months to come. The exciting part of that is we're getting more and more interest in our LED product line. We've gone through most of the certification of all of our LED products. As a matter of fact, and we'll talk a little bit, Scott will mention that today, how this -- where we are in relation to having the certification done, which now will give us the opportunity to move into a more aggressive marketing and sales approach in the European and in the Middle East.

I think that kind of covers the overall general scope of where LSI is as a Company. I'm being very guarded in my direction for the future of 2011. That's strictly based on the economy. There's a lot of discussion going on within the news media about this double dip recession, whether it's true or not, we don't know. We're focused now to continue on with the success we have achieved in turning our Company around. We're obviously much more solid ground.

We're not happy with the results. We're now working very hard to continue with our cost reduction or cost control process, and working hard to get our sales and revenue stream up. This obviously is our number one goal, and with our manufacturing operations now streamlined, we feel that if the economy doesn't get any worse, that we can continue to show improvement and it might be a little bit of a long-term basis, by that I'm saying a year, plus, as we all know, that's the forecast of what's going on as far as the stronger economy.

With that, I'm going to turn it over to you folks. I'm sure you have a bunch of questions to ask. If you would, Elizabeth, go ahead and turn it on, and I'll take the first question, please.

Yes, sir. (Operator Instructions). First in queue we have Glenn Wortman. Glenn, your line is open.

Good afternoon.

Hi, Glenn.

Can you just give us an idea of how the first quarter and the second quarter is shaping up. I know you guys didn't give guidance this morning. Can you just give us a little bit -- as much color as possible?

Yes. Let me do this. Let me let the other guys give you a little bit of an input. Let's start with Scott and his feelings, and Shawn may want to kick in, because the first quarter is really the beginning of some of the things that we've done in turning this Company around. So Scott, why don't you comment on that?

Sure. I'd be happy to. Good afternoon, everybody and hi, Glenn. I think that I can best characterize what we expect to see and, frankly, what we saw towards the end of last fiscal year as an environment where we have worked so hard to set the stage. You heard Bob mention about our cost control, which we talked about for several quarters going back several years now, it feels like.

But certainly resetting the size of the Company, combining the kind of investments that we have made, really puts a lot of that hard work behind us, not to say that we don't have more to do and to continue to keep the Company positioned where it is. But we certainly got a lot of that hard work in place as we looked at the end of fiscal 2010 and saw the slight uptick in the economy that was coming primarily from the influence of the cost of energy and interest in energy products, combined with the introduction of our new Generation III Crossover product line. I think you're starting to see the strategy coming together, and it's a strategy that we've been committed to for some time and working very hard on. As dad said, as long as the economy doesn't send a torpedo in the side of the ship again, which we have no control over, I think we're well-positioned to see the kind of success that we've been generating and the recent weeks continue.

The product releases and the product development, specifically around the LED platform are increasing our effectiveness in the marketplace right now in terms of generating volume, but it's not solely due to LED. There's a lot of base business there. There's a lot of fluorescent business there that we've been able to secure. Again, because we're positioned right, we have our costs under control. We have our service levels set in a strong position. And we're combining that with the slight uptick in the economy.

If I may add to that too, Scott, the other thing that is very obvious to me is that as we've gone through this last year, we as a Company, and I'm sure as an industry have learned a tremendous amount of information in regard to LED technology. This is so new to this whole industry as it relates to lighting, and we all, as companies going through the education curve, what I like about the direction that we've come up with, is that we now have a very, very good understanding of what our abilities are from a manufacturing, design, and certainly an implementation process. And now that we have a more stable product line, we've made so many changes because this product line has grown and changed so rapidly in such a short period of time. Now we have a customer base that is becoming more educated, more understanding of what this product can do and, therefore, creating a tremendous amount of more interest.

The amount of visits that we've had to our new iZone center has been remarkable. And it's all predicated on the basis of people wanting to learn and understand more about what this LED technology can do. At the same time that we're training and educating these customers on the LED technology, we're giving them a pretty good experience on what LSI is as a corporation. We're not just a Lighting Company. We're not just a Graphics Company. We're not just a Technology Company. We have a combination of products that can influence a number of markets and the importance to me is that our customer base is becoming more and more familiar with what our capabilities are and I think that's where we're building on with all the changes that we've made, and that's why my confidence level is so much stronger than it was a year ago.

