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LSI Industries Inc. (NASDAQ:LYTS)

F4Q2010 Earnings - Call

August 19, 2010 04:30 pm ET

Executives

Bob Ready - President & CEO

Steve Brucker - CIO

Scott Ready - President, LSI Lighting Solutions Plus

Ron Stowell - VP, CFO & Treasurer

Sean Tony - SVP, Commercial and Industrial Lighting Group

David McCauley - President, LSI Graphic Solutions Plus

Analysts

Glenn Wortman

Jim Ricchiuti

Dick Ryan

Rick D'Auteuil

Operator

Good afternoon and thank you for dialing in for our LSI Fourth Quarter Earnings Conference Call. Today’s host will be Mr. Bob Ready. During the discussions, all participant lines are placed on mute to prevent any background noises. (Operator Instructions).

Now, without further delays, I will turn your call over to Mr. Bob Ready.

Bob Ready

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

Steve Brucker

Yes, I just wanted to welcome everyone today and let you know that, with today’s call there will not be supporting visuals on the website, as we have sometimes done in the past, but after today’s call concludes, some supporting visuals will be available on our website that you can reach www.lsi-industries.com.

And now I will proceed with the conference Bob.

Bob Ready

Thanks Steve, good afternoon everybody its nice to have you on board this afternoon. With me today as our normal process is our CFO Ron Stowell with us. Scott Ready President of the Lighting Group, David McCauley, President of the Graphic Group. And today we also invited Sean Tony who is really our Senior Vice President In-Charge of C&I Lighting Sales, I thought it would be very appropriate to have Sean onboard based on the Q&A session, because of his tremendous involvement in what we have done in accomplishing a I think a very, very important turnaround in our C&I business. We put out a rather expensive press release as I am sure you are all aware. And so I am going to make my opening marks short.

We have made a lot of statements in there and they have a basis for giving you some direction at what's happened. When you look at the comparison of 2009, as compared to 2010, certainly fourth quarter there was a major turnaround.

A lot of things that are going on are obviously self developed. We've talked about those in the past, I am extremely confident on the basis of the changes that we've made. We have gone through a very strong reorganization both inside and out. We've made a number of major changes in strengthening our sales efforts specifically of the C&I part of our business plan. The direction for manufacturing, we have made major investments in both the Lighting Group as well as the Graphics Group. These new pieces of equipment are fully automated pieces of manufacturing equipment that gives us an opportunity to reduce our cost. We have a very straight forward approach in the manufacturing process and we've made a considerable improvement on reducing our overhead. We've reduced our inventories and as you can see by the strength of the balance sheet, the company is in really in a very good position as we start to move forward.

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

The overall conditions of our markets are very, very mixed. This economy has still had a major impact on construction, so our whole objective is obviously directed to do whatever we can to go after market share, improve our place in the market.

The petroleum industry, is a little bit more active, we are very pleased with some of the results of our new Generation 3 product which has been very effective in showing our customer base that we now have a very great retrofit product to take the existing stock sale down and replace it with a new Crossover 3 which we call an LED stock sale.

This product now is in, samples are in the hands of all of our reps, they are going out with great success, creating more and more interest for this product as we move into 2011.

On the video board side of our business, we are continuing to be very proactive in going after school. We have a new product that we have been working on, the drill what we have shown to the internal folks sometime in the next week or so, the new design, that they cost out of it and improve the visibility and the overall direction of this new visual board.

We’ll talk more about that in the months to come, but we have got the last seven or eight months kind of redesigning the whole product line as it would relate to the kind of markets that we feel that we have a ability to penetrate.

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

I think that kind of covers the overall general scope where LSI is as a company. I'm being very guarded in my direction for the future of 2011. That’s strictly based on the economy. We have lot of discussion going on within the news, media about the several [debt] recession, whether it’s true or not we don’t know. We are focused now to continue on with the success that we have achieved in turning our company around. We’re in on obviously much more solid ground and we are not happy with the results, we’re now working very hard to continue with our cost reduction, our cost control process and working hard to get our sales and revenue stream up.

