LSI Industries Inc (LYTS) 2011 Q2 法說會逐字稿

Good afternoon, everyone, and welcome to the LSI Industries second-quarter earnings conference. Today's conference host is going to be the Chief Executive Officer of LSI, Mr. Bob Ready. During the discussion all participants' lines will be muted. As a reminder, today's conference is being recorded. And now without further delay I will turn the call over to Mr. Steve Brucker.

Good afternoon, everyone, and welcome. And as we've done previously, we have supporting materials that will be available following the conference on our Investor Relations website that you can reach at www.LSI-Industries.com and clicking on the Investor Relations button at the lower left. During the conference however there are no supporting materials today available on the website. And now I'd like to introduce Mr. Bob Ready, Chairman and Chief Executive of LSI.

Thanks, Steve. Good afternoon, everybody. We really appreciate your time this afternoon. I think the press release pretty well covered most of the improvements of the quarter and I was very pleased with the second quarter. We've been seeing a much stronger growth in our revenue stream; our backlog is building better than it has in a couple of years. There are signs that the economy is getting a little bit better.

We're still being very cautious obviously with all of the things that are going on with Washington. But the overall snapshot of the -- certainly the past quarter was very positive. We had a couple of things that hit us at the very end of December. A couple of our accounts filed Chapter 11 and it cost us about $0.015 as it related to what we've accrued for that.

We don't know the disposition of these filings yet. One of them we feel comfortable that we're going to be in better shape, the other one we just don't know yet. It totally caught us by surprise. But that's an indication of what's going on in the economy.

I'm going to make a couple of comments and then I'm going to introduce Scott, Scott Reddy, the President of LSI Industries and also President of the LSI Lighting Group, and David McCauley who's on the line with the -- President of the Graphics Group. And we have Ron Stowell with us as well, our Chief Financial Officer, to answer any questions that you might have.

As a quick snapshot of the quarter, as I just said in my opening remarks, a better quarter for sure. There are some areas that we still are working on for improvement based on looking at a stronger profit contribution. There are a couple of areas that I want to comment on.

The BP program, just to save a lot of time and a lot of questions I want to be very straightforward -- we have no idea what the volume of this program will be until we start finishing up some of the surveys. This is not anything like the 7-Eleven program where 7-Eleven knew the number of stores. We had a contract with them on an agreed prices based on replacement of canopy fixtures, aerial lights, the security lights as it related to the petroleum and the non-petroleum security and area lights.

This is not the case with BP. This is a program for the jobber market. We're very pleased that we have it. Our folks now are in the field starting to take these surveys and as time goes on we'll probably have a much better idea of exactly what we're dealing with. So just to save a lot of time, we have -- we wish we could give you better direction with this program.

But we're excited about it because it's a continuation of a very important market to us that has a lot of confidence in our product. The conversion program will ramp up much quicker as the weather gets better. We're in the manufacturing mode of getting inventory ready to start shipping against the surveys once they start being turned into purchase orders and submitted to the Company.

The 7-Eleven program is definitely winding down. As indicated in our press release, we now have the Canadian market to do. That will probably take a few months based on weather again. This is all canopy lighting and could be some aerial lighting as well. Again, that becomes part of the survey process, but very similar to what was here in the United States.

In this particular case we're not doing the installation in Canada. They made the decision to do it on their own. We were doing installation here in the US, as you're probably aware of the fact.

The other part of the 7-Eleven is that there are what is estimated around 500 or 600 stores here in the domestic market, some petroleum, some non-petroleum, that are now being reviewed by 7-Eleven. These are stores that were somewhat left out of the initial programs due to the fact that 7-Eleven wasn't sure whether they were going to extend contracts.

And for a various number of reasons they weren't included, but now they're doing a review. And it looks very favorable that those stores will be released sometime in the next 60 days or so as is our estimate. We'll keep you abreast on that as we get closer to that program. But in conclusion with 7-Eleven, approximately 1,000 stores are left to do, so that makes this program a continuation for the third quarter for sure.

