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LSI Industries, Inc. (NASDAQ:LYTS)

F1Q2011 (Qtr End 09/30/10) Earnings Conference Call

October 21, 2010 3 PM ET

Executives

Steve Brucker – CIO

Bob Ready – President & CEO

Ron Stowell – VP, CFO & Treasurer

David McCauley – President, LSI Graphic Solutions Plus

Scott Ready – President, LSI Lighting Solutions Plus

Jonathan Labbee – SVP, Commercial and Industrial Lighting Group

Sean Tony – EVP, Commercial Industrial Federal Lighting Business

Analysts

Josh Bravo

Davis McCauley

Jim Ricchiuti

Rick D’Auteuil

Glenn Wortman

Dick Ryan

Operator

Good afternoon and welcome to the LSI Industries First Quarter 2011 Earnings Conference Call. Today’s host will be Mr. Steve Brucker, the Chief Information Officer of LSI. During the discussion, all participant lines are placed on mute to prevent any background noises. (Operator Instructions)

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

Steve Brucker

Good afternoon everyone and let me add my welcome as well. Today’s presentation will not have any accompanying online graphics. But you will be able to find supporting materials available on our website after the conference is concluded. You can go to our website at www.lsi-industries.com.

And you’ll find the Investor Relations button at the lower left. And now, let me introduce Mr. Bob Ready, the President and Chief Executive Officer of LSI Industries.

Bob Ready

Thanks, Steve. Good afternoon everybody. Welcome. I’m not going to get into a lot of detail in my opening remarks. I think the press release covered it all. As we have shared with you in the past conferences, especially over the last 12 months, we’re going through a major cultural and structural change in the way we do business.

We’re still, obviously, very focused on our niche markets which we’ll talk about in more detail on the oncoming hour. But the important thing to recognize is that all of the conversations that we’ve had over the past 12 months related to the economy and what we’ve done to improve the direction of our company is obviously in place.

And as I shared with you just three months ago, I knew that we were in that – headed in that direction. LED technology is definitely taking the right route system, not only in the U.S. but throughout the international markets. I’ve invited to sit in this conference my key marketing and sales folks, Scott Ready, the President of the Lighting Group; David McCauley; Ron Stowell, Chief Financial Officer; and Steve Brucker is on board as he made the introduction; Sean Tony, our Executive Vice President of the Commercial Industrial Federal Lighting Business; and I quite left off David McCauley, good to meet you. And Jonathan Labbee, of course, coming out of Montreal office is online as well.

I know that there are going to be a lot of questions in reference to probably this quarter really worked its way through and what the future is. As I said, we’re very optimistic about where we are. And certainly, our penetration in the commercial industrial market, with a number of changes that we made in our regional sales force, as well as just the overall acceptance of the LSI product line as it relates to total energy saving products, not just LED.

And I know Scott will make a comment or two on that. Those are my opening remarks. Ron Stowell is going to kind of hit a few of the highlights here and then Ron will switch it back to me. And then we’ll open up to Q&A.

Ron, if you would please.

Ron Stowell

Yes, thank you, Bob and good afternoon everybody. I will briefly cover our Safe Harbor statement that will point you to the recently filed 10-K and our previous 10-Qs that is to our forward-looking statements. And importantly today, we will not have any material non-public information that will be discussed.

Now to our net sales for the quarter and nearly $80 as our press release indicated. We’re up 18% and I’ll give you just a couple of the segments numbers of lighting was about 47,500,000. That was up 19.8%. Graphics $26.1 million, up 18.1%. Our electronic components $4.6 million, up 41%. And you’ll note that I did not talk about a technology segment and the differences of sales there.

We have reclassified the technology segment into the all other category. The technology segment is really the operations of LSI Seiko and that’s really our LED R&D center. And as a result of the size that that represents of our total, we felt it appropriate to reclassify into the all other category.

When it comes to looking at operating income by segment, we have made another change and that is that we are breaking out corporate administration from the all other category and onto its own line item in that segment reporting. We think that will give better clarity to the segment reporting, specifically with operating income, which I will also give some of the numbers there.

Lighting operating income was $3.7 million and that was up 6.8%. Graphics $4.6 million, actually up a hundred and sixty-one percent. Electronic components was a little over a million. And let’s just say that’s a huge percent as compared to $56,000 last year. Of course, last year was influenced by some purchase accounting requirements and inventory reserves that had been booked at the time of purchase.

