LSI Industries Inc (LYTS) 2011 Q4 法說會逐字稿

Please stand by for realtime transcript. Good afternoon, everyone. Welcome to the LSI Industries fourth quarter earnings conference. Today's conference host is going to be the Chief Executive Officer, 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'll turn the call over to Mr Steve Brunker, Chief Information Officer.

Good afternoon, everyone. Just a quick note that during today's conference, there will be no online handouts available to correspond with the discussion. However, after the call is completed you'll find additional handouts and materials available on the LSI Industries Web site. Simply click on the Investor Relations link at the bottom of the home page and you'll be taken to the presentations area where you can download those handouts. And now it's my pleasure to introduce Mr Bob Ready, Chairman and Chief Executive Officer of LSI Industries.

Thank you, Steve. Good afternoon, everybody. Appreciate you being online with us today. With me today, Scott Ready, the President of LSI Industries; Sean Tony, the Executive Vice President in charge of Sales; David McCauley, President of the Graphics Group; and standing in for Ron Stowell, who is now taking a short leave of absence with some elected surgery will be out for a few weeks, is Jeff Bastian, our Vice President and Controller, and Jeff, if you would go through Ron's normal presentation of the Safe Harbor statement.

Good afternoon, everybody. Thanks, Bob. There will be remarks made today related to our expectations and on a number of activities the Company is engaged. And reliance should not be placed upon such forward-looking statements because they involve risks and uncertainties which may cause our actual results to differ materially from those which are going to talk about today or which we may imply. And we do not have any material, non-public information that will be discussed today.

Thank you, Jeff, very much. I'm going to give you a quick synopsis of what's going on. As you could tell, as the year end, it was a good year for us based on all the conditions of the economy. The fourth quarter was a little bit slower than we had anticipated, primarily due to the fact that our graphics business was exceptionally flat. I guess that's the best way to say it, and that's all due to the economics of what's going on out there.

Our product mix was a little bit different in the fourth quarter. We had a very, very higher -- or let me say we had a higher amount of fluorescent lighting due to some very good school business that we had and they obviously came with lower margins, but I would like to say that our LED business is extremely strong. It's up about 50% growth over a year ago.

We're extremely happy with our LED technology, and certainly to say the least this industry is going through a lot of, let me say, an interesting time with the announcement of Cree and Beta coming together as you're probably all aware of. How that affects us? It doesn't. Beta has been a competitor, Cree has been a vendor. The determination of the future of LSI and Cree is in discussion right now, up for obvious reasons, based on a competitive situation. Our LED supply is in good shape with other vendors and so obviously, these decisions will be going forward based on the direction of what's going on in the lighting industry.

I'm not going to get into a lot of detail. I think basically, our business is straightforward and there's no big programs. The 7-Eleven program with a few things here and there has obviously been concluded. The BP program, as we have announced as we expected, it's doing fine but we're not having big, big volume. We weren't anticipating big, big large volumes in this, but the program is very successful. The jobbers that have participated in this program are extremely happy with the product and it's doing exactly what we proposed to BP it would do and BP is extremely happy with it.

What I'd like to do is turn it over to Scott and he will give you a little bit of an overview of the direction of the lighting, as well as what's going on with graphics and then we'll get into the question and answer period and let you ask questions and we can get more specific on it. Scott?

Sure, thank you. Just to fill in a little more color and detail on exactly how that fourth quarter ended up and what its relationship was to the rest of the year, last year was certainly a great year as compared to the previous. We came back in a lot of areas. The growth in specific market segments was strong, some stronger than others. The petroleum market growth was significant. The commercial industrial market growth for us appears, from the reports that I've read, to be stronger than most of our competitors out there. That indicates that we are gaining market share, which is something that we're very, very focused on and very proud to report.

All of those projects that culminated in the fourth quarter and drove quite a bit of volume through the fourth quarter certainly were affected by that product mix, certainly affected by pressures on the material and the commodity side. However, we did respond earlier in the Spring as you'll recall with one price increase back in April, and we have also announced the second price increase that will take effect in September. So, we think we're doing a good job finding that balance and growing market share, and that is absolutely critical as we continue to form a much, much stronger foundation for many of our agents out there with our traditional product, and I'll remind everybody how important traditional product technology continues to be in this market today.