This obviously is our number one goal and with our manufacturing, operations now streamlined, we feel that if the economy doesn’t get any worse, that we can continue to show improvement and there might be a little bit of a long-term basis by that I am saying a year plus as we all know that’s a forecast of what’s going on as far as the stronger economy. So with that I am going to turn it over to you folks, I am sure you have a bunch of questions to ask and if you would, listeners go ahead and turn it on and I will take the first questions please.

Question-and-Answer Session

Operator

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

Glenn Wortman

Can you just give us an idea of how the first quarter and second quarter shaping up, I know you guys have given guidance this morning but can you just kind of give us a little bit as much color as possible?

Bob Ready

Yes, well let me do this, let me give you a little bit of input, lets start with Scott.

Glenn Wortman - Sidoti & Co.

Sure

Bob Ready

And I have a feeling that, Sean now you want to kick in because the first quarter is really the beginning of some of the things that we’ve done in turning this company around so Scott why don’t you comment on that?

Scott Ready

I think that I can best categorize what we expect to see and frankly what we see in the stock towards the end of last fiscal year as an environment where we have worked to so hard to set the stage hereby mentioned better cost control which we’ve talked about for several quarters, go back several years now it feels like. But certainly resetting the size of the company, combining the kind of investments that we have made really puts a lot of that hard work behind us, not to say that we don’t have more to do and we have continued to keep the company positioned where it is but we certainly got a lot of that hard work in place as we looked at the end of fiscal 2010 and saw a slight up tick in the economy that was coming primarily from the influence of the cost of energy and interest in energy products combined with the introduction of our new Generation 3 cross over product line, I think you are starting to see the strategy coming together and it’s a strategy that we’ve been committed to for some time working very hard on.

As dad said, as long as the economy doesn’t send a torpedo on the side of the ship again which we have no control over I think we are well positioned to see the kind of success that we’ve been generating when the recent weeks continue. The product releases and the product development specifically around the LED platform are increasing our effectiveness in the marketplace right now in terms of generating volume but it’s not solely due to LED. There is a lot of base business there, there is a lot of florescent business there that we’ve been able to secure again because we are positioned right, we have our cost under control, we have our service levels set in a strong position and we are combining that with a slight up tick in the economy.

Bob Ready

[Finally] add to that too Scott, the other thing is very obvious to me is that if we’ve gone through this last year, we as a company and I am sure as an industry that we are in the tremendous amount of information in regard to LED technology. This is so new to this whole industry as it relates to lighting and we all as company is going through the education curve what I like about the direction that we’ve come up with is that we now have a very, very good understanding of what our abilities are from a manufacturing, design and certainly an implementation process. And now that we have a more stable product line, we have made so many changes because this product line is grown and changed so rapidly in such a short period of time.

Now we have a customer base that is becoming more educated, more understanding of what this product can do and therefore creating a tremendous amount of more interest. The amount of business that we’ve had to our new iZone center has been remarkable. And its all predicated on the basis of people wanting to learn and understand more about what this LED technology can do. At the same time they were training and educating these customers on the LED technology.

We are giving them a pretty good experience on what LSI is as a corporation or not just the lighting company, we’re not just the graphics company, we’re not just a technology company, we have a combination of products that could influence a number of markets and the importance to me is that our customer base is becoming more and more familiar what our capabilities are. And I that’s where we are building on with all the changes that we’ve made, and that’s why my confidence level is so much stronger than it was a year ago.

Glenn Wortman

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

Scott Ready

Yes, what we were seeing Glenn without getting too specific is that the pass through the industry has been very, very quiet. But now there is an indication that there is a lot more interest and what types of products can do more for them there is an interest now in some of our customer service to revisit their many award systems, we are seeing a lot more interest in the LCD screen, David will talk about that in a moment. But the important thing is that as you go back a number of years when you remember that 10, 11, 12 years ago, when LSI was really rolling up a big menu board drive through menu board product for Burger King. These are 10, 12 years old. We are developing and doing more innovation and trying to come up with the magic, and I say magic formula for LED menu boards. But now are combining it with LCD boards. And this industry is going through complete change as it relates to how it's going to build its products because of the requirements of getting more information to their customer based on calories for that content and so forth within their food products.

