LSI Industries Inc (LYTS) 2011 Q1 法說會逐字稿

Good afternoon, and welcome to the LSI Industries first quarter 2011 earnings conference call. Today's host will be Mr. Steve Brucker, the Chief Information Officer of LSI. 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. Brucker.

Good afternoon everyone. And let me add my welcome as well. Today's presentation will not have any accompanying online graphics, but you will be able to find supporting materials available on our website after the conference is concluded. You can go to our website at www.lsi-industries.com, and you will find the Investor Relations button at the lower left. And now let me introduce Mr. Bob Ready, the President and Chief Executive Officer of LSI Industries.

Thanks, Steve. Good afternoon everybody. Welcome. I am not going to get into a lot of detail in my opening remarks. I think the press release covered it all. As we have shared with you in the past conferences, especially over the last 12 months, we have gone through a major cultural and structural change in the way we do business. We are still obviously very focused on our niche markets which we will talk about in more detail in the oncoming hour.

But the important thing to recognize is that all of the conversations that we have had over the past 12 months related to the economy and what we have done to improve the direction of our Company is obviously in place. And as I shared with you just three months ago, I knew that we were headed in that direction. Our LED technology is definitely taking the right route system not only in the US, but throughout the international markets. I have invited to sit in this conference my key marketing and sales folks, Scott Ready, the President of the Lighting group, David McCauley, Ronald Stowell, our Chief Financial Officer, and Steve Brucker is onboard as he made the introduction, Sean Tony, our Executive Vice President on the Commercial Industrial side of our Lighting business, and if I left off, David McCauley.

and John.

and Jonathan Labbee, of course, coming out of the Montreal office is online as well. I know that there are going to be a lot of questions in reference to how this quarter really worked its way through, and what the future is. As I said, we are very optimistic about where we are, and certainly our penetration into the commercial industrial market with a number of changes that we made in our regional sales force. As well as just the overall acceptance of the LSI product line as it relates to total energy-saving products, not just LED. And I know Scott will make a comment or two on that. Those are my opening remarks. Ron Stowell is going to hit a few of the highlights here, and then Ron will switch it back to me, and then we will open it up to Q&A. Ron, if you would, please.

Yes, thank you, Bob. Good afternoon everybody. I will briefly cover our Safe Harbor statement that will point you to the recently filed 10-K and our previous 10-Qs as to our forward-looking statements. And importantly today we will not have any material non-public information that will be discussed. On to our net sales for the quarter, at nearly $80 million as the press release indicated we are up 18%. And I will give you just a couple of the segment numbers of Lighting was about $47.5 million, that was up 19.8%. Graphics at $26.1 million, up 18.1%. Our electronic components $4.6 million, up 41%. And you will note that I did not talk about a Technology segment and differences of sales there.

We have reclassified the Technology segment into the All-other category. The Technology segment is really the operations of LSI SACO. that is really our LED R&D center. And as a result of the size that represents of our total, we felt it appropriate to reclassify into the All-other category. When it comes to looking at operating income by segment, we have made another change. And that is that we are breaking out corporate administration from the All-other category, and onto its own line item in that segment reporting. We think that will give better clarity to the segment reporting, specifically with operating income which I will also give some of the numbers there. Lighting operating income was $3.7 million, and that was up 6.8%. Graphics $4.6 million, actually up 161%. Electronic components was a little over $1 million, and let's just say that is a huge percent as compared to $56,000 last year.

Of course, last year was influenced by some purchase accounting requirements and inventory reserves that had been booked at the time of purchase. And then so our total of $6.6 million on the face of it was up 165% from last year. However, in our press release I do want to point out here to reiterate that, we made some non-GAAP financial measure adjustments to last year's number related to the purchase accounting effects last year. And so our net income is up really 88%. Great increase on an 18% sales increase.

Quickly just over to the balance sheet, you will notice that we had $12.1 million of cash, that is down from June, but we have invested if you will, invested in working capital. Our inventories are up a couple of million dollars and our receivables are up almost $7 million, due to the size of the sales in the quarter. They are in good shape. Our DSOs are 47 days now at the end of December versus 48 days at June. I will point out too, that something everybody is interested in, our total LED product sales, sales related to LED products, $16.7 million this quarter. And that is about 21% of our total net sales. Last year in the first quarter with lower total net sales, and with more sports board sales last year than we had this year, our LED sales were actually 27% of total net sales. Bob, I think those are the highlights that I will point out.

If I may kind of add to that, Ron, the consistency in the LED sales as it relates primarily to our Lighting products are definitely pretty consistent. And we will address more of that when we get into Scott's dialogue as it relates to the Lighting side of it. And I am sure David has a couple of comments in reference to that as well.

Actually, Bob, in lighting our LED sales are up 75% from last year.

Yes. Well, I am talking about some of the markets that we are going into. And we are going to address that from more of a market-driven direction, Ron. And with that, I think I am going to turn it over to Scott. Scott, why don't you take a couple of minutes, just kind of give everybody a snapshot of how things have been going both on the C&I and in our niche markets as it relates to the generation 3 product that has really done a marvelous job in the last few months, and we see that continuing with a lot of strength.

Absolutely. Thank you very much. To really characterize the business as we have talked about it over the last year, we have mentioned many times about the progression of the technology into individual markets. Obviously gaining the earliest penetration, the petroleum market, certainly the 7-11 program as we have discussed has had a major impact on the volume. But more importantly the leadership that that program has had in the industry overall is generating tremendous interest and tremendous results now beyond 7-11.

And we really look at this next year kind of as a beyond 7-11 opportunity for us, we have much to do still to finish the 7-11 program, and are enjoying I think continued support, continued satisfaction from the client there. But we see the sales volume in this last quarter beginning to reflect penetration beyond that account. And that is what is really exciting and gratifying. The generation 3 technology that came into the market released in May, really started shipping in earnest during this quarter.