I'm not going to get into more detail for time's sake. I'm going to turn it over to Scott and he's going to kind of give you a quick review of the overall lighting conditions and the C&I market. Oh, there is one thing I did want to mention. I want to talk a little bit about the international market.

This market is well on its way in its first phase. Fred has been working, as I've reported to you in the past, and working very hard to get the market set up. The folks were over in England just last week -- was it last week, a week and a half or so ago -- had a big show over there that showed a lot of favorable results.

As shown in our press release, we now have certification with the European market, which has been a long, long process. This now opens the door for a lot more activity. There's a tremendous amount of interest in our LED product line and we're beginning to do more prototype work with the some of the companies over there in a very similar manner as we were building the US market.

So that's kind of a snapshot of the most important -- more important things. I will turn it over to Scott now and let him get into a little bit more detail and then we'll follow up with David and then turn it over to Q&A. Go ahead, Scott.

Great, thank you. Good afternoon, everybody. The quarter certainly illustrated a benefit that the Company felt in a general rise in the tide, if you will, on the lighting market as a whole. The slight improvement in the economy that we saw maintained a level of volume growth that we're very happy with.

It still remains difficult to determine how that's really going to play out as we move through the third quarter and it's blended with our typical cyclical nature that we traditionally see, weather related, market related. But we're very encouraged at this point with that order stream.

We've got a larger backlog of quotes, we've got a larger backlog of orders than we had -- have had at this point in time for the last two years. So again, we're encouraged. We think we've increased market share in some areas. We remain focused on our traditional lighting as well as our LED lighting.

This certainly has been a growth -- continued growth in sales. And really more importantly a continued penetration of different markets with our new LED product lines and specifically in the commercial and industrial area. That's going to be very important in the future as the economy dictates whether the market is going to expand further or continue to bump along, if you will, at this point.

Margins, pricing are all still very important areas for us to work hard at. The material increases that we have begun to see and expect to see as we move forward are certainly going to create a good challenge. We've got the team I think that's really up to that challenge.

We've worked very hard in the last -- in the second quarter bringing on line some efficiencies that frankly we didn't benefit from until this point or haven't had a chance to benefit from until we moved forward. As we brought in the [Greeley] product line into Cincinnati, as we opened and began operating our new electronic assembly area for electronic products and -- those are benefits and now as we move forward. If we can maintain and see the volume, that is certainly going to help.

We have announced a price increase to take effect at the end of the third quarter. It's always going to be interesting to see how much of that we can make stick, but we are certainly seeing a lot of that same general direction from our competitors and, again, feel that the market is going to have to move in that direction in relation to increased costs and increased materials that we're seeing.

As Bob mentioned, the program continuation in 7-Eleven, the BP volume that we hope to achieve beginning now in the third quarter, we expect that program to actually accelerate a little bit quicker than we originally anticipated given direction from BP.

It will be difficult to see, as Bob indicated, exactly how much volume we'll see in the quarters and in the year. But we do know and do expect to start it slightly sooner. So we should see product begin to ship in the third quarter.

The overall product line growth for the worldwide market is still moving forward. We're adding not only products in the LED space, which represent a greater percentage today than it ever has of our overall product sales, but also adding some product on the non-LED side that continues to be important.

The marketplace is adopting LED technology, but they are also continuing to look for very, very high value product buys. And as such there's still is lot of product out there in the Fluorescent Metal Halide technology that will be the preferred solutions for sometime forward. I won't take any more time. I think that gives a general picture and turn it over to David so we can same time for Q&A. David?

Well, thank you, Scott. Good afternoon to everyone. On the graphics side of the world we've had a fairly good quarter, good half and, like our release said, beyond our internal planning. So that was great news.

For two and a half years almost now I've semi-dreaded some of these phone conversations because I'm always excited to deliver good information or good prospects for the future. And it has been in the graphics side of the world a drought out there. But we see some rays of sunshine ahead.