So I think we are going to see a change to some degree as it going to open up more opportunity, we are a company that can handle all of those things because of our diversity in our manufacturing and certainly in our experience in that fast food business. They are not as hot on the lighting sides yet. Understanding that these products are a lot more expensive and most of these franchisees, their margins are very, very tough. But as the cost come down and of course they are all focused on energy and the cost are coming down I think we will see a much more stronger interest in the LED product lines relates to the lighting.

Glenn Wortman

Okay and then finally just on the non-petroleum side for 7-Eleven. Can you just help us out here with the revenue opportunity from this program? The timing of the program and how that's going to breakdown between lighting and graphics, and then the last question in there is the margin profile in the non-petroleum site is comparable to the petroleum sites?

Bob Ready

Are you specifically talking one about the 7-Eleven program?

Scott Ready

Yes

Glenn Wortman

Where it relates, Scott why don’t you, you and David might talk a little bit about this second phase. The first phase if we all remember, it was strictly an energy reduction program aimed at lighting. This program, the second phase is much different. There is a combination of lighting, but also graphics in this. So Scott, why don’t you make a point on that, then David pickup.

Scott Ready

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

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

David McCauley

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

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

Bob Ready

The other thing also to add to that David is that we are looking at this market now in a much different light than in prior years. The 7-Eleven program is obviously has been a very stimulus marketing direction as many, many people in the industry are aware what they have been doing. What’s interesting to me is some of the larger, non-7-Eleven type customers are taking a great deal of interest in refreshing their sights. I think 7-Eleven recognizes that their sights are quite old and quite as David said tired looking.

We have now about 22, 23 prototypes that we are doing completely interior both from an energy standpoint as far as the refresh look. Now where that’s going to go yet, we are not sure that was one of the things that Scott was referring to.

The important thing for me is, that the market now is awake and start looking at more and more things as it relates to where they are going to end up with this energy price, as well as kind of a cleaner and a better looking site and once one starts and another one starts I am hoping that its like anything else that’s happened, that starts catching on within the industry.

The important thing is that LSI is structured and in a position that not only can we build the product, but we can also install the product, when you take on a massive program like we have done with 7-Eleven of not just building the product, but installing the product and doing it according to the schedule that 7-Eleven is put in play, it shortly says that this company LSI industries has a capability far beyond anybody else’s.

So, where we are positioning ourselves to take whatever those opportunities are, I am being very, very guarded in how we approach this, we are being very careful for we add to more overhead, we are being very careful on how we approach the market based on supply and demand, so that we can get LSI back on our stronger profitability and start working on getting our stock backup.

Operator

Okay next in queue we have Jim Ricchiuti. Jim your line is open.

Jim Ricchiuti

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

Bob Ready

Ron I think you have some of that information.

Ron Stowell

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

Jim Ricchiuti

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

Bob Ready

That will take a little thought Jim, I think where we see 7-Eleven is and I call it phase II that’s accumulation of what was given to us on these non-patrolling sites and to forecast that at this point, I am not sure exactly what that percentage is going to be, based on other things that are happening with other customers. Certainly with the improvement on our C&I market, as well as some of the things that are going on with other petroleum customers.

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

David McCauley

Jim if I might add to that and as Glenn this really goes to your question I think that as we look at and I certainly understand the interest and try to revaluate the impact of 7-Eleven for the company, but we have been working through that program now for some time. We understand you know how to support it and really our process, our strategy is looking beyond 7-Eleven I think in fairness, as we look through fiscal 2011. We really now have other customers may be not of the same size and scope as 7-11 right now but more quantity of customers if you will that are already committing to programs and that’s quiet a bit different than we were six months ago where we’re really still in evaluation of prototype stages.