And we are very happy to count a number of other smaller programs certainly amongst programs that have committed themselves to that technology, and committed themselves to LSI as their supplier. We continue to work on a variety of new clients that, not new to LSI certainly but new to the adoption of this technology, and expect to see continued growth in that market segment with the adoption of the LED solid state lighting technology. Beyond the petroleum market, and by connection the QSR, the automotive which we have seen some smaller gains there, but certainly the product application is a little bit different than we announced or launched into the petroleum market place.

But really where the greatest opportunity lies as we look forward is the commercial industrial market place in understanding that our product offering was somewhat limited in the last part of fiscal 2009. And our introductions really began in the spring and late spring/early summer into the commercial industrial market. We are very happy counting amongst the gains in this last quarter penetration, certain penetrations of that market with the solid state lighting product. Our parking garage products are meeting some very favorable reviews. Our pole-mounted products again principally all exterior products, not having penetrated or really released much in terms of the interior products, with the exception of some retail linear products which are gaining a great deal of traction. We still are focused primarily in the exterior with product development projects in place now, that will be generating additional exterior products and then some interior products as we move into the third and fourth quarter of next year, next calendar year.

The market share challenge that LSI has really attacked I think is characterized quite a bit by our successes with certain agents in certain markets that we have now generated a great deal more interest with. Certainly a lot of that is due to the product offering, but even more so I think recently due to the efforts that we have made to grow our sales team and strengthen our sales team to a much higher level of effectiveness than we have ever had before. That effort itself has really started to gel during this quarter. So overall, the two principal markets, the niche markets, the C&I market complemented by national accounts pepper back through that. And I know David will talk to some of that in his session, is really combined now with the interest in energy savings, with the interest in lower maintenance, with the slightly improving, I will say, budget situations that some of our customers are beginning to experience, all bode pretty well for continuation of this kind of result I think at least through the second quarter.

If I may add to a couple of your comments, Scott, one of the things that were very obvious to me, and certainly with many conversations that I had with many of you that are online, and others that are probably not online, it was the anxiousness if that is the right word to see where this technology was going to bring us. Obviously with a difficult economy we weren't seeing the kind of sales increases on top of our traditional lighting that we would like to have had. But the encouragement to me is, and we started this marketing theme, if you remember, months and months ago when we shared with you how we were approaching the market. And we used the description seeing is believing.

It has taken a lot of time for a number of our customers to really build the confidence in what this technology was going to bring to them. And it was just a number of prototypes, it was experimenting with different ideas, and it was really developing this new technology, and how it would apply to our customer base, which was really more unique than our traditional methods. The traditional methods were pretty much they are what they are. But we have so much more flexibility, and so much more opportunity to give our customers a choice of how to utilize this technology to their specific market.

And it just took a lot of time to build that confidence level, and get these folks to now start looking at a major improvement in their expansion of where this is going to go. 7-11 of course was crucial because it gave us an opportunity, as Scott said, to seed the market. And now that we have done so, and I know there is a lot of emphasis on the 7-11 program, but I can tell you folks right now, based on what I know, and we are not at liberty today to get into more specifics of what we think will be coming in this coming next quarter, the quarter we are in now and moving into the third and fourth quarter with other customers, there are some very, very strong opportunities out there, that once we get into these programs we will be sharing with you that is going to replace a lot of that 7-11 business. And the 7-11 business is going to continue to grow in certain aspects. Just recently they gave us the direction that some of the locations that they decided not to do in the prior year are now being under consideration. Scott, you might touch on that a little bit.

Sure.

There is an interest now in moving into the Canadian market. So there is going to be some ongoing 7-11 business that will move well into the calendar 2011, our third and fourth quarter, as these locations are being finalized. Scott, why don't you make a comment on that?

Yes, thank you. I did not specifically mention the international market place yet. I knew we would discuss that further as we went along. But 7-11 domestically went through such an aggressive program that there were many sites, well, I will be careful how I characterize many, there were sites that were not included in the first couple of phases that are now being rolled back into the program, or at least consideration of the program as we move forward into the January, February and beyond time frame.

But even beyond those additional domestic US sites, the influence that the program has had for 7-11 in Canada, 7-11 in Mexico, as well as other non-7-11 brands both domestic internationally is difficult to ignore. I mean, it is really exciting to see the folks that have now viewed and believed, as Dad says, that this technology is ready yes, it is ready for prime time, and it will bring them value immediately, and are ready to start committing their programs in that direction.

So in closing for this segment, and until we get into QA, the point that I am making is that we are kind of phasing into a new era. Our markets are really very aware of the new technology, the tremendous amount of work that has been done internally by setting up numbers of visitors. As we speak today we have got somewhere in the area of eight to ten customers from Canada in for a day and a half to review the iZone Center, and get more of an education on the technology side. So the grassroots of our technology business are well in place, they are starting to really show some direction.

Our traditional lighting, we are just getting very aggressive going after market share wherever we feel we can do it. And with the stronger sales force, and certainly a tremendous amount of work that has been done by Sean in reference to beefing up our commercial industrial direction. And it is showing the results. Thanks, Scott. I am going to move on to while we are still on the Lighting side. Jonathan, you are online. Give us a quick snapshot of your just most recent trip to the Middle East and to Europe, and what your thoughts are as far as our momentum starting in the Middle East and European markets, please.

Thanks, Bob. Hello, everybody. As we have discussed in previous calls, the Middle East and Europe are very active markets. I have seen this first hand in my travel overseas, especially during my last travel where I had the opportunity to see some of the installations. I can personally confirm that it is moving a lot over there. Since we have initiated our overseas efforts we have been working pretty hard to position the Company.