As Bob said, our LED growth is strong and very, very encouraging, on track to what we planned to see with a better than 50% growth over last year. However, our value as a lighting company still depends on the breadth of our product line, and we're happy to report that we're securing growth in market share in most areas that we're pursuing right now and we've actually penetrated new markets over the last 12 months that have contributed, again, to that volume that you're seeing.

Now, certainly the impact of the lack of major program business as it relates to the graphic side of our Company has certainly had an impact and as we have cautioned everyone, looking at the business moving forward through the fourth quarter into the first quarter, we still are very encouraged about the amount of activity that's taking place and the prototyping phases, the amount of backlog that we see, not backlog technically, but pent-up demand I should say in many of the markets that we're serving with that graphics business. And again, LSI remains unique in that market for our ability to wrap a total and comprehensive services package around those products.

We simply don't have the program releases yet that we need to see to generate the kind of volume that we're looking for in the graphics side of the business. When that happens, as you all have seen in the past, added to the strength that we've been growing in the lighting side of the business, I think you're going to see some exciting things, but again, all that's dependent upon the economy and timing with some of these larger customers. Bob, I'll turn it back to you.

Well Scott why don't you make a comment about the international.

Yes, thank you for reminding me. That was the one thing I was going to say. From an international perspective, some of the growth that you actually saw in the fourth quarter came from that international segment. We had some very, very active programs overseas. We had, certainly, some challenges again as we continue to develop new markets overseas, but overall, the volume in that international effort continues to grow, and we're encouraged, again, by the preference that we're seeing for US manufactured product. Both in the US as well as overseas.

One of the phenomenons that we've noticed in the last six months that has really, really began to have an effect on business and as we have interacted with our customers, a direct relation or indirect relation to frankly the challenges that this economy and the US faces and specifically, I think in response to some of those challenges, we've seen a tremendous increase in preference and willingness to buy US and demand by US manufactured products. We're going to remain focused and committed to that effort. We're going to stand out in the marketplace as a Company that is probably more uniquely focused there than most of our competitors and we believe that's going to return some great value as we move forward.

It is interesting that even in places like Turkey and other around the world, their preference for US manufactured product is carrying some weight in decisions that are being made and we're very encouraged by and confident in our ability to support and supply those markets from here, with the partners that we've been developing overseas to provide the local service. Bob?

That's a good overview. I think what I'd like to do now is just turn it over to question and answer, Michelle, and we've got the appropriate folks here to answer those questions. So, if you would, please?

Thank you, sir. (Operator Instructions) I have one question in the queue and that question is from Glenn. Your line is open, sir. Go ahead, please.

Can you just break out the different factors in the sequential contraction in the gross margin, how much of it was product mix, how much of it was rising input costs?

Well, I don't know that I can give you the exact numbers, Glenn, in terms of how much affected the numbers specifically. The reality is, it is those influences, factors, exactly. Product mix certainly did change as we balance not only within the lighting segment as you heard Bob say, more of the fluorescent products. Glenn, one of the things that's happening is as those agents, as we've gained market share, we're moving into markets where typically LSI had not been a big player in some of that traditional technology business. And as we've done that and specifically in that fourth quarter, we've got a lot of opportunity and that opportunity did translate into improved volume which is very important right now for the Company, but certainly did have an impact on the average margin.

Within the LSI Industries portfolio, the improvement and increase in lighting sales as compared to graphic sales, again, had that same influence on the margin side. As you know, typically graphics has a slightly higher margin opportunity for us than lighting and then, again, when you dilute the lighting a little bit with some higher one-time sale opportunities in the fluorescent business, you're impacting it again. And then last but not least, you've mentioned to me in previous conversations you recognize the increases that most of the industry, all of the industry really has seen in some of the materials and the commodities. So, it's really those three factors combined that created the effect that we saw in that fourth quarter.

And I'd like to add to that, Glenn. I think the real impact was the major shift in the fourth quarter to the product mix change. We had an exceptionally high area of fluorescent lighting which we're very pleased with, both our plants in New York and Kansas City are just about at full capacity right now and that's an encouraging thing based on market penetration. The LED right behind it based on its normal growth as we've indicated

So, as Scott said, there's a combination of things that affected that, but our hope is and certainly a lot of efforts been placed by our folks on the graphics, these guys are working their tails off in order to make up and find new markets and new opportunities. Its been a very frustrating period for us and for the graphics folks because of the condition of the economy and really, the hold back on our normal customer base as far as spending any real money, because I think there's just a feeling of lack of confidence of what's going on and a concern about where the consumer dollar is going to be.