And then so our total of $6.6 million, on the face of it, was up a hundred and sixty-five percent from last year. However, in our press release, I do want to point out here, to reiterate that, we made some non-GAAP financial measure. Adjustments to last year’s number related to, yes, related to the purchase accounting effects last year and so we’re – our net income is up really 88%.

Rate increase on an 18% sales increase. Quickly just over to the balance sheet. You’ll notice that we had $12.1 million of cash that is down from June but we have invested, if you will, invested in working capital. Our inventories are up a couple of million dollars and our receivables are up almost $7 million due to the size of the sales in the quarter.

They’re in good shape. Our DSOs are 47 days now and at the end of December versus 48 days at June. And we’ll point out, too, that our – something everybody is interested in. Our total LED product sales – sales related to LED products, $16.7 million this quarter and that’s about 21% of our total net sales.

Last year in the first quarter was with lower total net sales and with more sport sports sales last year than we had this year. Our LED sales were actually 27 percent of total net sales.

Bob, I think those are the highlights of our point of views.

Bob Ready

Yes, and if I may kind of add to that Ron, we could sit and see in the LED sales as it relates primarily to our lighting products are definitely pretty consistent. And we’ll address more of that when we get into Scott’s dialogue as it relates to the lighting side of it. I’m not sure David has a couple of comments in reference to that as well.

David McCauley

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

Bob Ready

Yes, but I’m talking about some of the markets that we’re going into. And we’re going to address that – a couple of more of that market-driven direction Ron.

David McCauley

Okay.

Ron Stowell

And with that, I think I’m going to turn it over to Scott.

Scott, why don’t you take a couple of minutes, just kind of give everybody a snapshot of how things have been going both on the CNI and in our niche markets as it relates to the Generation 3 product that is, that’s really done a marvelous job in the last few months. And we see that continuing with a lot of strength.

Scott Ready

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

And we really look at this next year kind of, as a beyond 7-11 opportunity for us. We have much to do still to finish the 7-11 program. And are enjoying, I think, continued support, continued satisfaction from the client there. But we see the sales volume in this last quarter beginning to reflect penetration beyond that account.

And that’s what’s really exciting and gratifying. The Generation 3 technology that came into the market released in May, really started shipping in earnest during this quarter. And we’re very happy to account a number of other smaller programs, certainly amongst programs that have committed themselves to that technology and committed to themselves to LSI as their supplier. We continue to work on a variety of new clients that not new to LSI certainly but new to the adoption of this technology and expect to see continued growth in that market segment with the adoption of the LED solid-state lighting technology.

Beyond the petroleum market and by connection with the QSR, the automotive which we’ve seen, so smaller gains there. But certainly the product application is a little bit different than we announced or launched into the petroleum market place. But really, where the greatest opportunity lies as we look forward is the commercial industrial marketplace.

In understanding that our product offering was somewhat limited in the last part of fiscal ‘09 and our introductions really began in the spring, in late spring, early summer into the commercial industrial market. We’re very happy telling amongst the gains in this last quarter penetration – certain penetrations to that market with the solid-state lighting product.

Our parking garage products are meeting some very favorable reviews. Our pole-made (ph) products, again, principally all exterior products not having penetrated or really released much in the terms of the interior products with the exception of some retail linear products which are gaining a great deal of traction. We still are focused primarily in the exterior.

We had product development projects in place now that will be generating additional exterior products and then some interior products as we move into the third and fourth quarter of next year, next calendar year. The market share challenge that LSI has really attacked, I think, is characterized quite a bit by our successes with certain agents in certain markets that we’ve now generated a great deal more interest with.

Certainly, a lot of that is due to the product offering. But even more so, I think recently due to the efforts that we’ve made to grow our sales team and strength in our sales team to a much higher level of effectiveness than we’ve ever had before. That effort itself has really started to gel during this quarter.

So overall, the two principal markets, the niche markets, the CNI market, complemented by national accounts, peppered back through that. and I know David will talk to some of that in his session. He’s really combined now with the interest in energy savings, with the interest in lower maintenance, with the, you know, the slightly improving, I’ll say, budget situations that some of our customers are beginning to experience all about (ph) pretty well for continuation of this kind of result, I think, at least through the second quarter.