We have now secured proper certification for our products in Europe. And we have put in place some early adopters and our growing client base is really contributing to the success now of our strategy. The results to date are really encouraging, we are pretty happy with the exposure and the feedback that we are receiving from our overseas customers. With all of this happening we are moving forward with the strategy and working really towards getting some more results in the near future. One of our early adopting customers is now going to be placing a phase two order. So they have been very happy with the products, the installation was easy for them. This is the feedback that I have been getting back from these guys. And we are talking about some nice white light products here.

And to support that, I think from our perspective we are probably at the same level on the European and the Middle East market that we were about 17 or 18 months ago here in the US market. They are just now beginning to understand who we are. Most of the literature has been now printed in the proper languages, with Fred and Jonathan taking a very active travel role into those markets, introducing LSI to the next future customer base.

It is again part of that marketing theme, seeing is believing, getting these certain prototypes in place like we did 18 or 20 months ago in the domestic market and starting to build off of that. And so we are following a strategy that has worked well in the US. I believe it will continue to work well in the Middle East. And certainly in the European market, a lot is going to be up for grabs on those markets, as we watch those very closely with all of their financial problems. But the technology is there, the energy savings are there, and we have got a product that can do it and that is proven here in the US and we are just carrying that theme into those international markets. Thank you, Jonathan. David, if you would, a quick snapshot of the Graphics side.

Sure, Bob. Good afternoon everyone. As Ron stated the numbers today on the Graphics side of the business, we are very pleased with the revenue increase, and certainly very, very pleased with the income production. And we can attribute that to versus a year ago the right-sizing of the Company, the employee down and the dollar ratio per employee of revenue is certainly up. Cost containment program as they have been the reduction has been there for more than a year. But when it finally gets fine tuned and in place, and then you raise that volume, it starts dropping to the bottom line.

And then a third thing that certainly happened in this quarter versus a quarter one year ago is the product mix. There was a good product mix as it relates to the bottom line again. $5 million worth of volume versus $5 million of another type volume certainly can produce a different bottom line. In our case, the Graphics side it sure did. We are starting to see some movement in the menu board portion of the business. There have been some smaller QSR chains that have had opportunities for us, including small rollouts of their business.

And we have procured those type orders and we will be producing them over the next two quarters. Nothing major. No giant in there. But sure something to be excited about. Because we weren't expecting that particular amount of business to be coming in. In our active digital market, and again this is a lot of it our active digital happens to be in the QSR business in the menu board arena. If we go back trailing 12 months, our volume has been very good. In fact, the volume is darn near equivalent to the first four years of active digital. So the increase in the last 12 months in that business has been tremendous. And we don't see anything stopping us there.

In fact, we are prototyping more convenience and non-QSR type markets whether it be airports or hospitals, and again opportunity for growth there. As I mentioned last quarter in the earnings call, we have quite the marketing campaign. On 600 new prospects that we are chasing, we have already made overtures to 300 of them. And before the end of the year we will hit the other 300. And we expect to continue this marketing campaign. It is a three-year project. We will be hitting them every six months and adding new customers to our base. And we are real pleased with where that has gone.

On the graphics side of the business as we have said many times before, we are more about programs than we are product. The projects we look for the roll-out programs for the big companies. LSI is suited much more strongly than the competition that is out there. We can handle those big projects from cradle to grave. The engineering, the implementation, the manufacturing, the total roll-out. We can finance the deals a lot better than our competitors.

But on the product side, we are looking at a lot of the projects that we are building product for having LEDs involved with them. Before when you built signage, you would lighted with reflective light on the face of the sign. Another opportunity was to back light it, and in many cases they used neon. Neon was expensive, it wasn't very safe and secure. Maintenance was high. And with the introduction of LEDs it has given us a new opportunity to build these signs with a glow light that wasn't available before, which is low-cost and low-energy. And in the markets recognizing this, and the demand for that product is out there.

And of course when I mentioned menu boards and LEDs I can do it in the same breath because we are working on a version of a menu board that is lit with LEDs rather than the florescent standard T8s or T5s in many cases. Lastly one encouraging possibility for us is one of our major QSR customers yesterday closed their deal of gone from a public company to a private company. Hopefully they will take this chain of restaurants that has a new image already developed, hopefully they will answer to the franchise market, recognize the funding needed for that, and get involved there. We can't say that that is going to happen. There have been a lot of articles on it. But we are sure waiting in the wings, and hope to participant if something develops there. So Bob, I will turn it back over to you.

Yes. Thanks, David. And just to kind of add to David's comments, one of the most interesting parts of this whole story in reference to where we are going in the next six months or so, is the common denominator, the common theme in here is the LED technology. And with the tremendous growth and certainly the experience that we have developed as a lighting company, that obviously becomes very, very influential as part of our future designs and our graphics business.

That again highlights the uniqueness of LSI. Not to downplay or I should say not to overplay the graphics market, it is a tough market out there right now. People are being very cautious. They are being very, very conservative in their direction. And this whole marketing theme that David related to by finishing up with some over 600 target accounts is to bring these folks into an awareness of who LSI Industries is. We are not just a graphics business, not just a lighting business, but we are truly a Company that has a tremendous amount of experience now in this newest technology which everybody is aware of. And that is what we look at from an opportunity standpoint. Basically that is kind of a snapshot of where we are, and what we have done, and where we are going. And let's open up the direction to questions and answers, please.

(Operator Instructions). First in queue we have Jed Dorsheimer. Jed, your line is open.

Hi, you have got Josh Baribeau for Jed. Congratulations on the results, guys. Looks a little bit more change than what you have started talking about in some of your disclosures. I want to make sure we have everything correct. Ron, could you go over the LED number you gave us again? I think it was $16 million or something?