Well how should we think about the gross margin in the first quarter? Should we expect similar product mix that we just saw in Q4?

It's hard to tell. As these things come about, when we have an opportunity like we've had in the fourth quarter, we exercise that. It's our hope that we'll get into a stronger product mix with more of the LED and the HID product line, but it's very difficult to forecast right now. We're not getting a lot of help from our customers as far as giving us a longer term forecast of what to expect, so that's a difficult question that I wish I could answer, but I really can't because I honestly don't know.

Okay, and then finally, just how would you characterize business, particularly the lighting business so far this quarter and I know you guys did talk about graphics a little bit, but if you could just shed more light on the graphics pipeline?

Well, as far as I'm concerned, the lighting business is exceptionally good as compared to the economy is concerned. It could always be better, but the attitude of our customer base and the number of folks that we've seen here in Cincinnati through our iZone Center, we've got a tremendous amount -- have had a tremendous amount of visitors and are going to continue to do that and they see the benefit and the value of the American made products and the versatility of our products, and obviously, that's where we're going to continue to put our pressure and our marketing expertise.

You'll see some in the months to come, we're looking at some new markets. I'm not going to get into detail on that right now because of competitive interest in that, but we're taking some very strong direction to improve the opportunities that we have provided with these new LED products. They will be in the menu board business as much as they will be in the lighting business and obviously, the emphasis that we're going to continue to place on the international market because of the opportunities and the product acceptance. So, there's a combination of things that are now in play in order to continue on with the success of the growth.

A lot of efforts going to be put on the graphics side, a continuation I should say as well, and hopefully, we'll see a little bit of that improve. And as we've said so many times and already said this afternoon, the margins on the graphics side are considerably better than the lighting, so we could have a combination of a little bit of growth in the graphics side and an opportunity in some of the menu board business, as well as the continuation of our LED technology growth, things that I think are very, very positive.

Okay, thanks for taking my questions.

Thank you, Glenn.

I do have another question in the queue, and it comes from [Robert Huffman]. Your line is open, sir.

Could you just talk a little bit about the balance sheet? You don't give us a detailed one and I know in the last quarter you'd built up a fair amount of inventory in anticipation of some LED work. So, one, if we could get a sense of inventory and two, talk a little bit about the cost side of the equation. Are you seeing cost pressures? I know that technically, LEDs are going down but maybe there are other components that are not so if you could just give us a little flavor, that would be great.

Let me kind of take one step at a time. As overall the costs that we have, we're very comfortable with the cost situation. Material costs have gone up somewhat but as we've said, we're trying to offset some of that with our price increases.

As we look at the balance sheet, the balance sheet is very, very strong. The inventories have been increased due to the concern that we have in the shortage in the electronics world, but that's kind of evened itself out now and we're going to be working those inventories down considerably in the next few months. We had a situation with a couple of our larger customers who had given us a direction to improve in or to increase inventories to hit their demands. They put some of that off, but that now has been released, specifically one of our larger accounts, we prepared for a program in the Summer months and they kind of push that back, but now that program is now in the release stage. So, we'll see a considerable drop in that inventory level that was provided for them.

We are very pleased with the suppliers, with all of our vendors providing us with the materials that we need. We're not in the same dire straights that we were a few months ago on the electronics side, so with those inventories that we did purchase and put in play, those will be coming down considerably. That will, obviously, continue to improve our cash flow and certainly strengthening the cash position and our balance sheet. Right now, for the month of July, I think we ended up with about $12 million to $13 million in cash which was up considerably from the June of about $4 million, so we're getting back to the norm and we're very comfortable with that.

And in terms of the value of the inventory, you're not going to be stuck with anything that you bought in anticipation of tightness at $2 and now it's really only worth $1.50, something along those lines?