And then in this morning's press release you guys mentioned some strong potential in the QSR business as well as the convenience store markets. Can you just elaborate on that. Are we talking about some of those large traditional Graphics programs?

What we're seeing there, Glenn, without getting too specific, is that the fast food industry has been very, very quiet. But now there's an indication that there's a lot more interest in what types of products can do more for them. There's an interest now in some of our customers to revisit their menu board systems. We're seeing a lot more interest in the LCD screen. David will talk about that in a moment. But the important thing is, is that you go back a number of years, when you remember that back 10, 11, 12 years ago when LSI was really rolling out the big menu board -- drive-through menu board product for Burger King, these are 10, 12 years old.

We're developing and doing more innovation and trying to come up with a magic -- I say magic formula for LED menu boards. But now we're combining it with LCD boards and this industry is going through a complete change as it relates to how it's going to build its products because of the requirements of getting more information to the customer -- their customer, based on calories, fat content and so forth within their food products. So I think we're going to see a change to some degree. It's going to open up more opportunity. We're a Company that can handle all of those things, because of our diversity in our manufacturing, and certainly in our experience in that fast food business. They're not as hot on the Lighting side yet.

Understanding that these products are a lot more expensive and most of these franchisees, their margins are very, very tough. But as the costs come down and of course they're all focused on energy, and the costs are coming down, I think we'll see a much more stronger interest in the LED product line as it relates to the Lighting.

Okay. And then finally, just on the -- for the nonpetroleum side for 7-Eleven, can you just help us out here with maybe the revenue opportunity from this program, the timing of the program, and how that's going to break down between Lighting and Graphics and then the last question in there is the margin profile on the nonpetroleum sites comparable to the petroleum sites?

Are you specifically talking, Glenn, about the 7-Eleven program, how it relates. Scott, why don't you -- you and David might talk a little bit about this second phase. The first phase, if you all remember, it was strictly an energy reduction program aimed at Lighting. This program, the second phase, is a much more -- it's much different. There's a combination of Lighting but also Graphics in this. So Scott, why don't you make a point on that and then David pick up.

Sure. In the spirit of what they accomplished in the first phase of the program, they really are continuing to reduce energy on all the non-gas sites through the retrofit of -- replacement really of their existing Lighting with LED sources. That starts on the outside of the facility and begins to move in towards the inside of the facility as we look at different Graphics and interior Lighting solutions that they are continuing to evaluate.

So, Glenn, part of the challenge right now for us is the scope of the program is not totally defined yet for the remaining part of this year. We do know of the program scope that we've been assigned so far but we're involved in many other aspects of solutions that are being evaluated as we speak that have the potential of either increasing our opportunity within the account or certainly sustaining in the nature of what we did last year in terms of volume. David?

Yes. Speaking for the 7-Eleven program that you're asking about, Glenn, and adding the total convenience food market in the formula, as we said before, a lot of these sites are old and tired and there's been quite the pent-up demand since, well, almost two years ago today is when this thing started to go south in terms of capital expenditures by these type of companies, and there's pent-up demand and the capital, we're seeing demand for the old tired to be replaced and like Bob said earlier the caloric and nutritional information has to be changed anyways.

It's just not an add-on type signage. It's really a complete change to the menu board. This gives them the opportunity to exercise now the new food marketing program along with these federal regs that they're looking at in the next year and-a-half. And again, back to old, tired, Bob mentioned a couple programs that we've done in the past. Two years ago, it was a little over two years ago we finished a $30 million program for Dairy Queen. Those type of programs we think are going to be there real soon.

The other thing I also would add to that, David, is that we're looking at this market now in a much different light than in prior years. The 7-Eleven program obviously has been a very stimulus marketing direction as many, many people in the industry are aware with what they've been doing. What's interesting to me is some of the larger, non-7-Eleven type customers are taking a great deal of interest in refreshing their sites. I think 7-Eleven recognizes that their sites are quite old and quite, as David said, tired looking. We have now about 22, 23 prototypes that we're doing completely interior, both from an energy standpoint, as far as a refresh look. Now, where that's going to go yet, we're not sure. That was one of the things that Scott was referring to.