Bob Ready

You know, if I may add to a couple of your comments, Scott, one of the things that were very obvious to me and certainly with many conversations that I had with many of view that are online and others that are probably not online, it was the anxiousness, if that’s the right word, to see where this technology was going to bring us. Obviously, with a difficult economy, we weren’t seeing the kind of sales increases on top of our traditional lighting that we would like to have had.

But the encouragement to me is that we started this marketing theme, if you remember months and months ago when we shared with you how we are approaching the market and we used the description seeing is believing. It has taken a lot of time for a number of our customers to really build the confidence in what this technology was going to bring to them.

And it was against that number of prototypes. It was experimenting with different ideas. And it was really developing this new technology and how it would apply to our customer base which was really more unique than our traditional methods. The traditional methods were pretty much they are what they are. But we have so much more flexibility and so much more opportunities that give our customers a choice of how to utilize this technology to their specific market.

And it just took a lot of time to build that confidence level and get these folks to now start looking at a major improvement in their expansion of where this is going to go. 7-11, of course, was crucial because it gave us an opportunity, as Scott said, to seize the market. And now that we have done so and I know there’s a lot of emphasis on the 7-11 program, but I can tell you folks right now.

Based on what I know and we’re not at liberty today to get into more specifics of what we think will be coming in this coming, next quarter or now, and moving into the third and fourth quarter with other customers. There are some very, very strong opportunities out there that once we get into these programs, we’ll be sharing with you that is going to replace a lot of that 7-11 business. And the 7-11 business is going to continue to grow in certain aspects.

Just recently, they gave us a direction that some of the locations that they decided not to do in the prior year are now being under consideration. Scott might touch on that a little bit.

Scott Ready

Sure.

Bob Ready

There’s an interest now in moving into the Canadian market. So there’s going to be some ongoing 7-11 business. It’ll move well into the calendar 2011 in the third and fourth quarter as these locations are being finalized.

Scott, why don’t you make a comment on that?

Scott Ready

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

But even beyond those additional domestic U.S. sites, the influence that the program has had for 7-11 in Canada, 7-11 in Mexico, as well as other non-7-11 brands, both domestically, internationally, is difficult to ignore. I mean, it’s really exciting to see the folks that have now viewed and believed, as Bob (ph) says, that this technology is ready.

It’s ready for primetime and will bring them value immediately, and are ready to start committing their programs in that direction. So in closing for this segment until we get into Q&A, the point that I’m making is that we’re kind of facing into a new era.

Our markets are really very aware of the new technology, the tremendous amount of work that’s been done internally by setting up numbers of visitors. As we speak today, we’ve got somewhere in the area of eight to 10 customers from Canada in for a day and a half, to review the items that are on the center and get more of an education on the technology side.

So the grassroots of our technology business are well in place. They’re starting to really show some direction. Our traditional lighting were just getting very aggressive, going after market share, wherever we feel we can do that. And with the stronger sales work, certainly a tremendous amount of work that’s been done by Sean in reference to the beefing up our commercial industrial direction. And it’s showing the results.

Bob Ready

Thanks, Scott. I’m going to move on to why we’re still in the lighting side. Jonathan, you’re online. Give us a quick snapshot of your just most recent trip the Middle East and to Europe and what your thoughts are as far as our momentum is starting in the European and Middle East markets please.

Jonathan Labbee

Thanks, Bob. Hello everybody. Well, as we’ve discussed in previous calls, the Middle East and Europe are very active markets. I’ve seen this first-hand in my travel overseas especially during my last travel where I had the opportunity to see some of the installations. I can personally confirm that it’s moving a lot over there.

Since we’ve initiated our overseas efforts, we’ve been working pretty hard to position the company. We’ve now secured proper certification for our products in Europe. And we’ve put in place some early adapters and our ongoing client business is really contributing to the success network of our strategy. The results to date are really encouraging. We’re pretty happy with the exposure and the feedback that we’re receiving from our overseas customers.

With all this happening we’re moving forward with the strategy and working really towards getting some more results in the near future. One of our early adopting to customers is now going to be placing the Phase II order, so they’ve been very happy with the products. The installation was easy for them. This is the feedback that I’ve been getting back from these guys and we’re talking about some nice white light products here.