No, no, no. Some of that inventory is coming down, but that pricing structure for those fixtures are in place and part of our programs with the product that's out there is so those margins aren't going to change as compared to the inventory that's in place. What we hope to do is -- and you're right. The LED chips are coming down but in other cases, we are seeing some copper and some aluminum and what was the other? There was some other--

Well just steel.

Steel, thank you. That's what I was looking for. Yes, those have gone up, but not up to a level where we can't handle that, based on these price increases that we put out.

I don't want to ask too many questions. Are there more people in the queue? Should I go ahead and ask another?

Yes, sure, go ahead.

Okay. I'm going to bounce around a little bit. I'm relatively new to the Company. Just give me a little color on your dividend payout thought process. Is there a targeted -- a lot of companies like to see dividends equal a certain percentage of their net income over time smoothed out. Do you have any -- what drove the increase today going forward?

Well based on the fact that we feel that our business growth is there, it's certainly within -- and we have a percentage pay out somewhere between 50% to 70%. So, it falls in line and the Board made that decision based on everything that we feel for the future outlook and we're very comfortable with that. Trying to get our dividend policy back to the norm as we had to decrease it during the economic downturn, but we're hopeful the economic situation in this country will improve a little bit, but based on everything that we said so far, our market position, the expansion in our international markets, we're very comfortable with that dividend program.

So going forward, let's say three years out, the world is a better place. You're growing. Where do you see your dividend -- where would you like to see your dividend payout over a long period of time? Not 70% I wouldn't think.

No, sitting here today with the economics the way it is, that's really looking into a direction that I have no idea. I think the Board is very cognizant of what has to be done from a dividend standpoint and it is to share that back with the shareholders and history will show what we have done in the past and that would be a continuation of what we will do in the future.

Okay. Well I'll go one more and please --

Go ahead.

I had a couple a couple weeks ago and somebody got berated for asking too many questions so Ms Operator, please tell me if I'm asking too many.

No, you're doing fine.

When you have programs, explain a little bit to the dynamics of -- obviously, a corporation whether it's a BP or a 7-Eleven is making the decision, but share with me a little bit of how it eventually gets released. Is it done -- does it depend on whether it's all company owned and then they have a kind of a schedule or versus franchisees, how can we try to forecast demand I suppose is a better question.

Well, I think if you look at our markets as the way LSI has developed over its 35 year history, we've been really a niche market oriented company until the last few years when we really focused on expanding that to our commercial industrial world. Every customer has a different need and a different way of approaching the market.

The nice thing about LSI is we have such a very diverse capability as compared to a lot of our competitors. We're not only a manufacturer, but we do have an operation that manages installation capability. We provide a service that I think is unique to LSI, and you combine that with the lighting and the graphics, so I call them triggers. The different triggers that are out there based on that customer looking at us is they have whatever option available to them in order to do a rollout program, and that's the interesting part of our capability.

You take the fast food industry for example. When a decision is made to change a menu system or let me say upgrade it, they've got anywhere from 500 to 5,000 sites and how do you go about doing that so that they get this unified direction. Getting the same piece of material out on all 5,000 sites and a good example of how that happened with the recent 7-Eleven program where we did a major conversion based on the customers selecting it. Even though the franchisee was part 7-Eleven owned so many company stores, but also had franchisee stores. And in the instance of Burger King where they have so many franchisees from a menu board system where we designed it, built it and rolled it out for them as well.

So, it really comes down to the decision of the customer on how and they want to do it and at what level do they want it. Do they want to buy it and have themselves install it or do they want somebody else to do it, so there's really no real formula to give you a true answer of what the final decision is. The important thing is to know is that this Company is in a structural position to do whatever that customer wants, whether it be one or it be 5,000, whether they buy it and they install it themselves or we do it.

So, that's the uniqueness of LSI, and that's where the opportunity of some of that pent-up demand is how many companies out there can give a turnkey program and combine it for both lighting and graphics, and that's what makes us unique and that's where we're hoping, as the economy comes back with some of that pent-up demand and by the way, with fewer suppliers out there, there are many of them that have gone by the wayside because of the tremendous downturn in the economy but we've kept that balance sheet strong. We've kept our people in place and we have the capability from a production standpoint to meet that demand.