The important thing for me is, is that the market now is awake and start looking at more and more things as it relates to where they're going to end up with this energy drive as well as kind of a cleaner and a better looking site and once one starts and another one starts, I'm hoping that it's like anything else that's happened, it starts catching on within the industry. The important thing is, is that LSI is structured and in a position that not only can we build the product, but we can also install the product. When you take on a massive program like we have done with 7-Eleven, of not just building the product but installing the product, and doing it according to the schedule that 7-Eleven has put in play, it certainly says this Company, LSI Industries, has a capability far beyond anybody else's. So we're positioning ourselves to take whatever those opportunities are.

I'm being very, very guarded in how we approach this. We're being very careful where we add to more overhead. We're being very careful on how we approach the market based on supply and demand, so that we can get LSI back on a stronger profitability and start working on getting our stock back up.

Okay. Thank you for taking my questions.

Thanks, Glenn.

Next in queue we have Jim Ricchiuti. Jim, your line is open.

Thank you. I wonder if you could just comment on the percentage of revenues that 7-Eleven represented in the quarter. I believe in last quarter I think it was around 14%.

Ron, I think you have some of that information.

You're correct, Jim, 14% in the -- just under 14% in the third quarter and it was at 14% in the fourth quarter. And it was just under 17% for the full year.

Okay. And it's not completely clear how you see the second phase rolling out but do you anticipate 7-Eleven being a 10% plus customer in the current quarter?

Boy, that will take a little thought, Jim. I think where we see 7-Eleven is I call it Phase II, that's a continuation of what was given to us on these nonpetroleum sites. And to forecast that at this point, I'm not sure exactly what that percentage is going to be. Based on other things that are happening with other customers. Certainly with the improvement in our C&I market, as well as some of the things that are going on with other petroleum customers.

What we could see toward the end of this year, this calendar year, and moving into calendar year 2011, this interior prototype program that we're working on with them right now, I have no idea where that's going to go. I know there's a tremendous amount of interest on their behalf to start to look at how they can take their stores and make them look a lot nicer and a lot more inviting. That's a big question. If that goes, it's going to be a hell of a program. But I'm not going to put any kind of a direction in place until we have some kind of a commitment from 7-Eleven.

Jim, if I might add too, Glenn, this really goes to your question, I think that as we look at -- and I certainly understand the interest in trying to evaluate the impact of 7-Eleven for the Company, but we've been working through that program now for some time. We understand how to support it. And really, our process, our strategy is looking beyond 7-Eleven I think, in fairness, as we look through fiscal 2011. We really now have other customers, maybe not of the same size and scope as 7-Eleven right now, but more quantity of customers, if you will, that are already committing to programs and that's quite a bit different than where we were six months ago, where we were really still in evaluation and prototype stages.

These are programs that now have been awarded to LSI. We've been evaluated and selected above all competitors. And so we're certainly going to maintain our stance with 7-Eleven. We're going to grow our position with them, where we have opportunities to do so, as they become active in some other elements of their program. But we certainly are not a single account Company, even in the petroleum market right now. It's very exciting to see the kind of acceptance we're seeing with some other large companies there.

I think that's important to mention. And the reason, Jim, that I'm not getting more specific with those accounts, obviously for competitive reasons, but the fact of the matter is, these programs are now just starting to wind up. And to what extent that will be, it's a little bit early to tell based on the success of the initial roll-out. But Scott's absolutely right. My direction has been this year is the 7-Eleven program was a wonderful program. It really helped LSI go through a very, very difficult period. But now the objective is, is to put the 7-Eleven program on the side, understanding that if Phase III doesn't kick in, that we've got to make up that volume.

So we've made a tremendous effort to improve our ability, both on the C&I market, on our visual board direction as well as international. We're now looking for an overall revenue improvement in other markets, non-related to the 7-Eleven and just be very thankful that we've got a program like that which has really created a tremendous production process, helped us reduce costs, and put us in the position that we are in.

Some of the new business that you're alluding to, do you expect it to be meaningful to revenues on a combined basis this year? In other words, I understand you can't -- you're not in a position to name the accounts, but if we begin to aggregate some of that business, is it meaningful? Because it is incremental revenue. This is more LED Lighting product revenue, isn't it?