That is right, Josh, $16.7 million total LED for the first quarter.

And so that includes the video boards and LED lighting, correct?

That is right.

Are you willing to provide maybe the actual number or even maybe a percentage or how to think about the breakdown between lighting and video boards of that $16.7 million?

No. We are not going to get into that, Josh. This is Bob. Basically the direction, the video screens, we are working on a new generation of video screens. And that will be coming out I would say early spring or late winter. So it wasn't a big number. It was primarily more on the Lighting side than it would have been any of the other. So most of that $16.7 million is Lighting. Is that the fair comment?I think, correct me, guys, if I am wrong, but that is a true statement.

By far, yes.

Okay, great. That was very helpful. And then just on the Graphics business, it looks like you had some tremendous growth there this quarter as well. Is that more of a one-off type of opportunity, or do you think, is that a national account that is just starting to ramp up?

David, do you want to handle that one? I would be happy to.

I don't think I understand the question, Josh. Are you talking on the revenue stream for this quarter, and what that comprised?

Well, I mean, for instance, it was up by I think if I did the math right something like $10 million. Was that kind of some one-off small stuff, or was that beginnings of a new large national roll-out that we should expect -- (Overlapping Speakers).

It was a mixture of both of those. The large national program yes, there was increase there, and the one-off type stuff, there were increases there. So it was pretty proportionate as you look at it. It is spread across pretty much evenly, those two parts.

And the other part of that, Josh, was David and I think I am pretty much straight on this, in the last six months or eight months, we have invested in some very, very sophisticated high-end tech printing equipment. And the direction with that if we were going to make that investment, I wanted to see the operations of the marketing and sales direction, to go after some new customers and some new products. I think what you are seeing is a stabilization with some of our older customers that are beginning to adjust their direction as it relates to the market, as well as a tremendous amount of effort to start looking for new customers and new product opportunities, printing opportunities where they exist. And that is why I made the statement a few minutes ago is it is a tough market out there. But with our financial stability, the investment we made in those very high-volume, very sophisticated printing pieces, one went up into Woonsocket, the other one went down into Houston, we really started to open up our markets going after more customers.

And this is Dave again. I might add to that, Bob, that beyond the printing equipment we took conversion equipment for operations after the printing process. And we have cut our costs tremendously there. And like Bob said, brought some new customers. And that is what a lot of this marketing campaign is about, like Bob says, to drive it home to say, hey, here is what you knew about us. Here is what we are now, and here is where we are going.

Okay. And then just lastly, can you give us maybe a percentage or a size of what the international business is as a percentage of sales?

Oh, it is very small.

Still very small.

Just beginning. Very small. We are just seeding the market, getting certain prototypes with certain key customers. Because if you recall in other conference calls, we just didn't have the certification in place. And we were working with people, and we were trying little bits and pieces, but they really couldn't get into a program until we got true certification by country. And we have achieved that. And now the interest and the doors are beginning to open for us.

Great. That is it for me. I will jump back in the queue. Congratulations again.

Thank you.

Next in queue we have Jim Ricchiuti in queue. Your line is open.

Thank you very much. Congratulations on the quarter.

Thank you.

I wonder if you could perhaps tell us what percent of your revenue 7-11 represented in the quarter? And I have got just a couple of follow-up questions.

That certainly will be disclosed in the 10-Q, Jim. It is a little over 24%.

24%. Now, Bob, you alluded to the fact, and I think you did as well, Scott, that 7-11 now is going back and looking at some sites that previously they had not considered participating in this program. What is it that is prompting them now? Is it just the debtor economic environment? Is it the fact that the performance of what they are seeing is exceeding their expectations? Was it a combination of both? And I wonder if you can give us some sense as to what potentially could be out there in terms of follow-on business?

Well, Scott, correct me. You can follow up with my comments. I think, Jim, when they were going through their review during the early stages of whether they were going to, where they were going to move into this program, there were certain franchisees out there that they weren't sure whether they were going to go ahead and extend contracts and so forth. Now that they have flushed through the 80/20 theory, let's put it that way, now they are looking at the results of some of those out there that they didn't do and didn't commit to. And they are seeing, and then I think this is an evaluation of the energy, they are still part of the 7-11 program. And the energy program has been so strongly accepted by 7-11 with this conversion that now they are taking that lower tier and they are saying, okay, if they are going to stay with us we are going to extend their contract, now we are going to move into that phase. What the percentage is, we don't know that yet exactly. So I don't want to assume anything. But it is a continuation of a program that could go well into the balance of our fiscal 2011 year, which is good for us, because it is not just going to end in December. Is that a pretty good evaluation, Scott?

Yes, sir, you are right on the mark.

And if I could just ask a couple of follow-ups, if we look at the way the business is segmented, is the bulk of that 7-11 business that you generated in the quarter, is the bulk of that in Lighting products? Remind me, is some of that also in Graphics?

No, no. About 65% or so, somewhere in that realm would have been Graphics, and the balance Lighting. These were non-petroleum sites, Jim, if you remember.

Okay. And so is there a way to help us understand what might be left in the 7-11 original phase in the December-March quarters?

No, we don't know that yet. So I don't want to assume anything. It is substantial? In my opinion based on the international part of it, most of those are all petroleum sites, which are certainly larger than the non-petroleum. Once we get a direction from them, we will be able to share that with you. But it is a good part of an opportunity there that we love to have. As we phase in some of our other customers hopefully into bigger programs and that is the whole purpose of where we are now is getting much more aggressive with the success with other customers, so that they see the value of what it would, what could be done with a kind of a smaller roll-out program compared to a 7-11.