So, I guess my question on like to take a Burger King with lots of franchisees. So, do you communicate completely with the head office and they then hear from the franchisees and they say okay these three in Cincinnati want to convert and these four in Cleveland want to convert, or does it work that they approve it and then it's up to the franchisee to contact you and schedule whether they actually wanted any amendments to it and time schedule and who do you get paid by I guess is the final question.

It's from both. We can do it both ways. We can do it either way but in that particular example, Burger King, would make a decision that would maybe change out the menu boards and it's interesting that from a Burger King standpoint and I would assume -- David, you could chime in on this one, on the basis of -- they have a group of franchisees that are a Board and then they work with that company and then they work together as how they're going to implement that program. But we can take a franchisee that may have 50 stores and work with them as an independent or we could take a Burger King like that, that has 4,000 or 5,000 stores and work that as a total. So, David, if you want to answer a little bit more to that, please do.

Sure, sure, and in most cases, there aren't that many company owned stores anymore. In the case of Burger King they own about 600 of the 7,500 that are out there, and they usually prototype at the corporate store and then put an RFP out to us to bid on all 7,600 and usually they get the consoles and different franchisees group to approve it, and sometimes they get funding from the CIRC people whether it be Coke or Pepsi or whoever that support it, and then put the pressure on the franchisees to get involved and then we do what we call a milk run. We usually do it geographically across the country because that can afford them the best price and they usually are national programs. They don't want every store being different, because when they send a menu out, it has to fit into the same slots and they don't want six or seven different ones.

And if I could add to that, David, as well as might help also answer the question that we have set up a number of subcontractors throughout the United States that have been trained and certified by LSI to do multiple tasks as it relates to different installation procedures. So in essence, and every market is a little bit different. The oil industry for example, BP program was developed by headquarters and then made available through a process that a jobber would sign up with BP and then they would be allowed to purchase the product at a price based on the volume that was committed by BP and then pay the bill to us. So, it is a multiple direction and we've aligned our Company to be easy to do business with at any level as long as the credit is there and the volume is there.

I'll ask one more question and I'll drop down, but digital billboards. Can you talk to me a little bit about where you guys stand there and what you're seeing out there?

Oh, yes, sure, go ahead Scott. Why don't you handle that one.

Sure, from previous phone calls you may remember that our focus right now is developing a better line from a product standpoint at a more competitive cost point. We've physically moved the focus of that product and that sales and marketing effort to Cincinnati to headquarters. We've gathered a team around that now that really understands the marketplace and is focused on developing that lower price point solution and we've made a lot of progress since the early part of calendar 2011. We will be unveiling some new product here as we close out the Q1 in 2012 and again, being positioned properly and having the solutions developed, it's a bit of a waiting game, again, for the market to improve. We feel the timing is good for us now given the fact that we have a lot of that development time behind us and we've been earning some business as we have gone along, but the market itself is not that robust and we're still, obviously, a new entrant to the marketplace and we'll be making a market for ourselves as we move forward there.

I'd like to add to that. Based on our sheet metal capability as a large metal manufacturer of, obviously, lighting fixtures and the fact that we're a tremendous user of LED products and the fact that we have our own electronics capability with their acquisition of ADL, this is a market that offers us an opportunity. There are players out there, they are well situated but with all that capability, it just offers us another -- LSI another opportunity to bring another product line into a marketplace and over the 35 years that I've been building this Company, this is the way we've built this Company, taking step by step, looking at opportunities, taking the expertise of our people and the manufacturing support system that's in place and making more out of it.

And it's going to take a little bit more time and I know patience is a virtue, but in this particular case, I believe personally that on a long term basis, there's a viable product line out there. It's a method of communications. It's a culture that's developing around video conferencing and marketing around that, and with our capabilities, this is a market that we're going to go after and we're ready for it. And, as Scott said, the process was getting it right and getting the right product, building the support team, the service team, which takes a little bit of time, but that's now in place. So, these are different triggers that have been put in place during difficult economic times in order to start taking advantage when money starts coming back in the economy, so I'm confident that, that product line is going to be a viable part of our growth in the years to come.

So, the inference is that digital billboards are a very small part of your current, or if any?

Correct. But it's growing.

And just what is the value proposition versus some of the others? Is it cost? Is it delivery time? Is it quality? Or is it -- I don't know.

It's all those.

Hello?