The answer is that, very simply, yes. We feel that. It's a little bit early but the answer is yes. And I'd like Shawn Toney to kind of chime in for a couple of minutes and address that in the same light that you're looking at, Jim, from a C&I business. Specifically, with the changes that we've made, we have three new regional managers in very key markets. We have some new -- if you all remember my dialogue, what I call the fifth option with some of the bigger competitors that we have, we have a new agent on board in Minnesota. So Shawn, just address that for a couple of minutes, as that leans toward -- it's not just the petroleum and the convenient food store market but also it's an additional direction as far as it relates to C&I.

Thank you, Bob. What Bob's alluding to is on the part of our business, the core Commercial, Industrial and institutional we go to market through independent agents. So general sense, two to three agents per state, so you get a sense of the reach and the leverage that we've got into the markets. Simply put, with hard work, with process, structured growth programs, time and attention with the agents, certainly leveraging our innovation and having something new to introduce to the market that is directly linked to the energy markets is an exciting time. We're getting that car firing on all cylinders again.

Most markets, we have a very high level of activity. There are certainly some states in metropolitan MSAs that were more hard hit than others, so we're still working in those areas to fully rebound and recover. So a nice diverse collection of agents. We've got good activity in all of those markets. We have been successful in introducing new products, gaining price on the products that we've got in those markets to offset some of the commodity cost increases across the last year, and then also on our C&I base, we've got some significant relationships with major and leading retailers and several new ones that are on the horizon, all playing back into what Bob and Scott and Dave were talking about, the 7-Eleven program.

The capability and competency that LSI continues to demonstrate in rolling out that enormous program in record time, gains the interest of others in the space. So we've really got it on the agent side, many, many markets, a significant pickup in quotations inquiries, new orders, processes to manage that inbound volume, maintain our exceptionally high service levels and then also grow with our core retailers while we evaluate responsibly bringing on others.

You might add to that, Shawn, that we made a major commitment in change in our sales force as it relates to those comments that you just made. You might just highlight that a little bit.

Sure. Thanks, Bob. We have had the benefit of some folks that have a deep Lighting background, industry knowledge, good connections across the channel, from distribution to key users and specifiers, so really starting in about December of last year, we went through a full evaluation of those on the team, helped those to explore new roles and then really added to the competency base and industry connection with some significant new hires to the base.

In other words, we have a full court press on our sales efforts right now with a very, very strong product line, both in the LED product line and traditional Lighting. We're in a much better position than we were a year ago, based on the tailspin that we were in. We got our Company back on a playing level and then we started rebuilding that. And to your point, Jim, what we're really after is the fact the 7-Eleven program is what it is, but it's not the kind of direction that I want to see continue. We'll take advantage when those programs come out, come available to us. We've got to get the Company on a more stronger base on the traditional side of our business so that we can get out of this lumpiness that we've had for so many years.

I'd add one other comment that reinforces that, to give the audience a good perspective. We've had contribution from LED Lighting in the niche markets now for a number of years. We're really just starting to see a contribution from LED Lighting in the Commercial market space, which is a much bigger market opportunity overall.

And to throw a number out there, I believe I was told just a week ago, we have now shipped over 100,000 LED fixtures in the marketplace. Which is a very strong direction of the success of the product line.

Okay. That's helpful. And one final question. If I look at the Graphics segment of the business, it was up I believe close to 12%, 11%, 12% year-over-year in the quarter. Is any of that -- I'm still not completely clear. Is any of that 7-Eleven related or is that--?

There's some in there, Jim, there's some signage and so forth. The Graphics business is still very, very weak. We're not having any major commitments like we used to have with some of our bigger customers. But the fact of the matter is, we sized our Graphics business to a point where we now can work in a different environment and to get it back on a profitable level. Without cutting the heart out of the Company. We made a major investment in new equipment to give us a higher and more efficient production process with better resolution and we're going after a higher end market that we did not have the manufacturing capability in the years prior to that.

David, I don't know if you want to add any more to that. This LCD program that's gaining more and more direction in the marketplace is another part of that, so, David, I may have missed something here. You may want to add something to that.

As relates to the LCD, that's basically advertising and menu board screens. Usually a 46-inch liquid crystal display. We're real close to placing our 500th screen out there and that's pretty big for a non-mature industry of this active digital signage. So we're very excited about that. And it seems to be a lot of the answer for menu boards in the future.