Okay. Thank you.

Thanks, Jim.

(Operator Instructions). Next in queue we have Rick [D'Auteuil].

Hi Bob. So last quarter on the call you had seen definitely an inflection point on the lighting side of the business. You didn't know it was going to continue but you were seeing some rays of optimism. As you sit here today, you have had another three months to digest. Are you confident in saying that those rays of optimism continue on just regular-way business, not big project-related kind of stuff?

Why don't we turn that over to Sean? Sean is in the room there, based on what he has been able to do in the C&I, I think that would emphasize your question a little bit better, Rick. And Sean, why don't you kind of field that one?

Bob, thanks. And Rick, thanks for the question. I will answer it in a couple of ways. I would say cautiously optimistic. What we have done, Bob alluded to it. I will try not to be redundant. But we have got some terrific people. LSI has always been built first and foremost on people. We have incorporated some real leaders now into our C&I regions. The activity level is very high. As a result we get a look, a sniff if you will at opportunity that is out there that we can react to, and at the same time we are playing off and it is under Scott and Bob's leadership in the C&I regions on creating opportunities. Absent of new construction activity, the guys and girls that are out there in the sales force are doing a great job with our agents, teaching the agents how to shift their paradigm and sell into retrofit opportunities or reconstruction opportunities, where we would really live be in a leading position because of our crossover technology, and other products that really help somebody lower their energy spend, we are creating opportunity where frankly there isn't any. And finding that modest opportunity that is out there sooner.

I guess the other reason to remain optimistic is we launched a growth platform that is all around generating demand, both within the agent sales force that we have got, and then in the markets. We continue to incorporate that growth platform. That is a proprietary program we have got for our agents that does a couple of things. It generates demand, it generates volume to serve, and at the same time it strengthens our agents which are extensions of our business, our agent partners, and makes them stronger in each of the markets that we serve. Reinforces them financially at the same time. And I think all of those things tied together, as well as the interest that we continue to get out of our core national account retail partners, and new ones because of that type of reputation on service, quality, and delivery reliability, create a long-winded answer, create cautious optimism.

Yes. And I would like to support that, Rick, by saying that one of the things that has come about as a result of the tremendous just a whole different attitude change in adjusting our Company to really what the economy is out there, is putting emphasis back into the success of the LSI story going over 34 years. Refocused our operations on a higher level of service. It is a tough market out there. And with everybody competing after the same amount of business, which has obviously been reduced, service becomes a very, very high level of a requirement of doing business today. Pricing. With the adjustments that we have made internally in order to get our costs in a better position so we can be more competitive, yes, the margins are tougher. But the fact of the matter is that you can see in this last quarter that all of the things that we have been talking about for months are now beginning to work.

And it is really kind of interesting, as the level of management in place right now is experiencing really what the success of the LSI story is. And the benefit of that story is really finding its way through the C&I reps. Sean has done a unbelievable job of adjusting the type of people that we have out there, in order to bring the passion and the direction back into the sales effort. And then the marketing folks have got all this stuff that is flowing through in order to support it. So it is not just one thing. Am I optimistic? You are damn right I am. I am concerned about the third quarter, as I always have been for the 34 years that I have been part of this. We are working very hard to try to balance that out based on going into that third quarter. And if a few things happen which we are being very, very cautiously optimistic on, it could be a very, very interesting third quarter. It is a little bit early to tell yet right now.

I am concerned about what is going to happen next week, and see what the results will be. But as I said before, I can't control that. So we really put the effort where we needed to be, and proved to you and the rest of the market out there that changes that we have made and the investments that we made can support a continuation of some growth, and that will obviously adjust based on the economics of the economy, but I think it is important to look at the whole story right now.

7-11 a quarter ago, and I heard what you said about the potential for some additional sites, but I thought they were contemplating another kind of phase level of work. Is that still under consideration?

True. Those 22 or 23 prototypes are still in the process of being evaluated. They have made their own changes once they have seen what has been done. I really don't know where that is going to come yet. We probably won't know more. Scott, David, you can support me on this. Probably until calendar 2011.

Yes. That is correct. They have still got a lot of different initiatives even beyond the ones that we are participating in that are frankly competing for capital right now. And it is unclear at this point which one of those initiatives is really going to carry forward in a meaningful way.

Okay. And then lastly, I think it was David that mentioned, maybe it was Bob, that you have had some success on some smaller chain QSRs. Can you give me a sense of, are these 10-unit QSRs? Are they 100-unit QSRs? Give us a sense of the size of these wins?

They are chains with somewhere between 100 and 500 units. And it isn't necessarily a total roll-out of every site. But again, it is a nice, meaty project.

So this isn't just the testing phase?

No. The testing phase occurred probably 100 days ago. And finally the order has been placed.

And these are menu boards or --

Yes, outdoor menu boards.

Outdoor menu boards. And how many chains were there?

Again, they were in that 100 to 500 range.

There were two customers.

Two chains in the second tier, the 50 to 100 top 100 QSRs. They were in that second tier.

Okay. Appreciate it.

Rick, as you ask these questions, I think it is all in our minds with this changeover at Burger King. Let's just say where it is. Going from a public company to a privately-owned company. A lot of articles have been written in the last few weeks about a new look and what it is going to cost, and this and that. And there is no way to tell what these guys are going to do.. I don't think they really realize at this point what they are going to do. But what has happened is there is a change. It is a very, very big customer. A very important customer to LSI. And our role will continue to bring to them as much as we can in both the menu boards and the lighting, and so forth. And so if there is an opportunity out there, we are going to be sitting right at their doorstep to be sure that they are fully aware of what kind of products and services that we are going to be able to offer if that consideration is going to be part of their plan.