It looks like Mr Ready has disconnected his phone line. Give him a second and they should dial right back in. I'm going to dial their office and see if I can locate him and I'll be right back with everyone.

Thank you.

Hello, are we back on?

This is the conference, sir, go ahead.

Hello?

Hello?

Go ahead, sir, you're online.

Sorry, we got cut off. Can you hear us okay?

This is Rob Huffman. If my mic is still open, I can hear you.

Oh, that's fine, thank you, but all of a sudden you just dropped off there. We got you back on. Please continue.

I guess we were just talking about the value proposition for billboards.

Yes, I think if you didn't hear the last part of what I said, the fact of the matter is that as we look forward into the future, we have the capability of building the board and be a very competitive where we were. Our weak point was the software situation which we've been working on for the last number of months over the past year, and we're ready now of putting the capability of our software and our board together and really marketing a product to be competitive with the marketplace out there.

And do you think the demand is driven by quality or do you think the demand is more of a price point so that if the average billboard can get to X dollars, then we'll see a lot more of them out there versus today's, I don't even know where they are, 120,000 or something.

I don't know that we're really focused on billboards per se. The billboard market is one market. What we're really looking at video screens at high school levels and all kinds of different communication links that are going to be more predominant, we believe, in the future. The billboard is one market. There's a whole range of other things when you look at the retail segment, at the banking industry, certainly at the school level and this is where we think the market will be. And as a high volume manufacturer of metal products, we designed our manufacturing process to do it a little different than other guys out there and we think we can be very competitive. Now what the potential of that market is based on the cost of the unit because, as we all know they are much more expensive, it's hard to say based on the economics, but we really believe in the electronics world this is going to be a very important piece of media and with all our capabilities we should be in it and we're going to stay in it.

Great. Thank you.

Thank you. Michelle?

I do have one more question in the queue for you, sir. It's Glenn Wortman. Go ahead, sir.

I just had one other question. Can you just update us on where things stand with the calorie content requirements for menu boards and healthcare law and any impact that may have or has had on your business?

David? Go ahead and handle that, please.

Yes, all the people that were given an opportunity to address the standards that were being set have been set into the government and feedback is expected about six more months and implementation is about another year away from that, so we're down to 18 month chase, Glenn. Quite frankly, we're seeing a lot of activity especially in our digital arena. You've heard me comment before in our digital boards, we'll call them digital menu boards at this time. I ran the figures this morning, trailing 12 months we're up 125% on the number of sites in the first four years, we just doubled that in one year. So, we're real excited about that and we're getting a lot of inquiries, a lot of requests for RFPs and some of these have gone eight figures and their RFPs now, I think there's a lot of speculation, a lot of want out there, but don't expect them to turn into orders next week. But this time next year, we'll probably be talking about significant number of people that have implemented the system or are ready to.

Okay, thanks again.

Thank you. If there aren't any other questions, if not, Michelle, is there any other in the queue?

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

Thank you. As a wrap up, thank you for your time. In general, the overall viewpoint of where we're going I think is absolutely on plan. I am extremely encouraged by our LED technology, the success of the LED product line is growing rapidly, we're focused on getting our graphics business back into a stronger position. It is a tough economy out there. We're not using that as an excuse. It's a challenge. We've invested heavily in our manufacturing process.

We're putting a tremendous amount of marketing emphasis in the year 2012 on American made, American innovation. We have, as you are probably aware of in the past quarterly conference calls, we've invested heavily in our manufacturing operation to compete with the Chinese labor. Our lighting industry seems to be focused more on import where we are an American company with American people of building American products and we're going to put a lot of emphasis on our marketing toward that direction. We're seeing that attitude out there changing to looking for American made products.

Last but not least, the balance sheet is obviously our number one priority to keep the strength and the cash position in play and as we go forward into 2012, that will be a continuation of our strategy and we're hoping that the economy does improve a little bit, but if it doesn't, we're going to keep doing what we have been doing successfully. It was 35 years ago this month that I started this Company with an idea and there's another 35 years I hope it will be in a much stronger position as a worldwide brand of LSI Industries. And with that I'd like to thank you for your time. If you have any questions please give us a call. Thank you, Michelle.

Ladies and gentlemen, that concludes today's program. You may disconnect your phone lines at this time.