As we said, they're getting old and tired indoor. If they don't go to the screens that can be changed on the fly, the liquid crystal screens, then another option for them is to take the new boxes with LED Lighting as opposed to the tubular lighting that they had over the years and be much more energy efficient. But you can almost see the perfect storm lining up between old, tired, more efficient, more modern programs that can sell more inside the store and we think the cards are just coming our way.

I think the fact that we have this new equipment has certainly put us in a different position with an industry that is finding more and more people going out of business than people getting into business. So obviously, the limitation in production based on what's out there in the available market works to our advantage when these things start hopefully to improve. The other important item to remember is that we've worked hard to be sure that we maintain that strong customer base, the CVSs, the stop and shops and so forth. Those folks are still a very important primary part of our business and we're constantly working to be sure that we don't lose any of that potential and hopefully some of these folks will start to see an opportunity and they're going to come to us because we're strong, in a financial position. We have the installation capability. We certainly now have even an improved production capability. So during this tough time, with our strong balance sheet, we've been extremely aggressive to take the steps that we know that when the industry comes back, LSI is going to be in a position to handle the higher volume potential.

One thing I might add too, Bob, is the aggressiveness of a Graphics campaign that we have going on now, as the group knows, most of our Graphics are sold direct, very little sold through reps and we have quite the aggressive -- we call it the stim program, stimulation program, going on for prospects at this time. We started that on July 16. We targeted 720 of the largest retailers that are not currently customers. If they're not doing a $0.25 million, we call them a prospect. We're going to do 60 a month through the rest of the year and by this time next year we'll have that 720 of them, obviously in each quarterly call we may be reporting results of the effectiveness of this campaign.

That was a marketing program that we decided to put together as an education to that market of who LSI Industries is. We're working very, very straightforward to make LSI a worldwide brand in all aspects of the markets that we serve and we're now in a position that we can provide that kind of direction and we'll see what this marketing program will stimulate for us as customer interest hopefully finds its way to us.

Okay. Thanks a lot.

Thanks, Jim, appreciate it.

Next question from Len Brecken. Len, your line is open.

Hi, guys. Hope you've been well. I just had a question, no one really asked this, but I know you're feeling a lot more confident in your sort of business backlog and your cost cutting efforts, but can you just be more specific on the contribution of the new products, specifically the LED products in the quarter or in the upcoming quarters? I know it's still a small portion of the revenues, but if we're going to be optimistic about it I think we have to quantify it.

Yes, I think it is difficult. I don't know that I have the exact percentage but maybe one of the other guys can help me with this. I think of the LED product line now represents a little over 20% of our business.

Wow.

Close to 25%.

25.

All LED products. Fiscal year.

That has a big effect on the one 7-Eleven program. I think to quantify where we're going with this is the interest in the markets are gaining more and more importance because the product line is stabilizing. There were so many improvements and changes over the last 24 months, that the customer was confused and they're sitting there saying when do I make the change. The stabilization of that comes out with a much better LED chip, obviously a driver system that operates that chip with a lot more options, a lot more benefit to the investment, obviously with the cost reductions that we're seeing with the volume improving. So to quantify where it's going to go, it is the future of this country, of this world, really. It's the future of our business. And as we learn more and we can bring costs down, we will be replacing more and more traditional products.

But the answer to it is a combination of many products. Fluorescent, believe it or not, has found its way into a whole new market area. That was a product line that everybody was looking as kind of falling off the map, so-to-speak. But with the introduction of TAT-5 lamps with the energy savings there and the longer life, it's a combination of products now. It's a whole new approach and that's the way we set up our new iZone center when we bring customers in, that LED isn't the only answer. It's a combination of different products to accommodate the job that that customer's looking for.

Okay. Can you just give us, having answered that, that gives me an idea, it's obviously up sequentially and will probably be up sequentially for a while if you look at it on an aggregate 6 to 12 months period, recognizing it's lumpy. I'm comfortable with that. Can you just give us then a revenue -- I'm sorry, a margin contribution comparison?

No, I can't. I really can't. Based on the competitive situation in this economy, it's a buyer's market.

Okay. I understand.