There's pent-up demand that we always talk about. We're seeing that demand become orders now. We've been using the word convenience necessity, products ordered out of necessity, convenience items were just dropped. Well as you know, you can only get so many miles on a set of tires and this necessity -- a lot of items that were pending have fallen in there and orders and requests for proposals or requests for information are picking up significantly falling into that new bend of necessity.

As far as convenience goes, we see some loosening there of products that, again, were not in the necessity level, people are starting to talk about, starting to order. It seems like the budgets that are being set have been set and continue to be set for the calendar year are more robust than they have been in the last two years. And the feedback from our customers, our prospects and from the magazines, Internet -- that feedback about store openings, proposed plans, new identity, rebranding, reimaging are surely at a two year high.

So we like the position we're in. Some of our competitors in the graphics side of the business are definitely not in the shape that LSI is in both the manufacturing world, in the financial position that we're at, and we expect as we fill out these RFPs, RFIs that that will stand bold and make a big mark.

Two things that coincide with what I've said today are the programs that are going on out there in the 7-Eleven world and McDonald's. As you know, they're both the leaders in their industries, one in the QSR, one in the convenience store. When those type of people make the bold moves they are -- and McDonald's, if you've seen their earnings this week, in their announcement about a $2.5 billion capital expenditure on new and existing stores, on new builds and reimaging, that's a substantial -- a huge amount for that industry.

They're leaders and the rest have to keep up or try to keep up and follow and we've seen this time and time again when people like that bust out the rest will follow. So with those comments I remain positive marching into the end of the fiscal year and into the calendar year, the first part here. This is the best I've felt in two years in our position with the general market. Bob, I'll turn it back over to you.

Thank you, David. Before I open up for Q&A there are a couple of things that I want to mention -- is that LSI's balance sheet remains extremely strong, our process and collections and we should even see it strengthen in the next few months. This gives us an opportunity to do whatever we need to do to react to any kind of a market improvement.

With the investments that we've made over the past seven or eight months in new equipment, more of an automation process than we've ever had before has put us in a position to react to this increase as well without adding a lot more people to the payroll.

So, we've taken a very conservative approach and we've taken a very straightforward direction in order to strengthen the Company to get ready for any kind of an improvement in the economy. We continue to invest into our LED direction and with a little bit of caution. I'm really looking forward to seeing how this quarter is going to work its way through.

The winter has obviously been a lot more effective than in past years, we've got a lot more snow. But as Scott pointed out and I pointed out, so far into the month of January we've been very pleasantly surprised with our order entry rate and our backlog which was very surprising to me. With all of the years that I've been doing this has always been my dreaded month, January and February, because of the winter.

But we've got our fingers crossed that that will continue and we'll see that continuation as we look forward to the fourth quarter. So, that's a quick snapshot, everybody. I'd like to turn it over now to question and answer and fire away.

Before the first question I'd like to refer everybody to our Safe Harbor statements and our 10-Q and 10-K and indicate that today we do not have any material non-public information that will be discussed.

Thank you, Mr. Stowell. That's his input today.

There's very little change to that statement quarter to quarter.

All right, thank you. Let's open up to Q&A, please.

(Operator Instructions). Go ahead, Jed, your line is open, sir.

This is Josh Baribeau for Jed. Everything was pretty straightforward, thanks for all the color in the last 20 minutes or so. Just really one question. Ron, you had mentioned this -- you disclosed it last quarter. Can you give us an idea of what your LED-related sales were this quarter?

Sure. I have that in front of me here. LED sales this quarter were about $17.6 million.

Great. That's it for me, thank you.

Glenn Wortman.

Yes, good afternoon, everyone. How much revenue did you generate from 7-Eleven during the quarter and then what's your best guess on what you'll generate in the third quarter?

I will answer the first question. I will not be able to answer the second question. 7-Eleven is a -- will be disclosed in the 10-Q as an excess of a 10% customer and their volume was actually 22% of our total or about $16.5 million.

Okay.

And that's a combination of lighting and graphics.

Okay. And then in the press release you had referenced a more traditional graphics opportunity at 7-Eleven. Can you just please elaborate on that possibility?