Bob Ready

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

It’s again, part of that marketing theme seeing is believing getting these certain prototypes in place like we did 18, 20 months ago in the domestic marketing and starting to build off of that and so we’re following a strategy that has worked well in the US, I believe it will continue to work well in the Middle East and certainly in the European market.

Lots are going to be up for grabs on those markets as we watch those very closely with all of their financial problems but the technology is there, the energy savings are there and we’ve got a product that can do it and it’s proven here in the US and we’re just carrying that theme into those international markets; thank you Jonathan. David, if you would a quick snapshot on the graphic side.

David McCauley

Sure Bob. Good afternoon everyone. As Ron stated the numbers today on the graphic side of the business we’re very pleased with the revenue increase certainly very, very pleased with the income production. We can attribute that to versus a year ago the right sizing of the company, the employee down [ph] and the dollar ratio per employee of revenue is certainly up.

Cost containment program as they have been – the reduction has been there for more than a year but when it finally gets fine-tuned and in place and then you raise that volume, it starts dropping to the bottom line and then a third thing that certainly happened in this quarter versus a quarter one year ago is the product mix. There was a good product mix as it relates to the bottom line again. If you get $5 million worth of volume versus $5 million of another type of volume certainly can produce a different bottom line and in our case in the graphic side it sure did.

We’re starting to see some movement in the menu board portion of the business. There have been some smaller QSR chains that have had opportunities for us including small rollouts of their business and we’ve procured those type orders and we’ll be producing them over the next few quarters; nothing major, no giant in there but sure something to be excited about because we weren’t expecting that particular amount of business to be coming in.

In our active digital market and again this is – a lot of it – our active digital happens to be in the QSR business, in the menu board arena. If we go back trailing 12 months our volume has been very good. In fact the volume has done here equivalent to the first four years of active digital. So the increase in the last 12 months in that business has been tremendous and we don’t see anything stopping us there. In fact we’re prototyping more convenient and non-QSR type markets whether it be airports or hospitals and again opportunity for growth there.

As I mentioned last quarter in the earnings call, we have quite the marketing campaign on 600 new prospects that we’re chasing. We’ve already made overtures to 300 of them and before the end of the year we’ll hit the other 300 and we expect to continue this marketing campaign. It’s a three year project; we’ll be hitting them every six months and adding new customers to our base and we’re real pleased with where that’s going.

On the graphic side of the business as we’ve said many times before, we’re more about programs than we are product. The projects we look for the rollout programs, for the big companies, LSI is suited much more strongly than the competition is out there. We can handle those big projects from (inaudible) grade, the engineering, the implementation, the manufacturing, the total rollout we can finance the deals a lot better than our competitors but on the product side we are looking at a lot of the projects that we’re building product for, having LEDs involved with them.

Before when you build signage, you would light it with reflective light on the face of the sign. Another opportunity was the back lighted and in many cases they used neon. Neon was expensive, it wasn’t very safe and secure. Maintenance was high and with the introduction of LED, it’s given us a new opportunity to build these signs with a glow light that wasn’t available before, which is low cost and low energy and the market is recognizing this and the demand for that product is out there. And of course, when I mention menu boards and LEDs, I can do it with my same breath because we are working on a version of a menu board that is lit with LEDs rather than the fluorescent standard T8s or T5s in many cases.

Lastly, one encouraging possibility for us is one of our major QSR customers; yesterday closed their deal, have gone from a public company to a private company. Hopefully, they’ll take this chain of restaurants that has a new image already developed. Hopefully, they’ll enhance franchise market, recognize the funding needed for that and get involved there. We can’t say that that’s going to happen. There have been a lot of articles on it but we are sure waiting in the wings and hope to participate if something develops there. So Bob, I’ll turn it back over to you.

Bob Ready

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

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

Basically, that’s kind of a snapshot of where we are and what we’ve done and where we’re going and let’s open up the direction to questions and answers please.

Question-and-Answer Session

Operator

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

Josh Bravo

Hi, you’ve got Josh Bravo [ph] for Jed. Congratulations on the result guys. It looks like a little bit more a little change in what you’ve started talking about in some of your disclosures. So I just want to make sure we have everything correct. Ron, could you go over the LED number you gave us again; I think it was 16 million or something.