We have to be competitive. The one thing I failed to mention, it's really important in this scenario, is the international market is a market that we feel has greater potential right now with LED, maybe even more so than our domestic market. And the reason I say that is their energy costs in essence are just about double what they are in the US. There's a tremendous hunger for looking at the US products in the international market. We're finding so much interest in that market from so many different customer bases, and our challenge has been to get through the certification process, similar to UL in the US. We call it CE in the international market. We have absolutely just driven ourselves crazy trying to get through that process and Scott, I think you can -- I think you mentioned to me just yesterday that -- maybe it was this morning.

Yes.

That we've got in the final stages of getting the major approval of CE. That's going to open the doors for us.

Really it's quite rewarding to have the kind of interest that we're having and literally, folks that we're working with and talking to weekly on the phone and seeing overseas, waiting with bated breath for the final date that I can tell them the product they've seen be so successful in the United States is now available with a CE mark for their markets. And again, it remains the largest untapped contributor to LSI performance and results moving forward. We've had--.

Guys, that's the number one issue for adoption, as far as your customers?

Well, you can't even get started without CE.

You can't get going without CE.

You can't get started without that.

Give us some sense of how important it is in terms of the selling cycle. Are we still 12 months away for significant customers to come in or six months or -- just a ballpark. How early are we in terms of the adoption cycle over there, given your perspective in the US?

Would you like me to go ahead and address that?

Sure.

It depends upon the market. It depends upon the product. It depends upon the customer that we're servicing there. We've done work with customers in certain markets where they've already bought some product in volume for product that had the certification required. But to really blow it open, if you will, to really make it turn into a roll-out program as opposed to an occasional order or a large order even, you have to have that CE rating in place.

You have to have that prototyping done, the confidence of the customer established. From a selling cycle, again, the economy plays a big part in this. Budgets are not wide open at this point in Europe anymore than they are here in the United States. I can't tell you specifically when I think some of these programs will develop into day-to-day order contribution because of those variables, but I can tell you that--.

Let me help add to that, Scott. Hopefully this will answer the question. I have been very, very careful in allowing product to be sold into the European or international market, not only because of certification requirements, but I want to be sure that we have the distribution and a service network in place to handle the product. The selling of the product is really the easy part of it. With this complicated electronic product line that we now produce, it's so much different than traditional. And I've said this before. It's like selling computers and putting them on light fixture poles or in other applications.

Fred Jalbout has been over there, starting to develop the service network so not only is the sale important, but it's the support item behind it. We've been working on that for the past six or seven months and to answer your question, we're probably six months away from seeing that market start to improve. But the important thing to me is, is the tremendous interest in our product line. Because of the work that we've done, because of the success that we've achieved in the domestic market.

One last question, guys. If you gauge the interest where you were six months ago in the US, is it greater or less in Europe, European market?

It's greater.

Okay. There you go. You answered the question. I congratulate you on the quarter and keep it going.

Thank you.

Next in queue we have Dick Ryan. Dick, your line is open.

Good afternoon. Bob, the new product coming out, the Gen III that is a replacement for your Scottsdale lights, can you give an order of magnitude as to how many Scottsdale lights you've installed or what that installed base looks like that you're going after.

I don't have the numbers, Dick, but I can tell you the Gen III isn't only related to the Scottsdale replacement program. It really applies across the board to parking garages, site lighting and so forth. Because it's such a dramatic product and it offers so many options to the customer. But the important thing is the Gen III as it applies to the Scottsdale is that we have developed and designed and now are producing almost a plug and play replacement of the Scottsdale and what that means is, as compared to any of our competitors, we have the ability to drop an existing Scottsdale out of a canopy and very simply and very quickly and very easily put in a new Crossover Generation III canopy fixture and this is where now the sales reps, the guys that are out there promoting it, now have samples in their hands and are beginning to show this in a much stronger environment than they have been before. I think as time goes on, we're going to see more and more Scottsdales being replaced. It's a 12, 15-year-old product and now we have the ability to reduce energy with a really easy product to install with a tremendous amount of light.

Okay. Good. And you talked about attracting a new agents. I'm assuming that group came from one of the big three or four companies.

Yes, sir.

What do they see with you guys and are you talking to other agents around the country for similar sort of move toward your product line?

Shawn, why don't you -- you mention that to Dick.