I mean these are programs that now have been awarded to LSI. We have been evaluated and selected above all competitors and so we’re certainly going to maintain our stance for 7-11, we are going to grow our position with them where we have opportunities to do so as they become active in some other elements of their program. But we certainly are not a single account company even in the petroleum market right now and it’s very exciting to see the kind of acceptance we are seeing with some other large companies there.

Bob Ready

Yes, and I think that’s important to mention, and the reason Jim that I am not getting more specific with those accounts obviously for competitive reasons but the fact of the matter is that these programs are now are just starting to wind up. And to what extent that’ll be? Its a little bit early to tell based on the success of the initial role out but Scott’s absolutely right, my direction has been this year is in 7-11 program was a wonderful program, it really helped LSI to go through a very difficult period. But now the objective is to put the 7-11 program on the side understanding that if Phase III doesn’t kick in then we’ve got to make up that volume. So we have made a tremendous effort to improve our ability both on the C&I market on our visual board direction as well as international.

We are now looking for an overall revenue improvement in other markets non-related to the 7-11 and just be very thankful that we have got a program like that which has really created a tremendous production process, helped us reduce cost and put us in a position that we are in.

Jim Ricchiuti

Some of the new business that you are alluding to, do you expect it to be meaningful to revenues combined basis this year? Now as I understand you are not in a position to name the accounts but if we begin to aggregate some of that business, is it meaningful because it is incremental revenue, this is more and more LED lighting product revenues.

Bob Ready

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

Sean Tony

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

We are getting that car firing on all cylinders again, most markets we have a very high level of activity, there are certainly some, some states in metropolitan MSAs that were more hard-hit than others. So we are still working in those areas to fully rebound or recover. So a nice, diverse collection of agents, we have got good activity in all of those markets, we have been successful in introducing new products, gaining price on the products that we have got in those markets to offset some of the commodity cost increases across the last year and then also on our C&I base.

We have got some significant relationships with major and leading retailers and several new ones they are on the horizon, all thank back in to would Bob and Scott, they were talking about the 7-11 program, the capability and competency that LSI continues to demonstrate in rolling out that enormous program in record time, gains of the interest of others in the space. So we have really got it on the agent side, many, many markets a significant pickup in quotations, enquiries, new orders, processes to manage that inbound volume, maintain our exceptionally high service levels and then also grow with our core retailers while we evaluate responsibly brining on others.

Bob Ready

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

Sean Tony

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

Bob Ready

In other words, we have a full court press on our sales efforts right now for the very, very strong product line both on the LED product line and traditional lighting. We’re in a much better position than we were a year ago based on the tailspin that we were in, we got our company back on plain level and then we started rebuilding that. And to your point Jim, what we’re really after is the fact that 7-11 program is what it is but it’s not the kind of direction that I want to see continue. We’ll take advantage when those programs come out. Come available to us which got to get the company on a more stronger base on the traditional side of our business so that we can get out of this lumpiness that we’ve had for so many years.

Sean Tony

One other comment that reinforces that is to give the audience a good perspective. We’ve had the contribution from LED lighting in the niche markets now for a number of years. We’re really just starting to see a contribution from LED lighting in the commercial market space which is much bigger market opportunity overall.

Bob Ready

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

Jim Ricchiuti

If I look at the graphics segment of the business, it was up close to 12%, 11% to 12% year-over-year in the quarter, is any of that 7-11 related?

Bob Ready

Jim, there is some signage and so forth. The graphics business is still very, very weak. We are not having any major commitments like we used to have with some of our bigger customers, but the fact of the matter is that we’ve sized our graphics business to a point where we now can work in a different environment and get it back on a profitable level without cutting the heart out of the company.

We’ve made a major investment in new equipment to give us a higher and more efficient production process with a better resolution and we are going after a higher-end market that we did not have the manufacturing capability in the years prior to that.

David I don’t know if you want to add any more to that, this LCD program that’s gaining more and more direction in the market place is another part of that. So David, I may miss something here, you might want to add something to that.