Okay. Just this is more an Investor Relations kind of question. But we are not seeing press releases regarding these new business opportunities. What would it take? Is there a minimum level of revenue that a new customer has to be to make a--

It is called a contract, my friend. When I have got a contract, you will know about it. Right now we are being very cautious about what we are saying to whom we are saying. It is a very competitive world out there. It is tough enough as it is telling our customers what we have to being a public company. And I do appreciate your concern. But my guidance and direction has been to my team, you keep your mouth shut until we have a contract. Then we will share that with everybody.

So there is likely to be some announcements? Because you said you had some pretty nice opportunities to fill the 7-11 eventual hole, right?

It has been a couple of years since we have kind of had the cup starting to fill up with a direction. And it has all been part of this new technology, this new generation three. We don't have enough time on the phone to go through what generation three has brought to LSI. But it has definitely established a very strong, these folks that are in from Canada for a day and a half are coming in to see what this generation three technology will bring to the market place. And it doesn't stop there. I mean, we are putting more and more effort into whether we call it generation four or whatever we call it, it is an ongoing improvement of the product line. And it falls all the way through the graphics as well as the lighting because LED is now in both markets.

Okay. Thank you.

Thanks, Rick.

Okay. Next in queue we have Glenn Wortman. Glenn, your line is open.

Good afternoon, guys.

Hey, Glenn.

I just want to make sure I understand how much is left on this $38 million program the 7-11 for the non-petroleum sites. I understand it was $19 million this quarter. I think you did a few million last quarter. So is there about $15 million left for the fourth quarter?

I can't tell you that exactly. Based on the number of stores. I think we have about 1,300 left, guys? Is that right?

It is less than that. About 1,200, Bob.

1,200. And there is no way that I can give you an accurate figure on that, Glenn, because we really don't know. The only reason that we brought this out is that the program at this point is not going to be completed December 31. We will see some activity in the third quarter depending on the weather conditions, and depending on whether it is in an international like Scott pointed out, Mexico or Canada versus the US. And until we really have clarification where that is going to be, we have just been put on alert to say there is going to be more coming. We want to be sure that you are going to be in a position to service those needs, which we obviously will be. And we just wanted to share that with you at this point.

Okay. And then this might have been in reference to Burger King. I understand if you can't maybe mention the specifics names. But in the last conference call David mentioned that you guys were getting closer to a large graphics program, perhaps similar in size to Dairy Queen a few years ago. Is there a separate update on that particular point?

I think what he was referring to is that we knew for a fact that Burger King was doing an evaluation on their vendor base. We had a very important meeting with those folks, kind of showing them some of the newest technology and LED menu boards, and so forth. And that is all part of this new process that seems to be going on in the industry, with these folks going from a public company to a privately-owned company.

Okay. And then just the competitive landscape on these large graphics programs, I understand some of your competitors have left the market over the past few years. Can you just talk about that, please?

David, if you would?

Yes, sure. The plot thickened there when the orders stopped coming into, the pie got smaller as Bob said. And some of them didn't have the financial strength and weren't positioned as we were, and therefore the menu board side of the business we lost two competitors. But there are still a lot of them out there competing for this business. But the larger the program the better our opportunities are, as you know. Because when it gets to that scale that is where we are able to beat it in implementation, pricing, inventory, storage. So we like the position we are in. We just need that capital to release for some of these companies, and have those programs go forward. The nice thing that we know about the industry, though, the menu boards, menu boards are usually 10 years, and then changed out. It is hard to see anyone going 20 years. There are a lot of programs that are 10 or more years older. And it has to change. They just can't keep fixing and repairing those things daily. So we like the position we are in. We like where the market is. We just want that capital to release.

And Glenn, what we have had to do is take our graphics business and adjust it to the size of what the real economy is. And obviously with our financial strength as a corporation is we have made some major reinvestments in our internal manufacturing process, so that when this economy does turn around and gets back to a more normal level, we will have the ability to service those markets. We still have the ability to install. We have the greatest ability to print at the highest level in resolution of any type of graphics needs. We have this tremendous support mechanism in place, as it relates to the history of the companies that we have pulled together. And we have kept them financially strong enough, so that they are not going out of business. Our competitors are going out of business. And with a strong marketing direction that David and his team has now implemented is to get that message out to those respective customers and existing customers, that we are here and we have got the ability to do whatever you need us to do. Even if it is the smaller pieces. And that is what these graphics guys have had to do. They have had to adjust their whole strategy to having smaller pieces of the pie, and hopefully getting a larger number of those smaller pieces in order to keep the strength and the financial stability of the Company in place, so that when another Dairy Queen comes out with another 5,000 stores we are right there, and there isn't anybody out there that can do it better than us.

Again, and then finally just for the international business, is your primary focus there convenience stores, gas stations, and do a lot of your competitors offer LED type or similar products that you do?

Yes. I think it is very simple to say that based on what we have created for retrofit business, based on energy savings, that market in the Middle East, the market in Europe, is no different than the market in the domestic as it relates to the market. Now that we have the product line certified and we are building the sales force, and more importantly, not only are we building the efforts on the sales side of it, but the service side of it having the right people in place, so that when you sell it you have the ability to service it, all of that is part of the strategic building plan. And as I pointed that out, that is where we were 24 months ago in the domestic market. And now that we have certification, we can start moving forward in the same similarity in the European and Middle East. Isn't that, Jonathan, pretty much where we are?

Yes. Absolutely.

Again, thank you very much.

Thanks, Glenn.

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

Thank you. Say, Bob, you have a very large installed base of the older Scottsdale lights. Can you quantify if it is, maybe it is not even starting to contribute yet, but the gen 3 retrofit opportunity there, is that starting to kick in yet, and can you quantify it as yet?