I think the question was on the attraction?

The conversion. Like our folks up in Minnesota.

I understand. There's a high level of interest. There are Luma sales associates in Minneapolis. There's a high level of interest because of the service issues and quality issues that they've experienced with other suppliers. LSI's strong reputation on delivery, reliability, high rate of innovation, I would characterize that there's a high level of interest in many markets with other agents. Some of their interest would be that we have a wide product offering. It is nearly complete in all application solution types and a good name and an established brand or a group of brands in the industry under the LSI umbrella.

To add to that, to simplify all of that, Dick, LSI Industries is not a conglomerate. LSI Industries is a Company with a personality and a goal and more and more of these people are relating to us and that's the basis of building this company over 34 years. Now having the strong product offering and the ability to produce that product offering, we're gaining more and more interest as more and more independent agents who are looking at their conglomerate control and looking at other options and that's what we strive to do for all these years.

Great. All right. Thank you.

Thanks, Dick.

Okay. And last in queue we have Rick D'Auteuil. Rick, your line is open.

Rick, how are you?

Hey, Bob, how are you. Hi, guys. Just to touch on the QSR space a little bit, if you sort of say, I don't know, pick the top 20 QSRs, how many of them are looking at doing or at least in the early stages of looking at revamping the menu boards, maybe adopting some sort of digital screen program? And then how many are you actually talking to in an active way?

Without getting too specific, Rick, I think the interest is across the board with all of them. And obviously from our standpoint, the existing customers that we built on that fast food business or that quick serve business are our primary targets. We have certain limitations as it relates to how we're expanding the LED product line. So we have to be careful of where we spend our engineering time and where the primary interest is. I think everybody has a strong feeling of what is yet to come with LED technology. We're allocating that time and energy toward the markets that we know we can get quicker return on revenues.

As you well pointed out with many conversations with me, we've got to get that revenue stream up. We've got to get that, improve the bottom line and that's strictly due to volume. So from my perspective, in the allocation of time and resources, we're looking at markets where we know that we have a better opportunity to have a quicker return but at the same time, the technology development that's being applied to those markets obviously fall into other markets that will be coming behind this, once we stabilize this technology.

Okay. So again, I'm not asking for names, but is there -- it is a market you're pursuing, the QSR menu board, digital menu board kind of space; right?

Absolutely. Whether it be one customer or 50 customers, the key to this thing is developing a menu board system that is affordable to that market and has the utilization of the technology and do it in the proper manner. Understanding that a lot of these menu boards now that were replaced 10, 12 years ago are going to have to be refurbished somewhere along the line. Some of the lamp types that were used in those menu boards are being actually phased out by the lamp companies. So there's going to be a market out there.

It might be a few years out in the future. But understanding that the technology that we've developed in our Lighting program is going to absolutely apply once we get into linear, that being the replacement of fluorescent which is a linear light source, in a much more affordable and much more controllable direction. That takes a lot more time than a light fixture based on the way these fixtures are designed. So from our perspective, with, again, I'm repeating myself, but it's extremely important, the limitation in time and cost, we're going to where the market is with this economy being the way it is, we're finding ways now to penetrate that market, turn that into revenues and as these markets change and hopefully the economy improves, we'll be, again, be able to go back in a more aggressive direction with these other markets.

Is there any -- is anybody in that space looking for near term roll-out or are there out seeking RFPs from the multiple suppliers to that space?

I'm not going to get into specifics but the answer is yes, we have a Company that's looking at this right now, aggressively. Where it will go, we don't know yet. As you well know, sometimes these programs take as much as a year, plus, once they make their decisions, but this is very important to us, based on how we're working on a very direct basis to develop this new product. When we have an opportunity to work with a specific customer, and develop that product, obviously that opens the door for other companies to look at what we have. A good example is what we did a number of years ago with Burger King and then it opened up the door with Dairy Queen. Taking the same strategy, the same direction, that's the way we're working today.

I think you've already done a number of locations, maybe pilot locations with Burger King. I know they're doing some reimaging right now. I don't know where they are in their process. You're probably not prepared to talk about.

We've done some of that. It's not specifically LED yet. I think the main product line in my opinion will be the drive-through board again. These are older, tireder boards. They're wearing out. I think that's where the market is for us right now. What happens indoor is a combination of the LCD and what we learned in the development stage of the outdoor can also be applied on the indoor.