Ron Stowell

That’s right, Josh, $16.7 million total LED.

Josh Bravo

About the breakdown between lighting and video boards of that $16.7 million.

Bob Ready

No, we’re not going to get into that Josh. This is Bob. Basically the direction – the video screens – we’re working on a new generation of video screens and that will be coming out I would say early spring or late winter. So it wasn’t a big number, it was primarily more on the lighting side than it would have been any of the others.

Josh Bravo

So most of that $16.7 million is lighting, is that the fair comment?

Bob Ready

I think – correct me guys if I’m wrong, but that’s a true statement.

Ron Stowell

By far yes.

Josh Bravo

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

Bob Ready

David, do you want to handle that one – I’d be happy to.

David McCauley

I don’t think I understand the question, Josh. Are you talking of the revenue stream for this quarter and what that comprised or –

Josh Bravo

Well, I mean, for instance, it was up by, I think, if I did the math right something like $10 million. Was that kind of some one-off small step or is that the beginnings of a new large national rollout that we should expect?

David McCauley

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

Bob Ready

The other part of that Josh, was David and I think I’m pretty much straight on this, the last six months or eight months we’ve invested in some very, very sophisticated high-end tech printing equipment and the direction with that – if we were going to make that investment, I wanted to see the operations or the marketing and sales direction to go after some new customers and some new products.

I think what you’re seeing is a stabilization with some of our older customers that are beginning to adjust new direction as it relates to the market as well as a tremendous amount of effort to start looking for new customers and new product opportunities, opportunities where they exist and that’s why I made the statement a few minutes ago is that it is a tough market out there but with our financial stability the investment we made in those very high volume, very sophisticated printing pieces one went up in the (inaudible) socket, the other one went down into Houston. We really started to open up our markets going after more customers.

Davis McCauley

This is Dave again. I might add to that Bob that beyond the printing equipment we took convergent equipments for operations after the printing process and we have cut our cost tremendously there and like Bob said, brought some new customers in, and that’s what a lot of this marketing campaign is about. Like Bob says, to drive it home to say, “Hey, here’s what you knew about us, here’s what we are now and here’s where we’re going.”

Josh Bravo

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

Bob Ready

Oh it’s very small. It’s just beginning, very small. We’re just feeding the market, getting certain prototypes with certain key customers because it is – if you recall at other conference calls, we just didn’t have the certification in place and we were working with people and we were trying little bits and pieces but they really couldn’t get into a program until we get true certification by country and we have achieved that and now the interest and the doors are beginning to open for us.

Josh Bravo

Great, that’s it for me. I’ll jump back into queue; congratulations again.

Bob Ready

Thank you.

Operator

Okay. Next is queue we have Jim Ricchiuti [ph] in queue, Jim your line is open.

Jim Ricchiuti

Hi, thank you very much. Congratulations on the quarter.

Bob Ready

Thank you.

Jim Ricchiuti

I wonder if you could perhaps tell us what percent of your revenue 7-11 represented in the quarter and I’ve got a couple of follow-up questions.

Bob Ready

Yes, that certainly will be disclosed in the 10-Q, Jim. It’s a little over 24 percent.

Jim Ricchiuti

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

Bob Ready

Scott, correct me. You can follow up with my comments. As I think Jim, when they were going through their review during the early stages of whether they were going to – where they were going to move into this program, there were certain franchisees out there that they weren’t sure whether they were going to go ahead and extend contracts and so forth. Now that they flush through the 8020s here, let’s put it that way, now they’re looking at the results of some of those out there that they didn’t do and didn’t commit to and they’re seeing and I think this is an evaluation of the energy. They’re still part of the 7-11 program and the energy program has been so strongly accepted by 7-11 with this conversion but now they’re taking that lower tier and they’re saying okay if they’re going to stay with us or going to extend their contract, now we are going to move into that place.

What the percentage is? We don’t know that yet exactly, so I don’t want to assume anything but it’s a continuation of a program that could go well into the balance of our fiscal 2011 year which is good for us because it’s not just going to end in December. Is that a pretty good evaluation, Scott?

Scott Ready

Yes sir, you’re right on the mark.