David, why don't you handle that one, because that is some of the things that we've been doing working with them on some prototype levels? And again, it's a little bit early to tell which direction they're going to take because we've done multiple stores with multiple ideas. David?

Right. As you know, the convenience stores, they want to get into the food business. And if you're in the food business -- they are in the food business and they want to get into it at a deeper level. And in order to do that you have to have that clean, fresh look. And again, I emphasize my comment earlier about McDonald's.

If you go into a current new remodeled McDonald's, it does not have that plastic look that it had for years and years. The same way with the convenience stores, they're getting into that clean upscale fresh food, prepared foods in their store. And like Bob said, we've given them multiple different looks, what they want their interior of the store to look like and our hope is that they zero in on one or two depending on geography and roll that type of thing out.

So, along with -- Glenn, I'll remind you again -- what 7-Eleven does usually the rest of the Circle K's and the Casey's and the rest of the world kind of follow that lead. They have to answer to that.

To follow up with this, this is something that we're looking at with a tremendous amount of interest. This C-store market is a market that's constantly going through a review. They're open 24 hours a day; they take a hell of a beating. And with the economy being the way it has been, there hasn't been a heck of a lot done in the entire market over the last two and a half to three years.

So there's a lot of market out there that I think there's, as David pointed out, a lot more conversation going on as far as some of the elements to improve the look of the interior. We focused on 7-Eleven using that as an example primarily on the exterior because of the LED. But really where I think there's more opportunity in the months and the years to come is what's going to happen with that huge market on the interior that hasn't had the opportunity to refresh itself.

So, only time will tell. We've positioned ourselves from a manufacturing standpoint and certainly a product introduction standpoint. As you've heard me say and David say many, many times -- the graphics businesses are project driven.

Well, David and his crew have taken a direction where using some of our LED technology we're going to make available certain products for the C-store market based on primarily signage, internally illuminated with LED technology, stuff that we've never done before because we believe there's going to be an opportunity there.

Then you add to the LCD screen market potential as we've shared with you before. So in our opinion, as this market goes through a review -- and I'm talking not just one or two customers, I'm talking about the entire industry -- we'll see what comes. But the important thing is that LSI is ready for it.

Okay. And then you guys had mentioned McDonald's, are they a current customer of yours or are you a candidate to win any work with McDonald's?

We're definitely a candidate. We've had talks with them and, no, they're not a substantial customer at this time. Okay?

Yes, they're a tough company to work with. We are very strong with Burger King, they know that. They're a very interesting customer to say the least. But we certainly have the ability and we have the product offering. We periodically keep them up to speed on what we're doing and it's just -- at this point though it's not one of our primary customers.

Okay, and then just lastly, given the requirements in last year's healthcare bill for a posting [counter] content at restaurants and other stores, has there been any movement on many board orders are you seeing increased bidding activity to meet the requirements of that bill?

Yes, they're certainly has, Glenn. In fact, people like 7-Eleven and the convenience stores, they're going to have to meet that requirement also. That is part of this new identity, this prototyping. In most every store we do the artwork does contain nutritional and caloric information, whether it be in the digital world or in the static world. But that's driving a lot of this in the industry.

Okay. All right, thank you very much.

I have one more question in the queue, it comes from Rick. Go ahead, sir.

Hi, it's Rick D'Auteuil, guys. How are you? So, you brought it up, Bob, we're a big supplier over the years to Burger King, less so to McDonald's. Burger King had also announced prior to their going private transaction that they were going to do a very substantial -- I believe an across-the-board remodel program, refresh program. Can you give us a sense of whether you're doing any business with them under their new ownership and whether that could be a substantial customer during this year?

Let David handle that one -- that came up in our Board meeting yesterday -- if you would, Dave.

Sure. Rick, as you know, that transaction isn't even approximately 90 days old and there's been some bloodletting, there's been a lot of employee movement. And we did have a webinar with them along with some other vendors most recently.