David McCauley

Yes, as it relates to the LCD, that’s basically advertising and menu board stream screens. It’s usually a 46-inch liquid crystal display. We are very close to placing our 500th screen out there and that’s pretty big for a non-mature industry of this active digital signage and so we are very excited about that and it seems to be a lot of the answer for menu boards in the future.

As we said they are getting old and tired indoor, if they don’t go to the screens that can be changed on the fly, the liquid crystal screens, then another option for them is to take the new boxes with LED lighting as opposed to the tubular lighting that they had over the years and be much more energy efficient.

But you can almost see the perfect storm lining up between old tired, more efficient, more modern programs that can sell more inside the store and that we think the cards are just coming our way.

Bob Ready

Yes and I think the fact that we have this new equivalent has certainly put us in a different position with an industry that is finding more and more people going out of business and people getting into business.

So obviously the limitation in production, based on what’s out there in the available market, it works to our advantage when these things start hopefully to improve. The other important item to remember is that we’ve worked hard to be sure that we maintain that strong customer base, the CVSs, the stop and shop and so forth. Those folks are still a very important primary part of our business and we are constantly working to be sure that we don’t lose any of that potential that hopefully some of these folks will start to see an opportunity and they are going to come to us because we are strong in the financial position, we have the installation capability, we certainly now have even an improved production capability.

So during this tough time with our strong balance sheet we were extremely aggressive to take the steps that we know that when the industry comes back, LSI is going to be in a position to handle a higher volume potential.

David McCauley

One thing I might add to Bob is the aggressiveness of a graphics campaign that we have going on now. As the group knows, most of our graphics are still direct, very little sold through reps and we have quite the aggressive, we call it the stim program, stimulation program gone on for prospects at this time.

And we started that on July 16, we targeted 720 of the largest retailers that are not currently customers. If they are not doing a $0.25 million, we call them a prospect and we are going to do sixty a month to the rest of the year and by this time next year we will 720 of them and obviously in each quarterly call we maybe results of the effectiveness of this campaign.

Bob Ready

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

Operator

Next question from Len Brecken.

Unidentified Analyst

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

Bob Ready

I think it is difficult. I don't know that I have the exact percentage, but maybe one of other guys can help me with this. I think of the LED product line now represents a little over 20% of our business, plus 25% of all LED products.

That is a big effect on the 7-11 program. I think to quantify where we are going with is the interest in the markets are gaining more and more importance because the product line is stabilizing. There were so many improvements and changes over the last 24 months that the customer were confused and they are sitting there and saying when do I make the change.

The stabilization of that comes out with a much better LED chip, obviously a driver system that operates that chip with a lot more options, a lot more benefit to the investment obviously with the cost reductions that we are seeing with the volume improving. So to quantify where it's going to go, it is the future of this country, of this world really.

It's the future of our business and as we learn more and we can bring cost down, we will be replacing more and more traditional products, but the answer to it is a combination of many products. For reference, it found its way into a whole new market area. That was a product line that everybody was looking as kind of following of the map so to speak.

But with the introduction of TAT-5 lamps, with the energy savings there and the longer life, it's a combination of products now. It's a whole new approach and that's the way we set up our new iZone center where we bring customers in, but LED isn’t the only answer. It's a combination of different products to accommodate the job that that customer is looking for.

Unidentified Analyst

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

Bob Ready

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

Unidentified Analyst

Okay, I understand.

Bob Ready

We have to be competitive. The one thing I failed to mention, it's really important in this scenario, is the international market is a market that we feel has greater potential right now with LED; maybe even more so than our domestic market. And the reason I say that is their energy cost and efforts are just about double what they are in the US. There is a tremendous hunger for looking at the US products in the international market.

We are finding so much interest in that market from so many different customer bases, and our challenge has been to get through the certification process similar to UL in the US. We call it CE in the international market. We have absolutely just driven ourselves crazy trying to get through that process. And Scott, I think you mentioned only just yesterday that or maybe it was this morning that we're in the final stages of getting the major approval of CE. That could open the doors for us.