Okay. And then a question regarding the operating model. So we know that at the revenues that you produced in the fourth quarter, you were a little better than breakeven, around breakeven. You've talked about bringing the cost down. Where do -- where does the operating leverage kick into the model?

At what level of revenues does it get interesting? In the past it was one thing. When I say interesting, I'm saying this is a Company that did $0.50, even $0.75, $0.80, $0.95 in prior years in earnings. When do we get back in that $0.50 to $0.95? At what level of revenues. I know you can't promise when the revenues come but I'm trying to get a sense of the leverage to the model.

If I could simplify that answer is when the economy straightens out a little bit and it becomes more of an opportunity on the seller's side than it is a buyer's side. I have never experienced in my career the kind of direction of demand that comes in on a daily basis with a customers knowing that they work every manufacturer to get their lowest price. And of course, that's a very, very difficult situation when you're trying to balance the revenue side, you're trying to balance the overhead cost and trying to look at how we can keep this company in a stronger position. My goal right now is to do a better job penetrating larger markets and expanding LSI's capability. And even with the margins being tighter because of the buyer's position that they're in with this economy, we're going to find ways to drive volume.

We've also learned a great deal to keep our overhead down. I go back to my statement, looking at it from a manufacturing standpoint. We've taken a direction, which I believe is the right direction for LSI, not to move into buying more and more finished product from China as many of our competitors are doing. I don't want those inventories. I don't want with the change in these product developments, I don't want to be stuck with stuff that I can't sell.

So we're actually focusing on a much more improved, much more efficient, faster method of producing and I think at the end of the day, being a US made product, hopefully the pride is coming back and the change that we're creating with our C&I reps, they're going to start driving that volume through so that you will see the improved market, the improved position in our stock price. Right now, I'm just thankful that we've got this company turned around in a much stronger, solid base than it was the last year. It was a tough year when you compare 2009 to where we are today.

Have much more -- am I optimistic? I don't use the word optimism any more because I can't control the economy. Am I confident? Yes, in what we've done. I still maintain you look at what this company has invested, what the changes we've made, and all the things that we've done and still have the balance sheet that we have, I think our folks have done a remarkable job.

Are we happy with it? I know as a shareholder and you as a major shareholder, we want to see that stock price back up there. And that's my focus right now, stabilize the Company, get the foundation back in place, make the changes that we had to make and now focus on the ability to build our revenues and hopefully improve the profitability so that the stock market will take the course that we hope it will do.

So at $250 million in revenue, I mean, in the past you needed to get to $300 million, and you made some good money. If we get back to -- if, I'm saying hypotheticals, if we get back to that which is a 20% growth from here, does that produce a bottom line that I'm going to be happy with, you're going to be happy with?

I hope so. I'm not going to commit to that because I really don't know what this condition of this economy is going to be but I can tell you right now that everybody in the management team of this company understands what their goals are.

Okay. Thank you.

Thanks, Rick.

And that was the last question in queue.

All right. Thank you.

Bob, if I may step in and just briefly remind everybody of our Safe Harbor statement that's in our press release and 10-Qs and that we have no material nonpublic information that we've discussed today.

In closing, I want to thank everybody for their time and patience and I promise you this, as things start to hopefully start to settle in here and we have more information, we'll be making more press releases on the condition of the Company, some 06 of the things that are happening. Right now, I'm being very guarded on how we go. With this economy being so fragile, we have no idea what a customer -- a customer may come in today and then pick up the phone and say you know, let's put everything on hold.

Some of the programs that we talked about, this has happened over the past year. It gets very frustrating when you start to ramp up for something and then somebody says to you, well, wait a minute, let's see what's going to happen here. So we almost work from day-to-day, week to week, month to month, to be sure that we're doing the right thing and creating the right programs in order to market our products. The exciting thing is, is that this new technology is expanding. We're coming out with more products quicker. And we really are seeing a tremendous interest in the product line.

So with that, I'll thank you for your time today. And we look forward to visiting with you in the next quarter. Thanks everybody and that concludes the meeting.

Thank you for dialing in for the LSI conference call. This call has now concluded. Have a great day.