I will let Scott handle that one, Dick.

Unequivocally, yes, it has started to contribute. We are not prepared to quantify it for you. But the product designs and the development of the technology has been geared directly towards replacing those Scottsdales. From the mechanical features and the ease of installation all the way through the performance characteristics of the product, so that the client that has enjoying the benefits, the marketing benefits, the maintenance benefits of the Scottsdale for the past 15 years can enjoy an improved level of those same benefits through the crossover generation three. It has been well received and understood by the market that that product has been geared directly to do that replacement, and certainly a good portion of where that market opportunity exists, and where it has been beginning to contribute especially in this last quarter comes directly from that market space.

Has there been a demonstrated ROI that you have been able to show these customers?

Yes, sir, yes. In most cases the ROI is still falling within three years or less.

A lot has to do with the energy costs. And the most important thing to remember, Dick, is that the Scottsdale product was the most successful petroleum canopy fixture ever produced. And we took a little bit longer in bringing the generation three into play. Obviously it opened up the door for competitors to come in. And everybody is looking at this market. I mean, this is something that we understand. But when we did it, and this was the direction that I put in play, this had to be something so much better than anything that anybody else could produce, and truly a replacement of the Scottsdale.

And if you look at our literature, we relate the new generation three crossover canopy fixture, for example, to the Scottsdale replacement. I mean, we go right into our marketing theme and say, we built the Scottsdale. We brought it to you. Now we are bringing you a new crossover, a replacement which gives you all of these other benefits. And I am telling you right now, what you are beginning to see, what happened in this first quarter, and I believe will continue on based on the new products that are coming behind these, that have the generation three technology into it ,and extending into the parking garage markets, into site lighting, into street lighting, into the high-volume retrofit markets. It is all part of the strategy that has been in place for 24 months. And even though we understand the anxiety of the market, it was all part of the strategy to say, we are going to do it right and we are going to do it better than anybody else can do it. And we are going to set up a production process that can service the market. And that is where we are today, and we are going to continue to expand on that.

Right. A question for Dave, if I may. Dave, on the outdoor menu boards, can you kind of walk through the thought process of the customers? It looks like you are talking about some of the smaller QSRs that probably have a little more flexibility and less bureaucracy to make a decision to move. But do they need to, I mean when they look at their outdoor menu boards, is that something they look at after they do some upgrading to the inside? Or can these outdoor menu boards be sold kind of independent of having to do something inside the restaurant?

Second statement, they can be sold independently. What is usually happening out there is one of two things when it becomes to the outdoor board. One it is old and tired. It is 13 years old. It is weathered. It needs repainted. The slots are bent, curved. It just looks shabby. But rather than just take their chain and order all new menu boards for them of like product, usually their menu has changed tremendously over those 13 years. There is not enough space, or the space isn't divided right, and they can't really retrofit that outdoor board. So they are into generation two boards. And that is what is happening now. Either they are too old or they are not, they can't be retrofitted so they order the new ones. And we see this in a lot of cases. And it somewhat holds true for the inside. The inside board is a lot more protected from the elements. It might have a longer life unless again it is a space problem, how they divide their menu boards up.

What sort of warranty --

David, isn't 60% of the fast food sold today still go through the drive through?

55% is the number of the revenue stream comes from the orders placed outdoors versus the counter.

I know it may not get much traction until the healthcare bill goes through, but the calorie information are any of these that you have signed up or that you are talking to, are they starting to put calorie on the outdoor boards, and then is that creating any issues for you?

We have a few that have it on the outdoor boards, the caloric and nutritional information. And when I say the indoor boards, we have a lot more of those. The indoor boards, though, they have gone to the digital aspect. Where they can change on the fly versus just a slot or a pattern. They day part them all of the time. So this caloric information that you probably won't see required out there for two years by the time it all gets settled, digital, active digital becomes the real player there. And that may be the trigger point from going from conventional back-lit boards to LCD screens. But we have markets out there that already have incorporated them.

Okay. Good. Thank you.

Thanks, Dick.

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

Thanks. Just a follow-up question with respect to the pipeline, the funnel of business or potential business that you see out there. If you were to see some resolution on potential contract in the next couple of, next say month or two, would you anticipate some of these ramping up relatively quickly, or would there be some transition period where they might not start until later in the fiscal year?

Great question. I will tell you, Jim, when these guys finally make a decision they want it yesterday. That is a two-part answer. There are customers out there that are getting to a point where they are looking at this and saying, we need to get our ducks in a row. And it could be three, four months before they start off. There are others who are out there who say, we made a decision, now we want them yesterday. It has been a tremendous struggle to keep up with the demand, based on the shortage of electronic parts. And it is really, really challenging, our manufacturing and operation folks in order to stay on top of this and meet the demands of our customer. One of the things that really, that I have got to give a tremendous amount of applause to is the manufacturing part of LSI, in its ability to handle the demand and the volume that we have had been put on us in the last six months. And Scott, you might want to even allude more, because that is part of your life now.

Well, absolutely. Absolutely. I mean, I think as we have talked in the past it has always been our goal to be able to begin to ramp down one program and ramp up another program to fit, dovetail beautifully into its place. And I am not saying that we are able to achieve that at this point. But we have spent a tremendous amount of time gearing our operational side of the business stuffed to support high-volume production. We have increased our investment in the level of actual production space that we are using to support solid-state lighting. And with the program opportunities that we have looking forward, I think we are going to be better suited than anybody else out there to service that business in a high-volume fashion in a very, very high-quality and reliable way. I think Bob is absolutely right. It is difficult if not impossible at this point, to tell you exactly when it is going to start. And that will remain difficult up until the day we start receiving purchase orders. But we have some very high hopes that we will have some great dovetail opportunity between the two programs.