Scott Ready

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

Unidentified Analyst

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

Bob Ready

You can’t even get started without the (inaudible).

Unidentified Analyst

Give us some senses, how important it is in terms of the selling cycle. Are we still 12 months away before significant customers to come in or is it six months or? Just a ballpark, I mean how early are we in terms of the adoption cycle over there, given your perspective on the US?

Scott Ready

Would you like me to go ahead and address that there?

Bob Ready

Sure.

Scott Ready

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

From a selling cycle, again, the economy plays a big part in this. Budgets are not wide open at this point in Europe any more than they are here in the United States. So, I can’t tell you specifically when I think some of these programs will develop into day-to-day or a contribution because of those variables. But I can tell you that…

Bob Ready

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

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

Unidentified Analyst

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

Bob Ready

It’s greater.

Operator

Okay next in queue we have Dick Ryan. Dick your line is open

Dick Ryan

Bob, the new product coming out, the Gen 3 that is a replacement for your Scottsdale lights, can you give an order of magnitude as to how many Scottsdale lights you've installed or what that installed base looks like that you're going after?

Bob Ready

I don't have the numbers yet. But I can tell you Gen 3 isn't only related to the Scottsdale replacement program, it really applies across the board to parking garages, site lighting and so forth, because it's such a dramatic product and it offers so many options to the customer. But the important thing is that Gen 3 as it applies to the Scottsdale is that we have developed and designed and now producing almost a plug and play replacement of the Scottsdale.

And what that means is as compared to any of our competitors we have the ability to drop in all out of existing Scottsdale out of a canopy and very simply and very quickly and very easily putting a crossover Generation 3 canopy fixture. And this is where now the sales reps, the guys that are out there promoting it are now have samples in their hands and are beginning to show this in a much stronger environment than they have them before. I think as time goes on, we are going to see more and more Scottsdales being replaced. It's a 12-15 year-old product and now we have the ability to reduce energy with a really easy product to install with a tremendous amount of life.

Dick Ryan

Okay, good. And you also talked about attracting a new agent. I am assuming that that group came from one of the big three or four companies. What do they see with you guys and are you talking to other agents around the country for similar sort of move towards your product line?

Bob Ready

Sean why don’t you mention that to Dick?

Sean Tony

I think the question was only attraction.

Bob Ready

Well, it was the conversion, the conversion Sean based on what’s happening, like our folks up in Minnesota.

Sean Tony

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

Bob Ready

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

Operator

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

Rick D'Auteuil

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

Bob Ready

Without getting too specific, Rick, I think the interest is across the board with all of them, and obviously from our standpoint the existing customers that we built on that fast food business or that quick serve business is our primary target. We have certain limitations as it relates to how we are expanding the LED product line. So we have to be careful of where we spend our engineering time and where the primary interest is.

I think everybody has a strong feeling of what is yet to come with LED technology. We are allocating that time and energy towards the markets that we know we can get quicker return on revenues. As you well pointed out with many conversations with me, we've got to get that revenue stream up, we've got to get that, improve the bottom line and that’s strictly due to volume.

So from my perspective in the allocation of time and resources, we are looking at markets where we know that we have a better opportunity to have a quicker return, but at the same time the technology developed that is being applied to those markets obviously fall into other markets that will be coming behind this, once we have stabilized this technology.

Rick D'Auteuil

I'm not asking for names, it is a market you're pursuing, the QSR menu board, digital menu board kind of space; right?

Bob Ready

Absolutely because whether it be one customer or 50 customers, the key to this thing is developing a menu board system that is affordable to that market and has the utilization of the technology and do it in the proper manner. Understanding that a lot of these menu boards now that were replaced 10-12 years ago are going to have be refurbished somewhere along the line.

Some of the lamp types that were used in those menu boards are being sourced or being actually phased out by the lamp companies. So there is going to be a market out there. It might be a few years out in the future, but understanding that the technology that we’ve developed in our lighting program, is going to absolutely apply once we get into linear, that being a replacement of fluorescent which is a linear light source in a much more affordable and much more controllable direction.