They have a trade show coming up first week of May. They're going to make what we feel are major announcements to both the franchise group and to the rest of the world of their answer of what they said was 12,000 stores that needed remodeled and they said that in December, right after their purchase.

So they already have that image that they want, it's a matter of how they are going to fund that. And like Bob said, we're in line ready to participate and we have good reason to think if they pull the trigger we'll be involved with that.

So, you feel like you're among the solutions that they're likely to pursue if and when they go there?

With Burger King, definitely, we're in the front row.

Okay. Also one think that's not mentioned is my understanding is any CapEx that gets spent this year is tax advantaged. So my understanding is a lot of -- maybe that was one of the catalysts for McDonald's ramping up their capital expenditure program, the timing of which is very beneficial this year. Are you hearing that from your customers? Because I would think some of that would relate to these remodels -- some of those (multiple speakers)?

Haven't really heard anything of that magnitude from any of our top customers. That hasn't been a discussion at least with us.

But of course that's the bonus depreciation you're talking about, Rick. And, yes, it's out there now to be taken advantage of.

yes.

And the menu board -- I think Glenn mentioned the requirements in the healthcare bill for calorie content. A digital solution certainly is among the answers and you guys with your partnership I think with 3M have a solution in that space, right?

Well, not only do we have a solution, we've already -- we're already using it. We have existing sites both here and in Canada. In fact, we have some in South America that have that information on it. So some people, state of California and the state of New York, have implemented it, even though they're not required to federally but statewide they have but they've already, again, gone through the exercise, they're early adopters.

To answer your question, Rick, we have a product and a solution for that and have had now for almost a year.

Okay.

Rick, one other thing. They've set a date like they -- the government has set a date when it's mandatory, they just haven't set the rules or the guidelines. And even the FDA backed off of the dates that they set and I have a feeling that that date will be -- this is a personal feeling -- would be extended beyond what the normal drop dead was. It seems to happen that way. Still they know it's not going to disappear, it is coming.

Okay. On the last acquisition, ADL, I think it was that you guys did, is the electronic component segment -- can I take that to overlap with them or is that 100% them? Give me a sense of how I should look at that whether I'm looking at the acquisition when you break out those numbers?

That is entirely the ADL. However, that's -- keep in mind that that is only the outside customers that ADL serves. That does not represent the interior business, if you will, of ADL supporting our lighting operation. And in that intercompany business, intersegment business there was -- has been substantial growth in ADL's business supporting the Cincinnati lighting business.

Okay. Is there -- is that tracking according to plan or a little lighter or a little better? How is that tracking?

It's exceeding plan based on the market acceptance of the LSI product. We have put ADL under a very, very straightforward review based on its ability to keep up with our needs and its market needs. It's a very important element in the strategic plan for the future, Rick, and will continue to be so. We're extremely pleased with what ADL has contributed toward LSI as well as produced for LSI. It's a great little company and we're very happy to have them.

Are there any capacity issues there that need to be addressed?

Well, yes. I think anybody in a situation like that, but LSI has the financial wherewithal and the capabilities to expand those capacities. So we're not too concerned about it.

And we have been, I think is the point. Since the day we bought the Company, Rick, we've made improvements, we've added machines, we've added the capacity --

Capacity.

-- and product lines to grow and be able to grow and keep up with the demand that intercompany LSI is putting on its very, very important operation.

Okay. Okay, thank you.

Thanks, Rick.

I have no other questions in the queue at this time, sir.

Well, I want to say thank you, everybody, for your time. In conclusion, steady as she goes. We've got our nose to the grindstone. We're really pushing hard and we look forward to getting through this quarter. We look forward to getting through this winter and reporting to you folks in just eight weeks or so or whatever the time element --.

90 days.

And then really looking forward to the fourth quarter when weather improves and we get this program starting to roll out with BP and other, other opportunities that are there that we're looking at that we'll be reporting to you as we move forward into these quarters.

Thank you for your time. We appreciate it. If you have any calls we'll be here today and tomorrow. So, give us a holler. Thanks again for your time. Bye-bye.