You know, and what's really kind of unique, Jim, about where we are today, if you had asked me this question 18 months ago where LSI would be working with overtime, working Saturdays in order to keep up with demand, I would have said you are crazy. But where we are right now is, really understand the history of the Company. We were never a company to produce product that went into a high level of distribution like our competitors, our stock and flow as they call it. We were always a company that were hounding that customer, and getting them to make a decision and then shipping it quicker than anybody else could. That is where this economy is right now. It is not through stock and flow, as we look at traditional. And Sean, support me on this or not.

But we now find ourselves where we were 25 years ago based on the demand and the supply and the ability to do so. And we are built to do that. We can do stock and flow, but the heartbeat of this company is what it is. And that is the ability to service the customer base that we have created. And it is really kind of an interesting page in the history of LSI's book, as we see where we are now in a down economy, with a lot of pressure on pricing with tremendous challenges on getting materials, but we have found a way through our relationships with good vendors, certainly our understanding with our agents working closer with them to give us as much time, lead time, and being able to meet that customer's demand. It is a whole different culture out there. And that is what we have been working on probably for the last eight or nine months to get our Company positioned and use this new LED technology as part of that spearhead.

And then last question if you could just give us perhaps an update on your traditional fluorescent lighting business, what you are seeing there with what historically were some of your bigger customers?

Scott and Sean, you can handle that one.

Sure. Sure. There is certainly a great deal of influence. We haven't talked a lot about the retail market place right now. And let me mention that and then the international aspect, and I will pitch it over to Sean to talk about the commercial space. From a retail perspective, we maintain the same contracts that you are familiar with some of the larger retailers. We do see a little more willingness to spend, as David likes to refer to it, opening up their spend and their budgets as we move forward into next calendar year, or the second half of our fiscal year. From those existing clients. And of course, that is so dependent upon the economy, and the retail experience that we all will see as we go through the November/December time frame that could accelerate, it could quit at any time. We are well aware of that. But right now the indications are stronger than they have been in quite some time. Interesting to note in some of the international opportunities that we are actually expanding some of our fluorescent sales there as well. We hooked into a good-sized program. It is still early, so again we are not at liberty to give a lot of detail. But we have some great opportunity outside the country supplying a retailer, a well-known retailer with a high volume of fluorescent products that we will begin to ship this quarter, and then with all of the success we expect, continue on through the next year. Sean, why don't you go ahead and address really the traditional, I know we talked a little bit about stock and flow already, but we are gaining some market share on traditional fluorescent products in the commercial space.

Thanks, Scott. Bob, Scott, I think you are absolutely right. I think if the overall electrical market was $11 billion several years back and is hovering around $6 billion or $7 billion, the hardest post of that or the biggest piece of that that has been hit has been that stock and flow loaded onto electrical distributor and wholesaler shelves, for discretionary or pickup business. I see that still in my travels as being down substantially. What I think the business has done a nice job of, service and communication, some of the other tenets of LSI. We continue to communicate with our agent partners in all markets, getting better understanding of what is out there, or what can be created doing a better job of forecasting. And one things I am very proud about being part of the team is we have done a tremendous job through electronic shortages. Ballast in particular to continue to leverage our strengths in manufacturing and operations in general, to service demand specifically in our fluorescent products. So of the nice, diverse base of sales we have got and the day-to-day C&I businesses, schools, prisons, hospitals, et cetera, we are in a great position through communication, through forecasting, to play offense in that area. Scott alluded to it. What we have seen with our core retail partners, national accounts, we have seen a shift in their business. Activity is up for sure. And then where they have split the business between us and potentially another supplier more of a migration over to LSI because of that ability to service high-quality product in the shortest amount of lead time possible.

Okay. Thank you.

(Operator Instructions).

I think that probably pretty well wraps up the Q&A part of it. And just a couple of seconds in the closing remarks, this was a great quarter for us. Because not only proven in sales and the bottom line, but from a morale standpoint to see the Company start to turn around. All of our employees are beginning to see it, feel it, taste it. And that is really important as we start down this new road, based on everything that we have discussed today. It was one quarter. We have got a lot of work to do in the oncoming quarters. We have a lot of challenges out there as we all know. It is not going to be easy, and I think we all feel that certainly the folks that are on this line probably have a better understanding than I do, that we are a good two years out before we see any kind of a return.

The bottom line of where LSI is today is that we had to slow that train down coming out of 2007 into 2008 in a different direction based on the economy. But we did it without cutting part of the Company out. We did it by keeping our Company financially strong. We have made major investments and acquisitions. And certainly in a new product development we move a worldwide market. There are a lot of things going on right now. There are still a lot of unknowns out there. And it is important to know as shareholders that this Company is well in control of its own destiny. And there may be some more ups and downs coming that we can't forecast.

But I think where we are now, we have been through the worst, hopefully, from an economic standpoint. And our Company has weathered that storm as well as anybody out there. And we are now on the point of recovery. And we will continue to do what we have been doing, and doing it well and getting better at it. We have a stronger team of people, we have a stronger commitment internally as well as externally. We have got a larger customer base to look at. And I am just very optimistic. But it is a very guarded optimism.

And we will continue to share with you and feed you more and more information as it becomes proper and available to us, and doing the right thing, so that hopefully some point in the future we can give you a little bit better guidance. That is what we are trying to do so that it makes your job just a little bit easier in following the Company. So with that I want to thank you for your time. We have got a pretty busy day and a half, so if anybody wants to call I would suggest waiting until Monday because of the folks that are in, we have got eight or nine folks as I said coming in for a specific reason. And we want to spend some time with them. So with that, thank you for your time and appreciate it. And we will be in touch. Thanks, everybody.

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