That takes a lot more time than a light fixture based on the way these fixtures are designed. So from our perspective, again I am repeating myself, it is extremely important the limitation in time and in cost, we are going to where the market is with this economy the way it is, we are finding ways now to penetrate that market, turn that into revenues and as these markets change and hopefully the economy improves, we’ll be again be able to go back in a more aggressive direction with these other markets.

Rick D'Auteuil

Is anybody in that space looking for near term rollout or are they out seeking RFPs from the multiple suppliers that space?

Bob Ready

I am not going to get into specifics, but the answer is yes, our company that’s looking at this right now aggressively. Where we’ll go, we don’t know yet, as you will know sometimes these programs take as much as a year plus once they make their decisions, but this is very important to us based on how we are working on a very direct basis to develop this new product.

When we have an opportunity to work with a specific customer and develop that product, obviously that opens the door for other companies to look at what we have. A good example is what we did a number of years ago with Burger King and that had opened up a door with Diary Queen, taking the same strategy, the same direction as the way we are working today.

Rick D'Auteuil

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

Bob Ready

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

Rick D'Auteuil

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

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

Bob Ready

Well, if I can simplify that answer and is when this economy strings out a little bit and it becomes more of a opportunity on the seller side than it is a buyer side, I have never experienced in my career a kind of direction and demand that comes in on a daily basis with our customers knowing that they work every manufacturer to get their lowest price.

And of course, that’s a very, very difficult situation when you are trying to balance the revenue side, you’re trying to balance the overhead costs and trying to look at how we can keep this company in a stronger position.

My goal right now is to do a better job penetrating larger markets and expanding LSI's capability. And even with the margins being tighter because of the buyers' position that they are in with this economy, we are going to find ways to drive volume. We have also learned a great deal to keep our overhead down. And again, I go back to my statement, looking at it from a manufacturing standpoint, we’ve taken the direction which I believe is the right direction for LSI, not to move into buying more and more finished product from China as many of our competitors are doing.

I don’t want those inventories, I don’t want what the change in these product developments, I don’t want to be stuck with stuff that I can't sell. So we are actually focusing on a much more improved, much more efficient faster method of producing. And I think at the end of the day being a US made product, hopefully the pride is coming back and the change that we are creating with our C&I reps, they are going to start driving that volume through so that you will see the improved market, improved decision in our stock price.

Right now, I am just thankful that we have got this company turned around on a much stronger solid base that it was the last year. It was a tough year, when you compare '09 to where we are today. Have much more. Am I optimistic? I don’t use the word optimism anymore because I can’t control the economy. Am I confident? Yes, in what we’ve done. And I still maintain, you look at what this company has invested, what the changes we have made, and all the things that we have done and still have the balance sheet that have. I think that our folks have done a remarkable job.

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

Rick D'Auteuil

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

Bob Ready

I am not going to commit to that because I really don’t know what this condition of this economy is going to be. But I can tell you right now that everybody in the management team of this company understands what the goals are.

Operator

And that was our last question in queue.

Ron Stowell

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

Bob Ready

Okay, Ron thanks. In closing, I want to thank everybody for their time and patience and I promise you that as things hopefully start to settle in here and we have more information, we will be making more press releases on the condition of the company as some of the things that are happening. Right now, I am being very guarded and how we go. With this economy being so fragile, we have no idea what a customer is like.

Customer may commit today and then pick up the phone and say, let’s put everything on hold. Some of the programs that we have talked about, this has happened over the past year, it gets very frustrating when you see start to ramp up for something and then somebody says to you, well wait a minute, let’s see what’s going to happen here.

So we almost work from day to day, week to week, month to month, to be sure they we are doing the right thing and creating the right programs in order to market our products. The exciting thing is that this new technology is expanding or coming out with more products quicker and we really are seeing a tremendous interest in the product line.

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

Operator

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

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