Jim Ricchiuti

If I could just ask a couple of follow-ups. If we look at the way the business is segmented, is the bulk of that 7-11 business that you generated in the quarter, is the bulk of that in lighting products, remind me, some of that also in graphics?

Bob Ready

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

Jim Ricchiuti

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

Bob Ready

We don’t know that yet, so I don’t want to assume anything. Is it substantial? In my opinion based on the international part of it most of those are all petroleum sites, which are certainly larger than the non-petroleum. And once we get a direction from them, we’ll be able to share that with you, but it’s a good part of an opportunity there that we love to have as we phase in some of our customers hopefully into bigger programs and that’s the whole purpose of where we are now is getting much more aggressive with the success with other customers, so that they see the value of what could be done with kind of a smaller rollout program compared to a 7-11.

Jim Ricchiuti

Okay thank you.

Bob Ready

Thanks, Jim.

Operator

(Operator Instructions). Okay, next in queue we have a Rick D’Auteuil [ph], Rick your line is open.

Rick D’Auteuil

Hey Bob.

Bob Ready

Hey Rick.

Rick D’Auteuil

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

Bob Ready

Well, why don’t we turn that over to Sean? Sean’s in the room there, based on what he’s been able to do in the C&I, I think that would emphasize your question a little bit better Rick and Sean, why don’t you kind of feel that one?

Sean Tony

Bob, thanks and Rick thanks for the question. I’ll answer it in a couple of ways. I’d say cautiously optimistic. What we’ve done, Bob alluded to it; I’ll try not to be redundant but we’ve got some terrific people. LSI has always been built first and foremost on people. We’ve incorporated some real leaders now into our C&I regions. Their activity level is very high and as a result we get a look, a sniff if you will at opportunity that’s out there that we can react to and at the same time we’re playing off and it’s under Scott and Bob’s leadership in the CNI regions on creating opportunities.

Absent of new construction activity, the guys and girls that are out there in the sales force are doing a great job with our agents, teaching the agents how to ship their paradigm and sell into a retrofit opportunities or reconstruction opportunities, where we’d really be in a leading position, because of our Crossover technology and other products that really helps somebody lower their energy spend. We’re creating opportunity, we’re frankly there isn’t any and finding that the modest opportunity that’s out there sooner.

The other – I guess the other reason to remain optimistic is we launched a growth platform that’s all around generating demand, both within the agent sales force that we’ve got and then in the markets. We continue to incorporate that growth platform. It’s a proprietary program we’ve got for agents that does a couple of things.

It generates demand, it generates volume to serve, and at the same time it strengthens our agents which are extensions of our business, our agent partners, and makes them stronger in each of the markets that we serve, reinforces them financially at the same time. And I think all of those things tied together as well as the other the interest that we continue to get out of our core national account retail partners and new ones because of that type of reputation on service, quality and delivery reliability create – a long winded answer – create cautious optimism.

Bob Ready

Yes, and I’d like to support that Rick by saying that one of the things that has come about is a result of a tremendous just a whole different attitude change in adjusting our company to really what the economy is out there is putting emphasis back into the success of what size story going over 34 years. We focused our operations on a higher level of service. It’s a tough market out there. And with everybody competing after the same amount of business which has obviously been reduced, service becomes a very, very, high level of a requirement of doing business today.

Pricing, with the adjustments that we’ve made internally in order to get across in a better position, so we could be more competitive. Yes, the margins are tougher, but the fact of the matter is, is that you can see in this last quarter that all other things that we’ve been talking about for months are now beginning to work. And it’s really kind of interesting as the level of management in place is right now is experiencing really what the success of the LSI story is. And the benefit of that story is really finding its way through the C&I reps.

Sean has done an unbelievable job of adjusting the type of people that we have out there in order to bring the passion and the direction back into the sales effort and then the marketing folks have got all this stuff that’s falling through in order to support it. So it’s not just one thing.

Am I optimistic? You damn right I am. I am concerned about the third quarter as I always have been since the 34 years I have been part of this. We’re very working hard to try to balance that out based on going into that third quarter. And if a few things happen which we’re being very, very cautiously optimistic on, that could be a very, very interesting third quarter. It’s a little bit early to tell yet right now.

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

Rick D’Auteuil

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

Bob Ready

True. That’s more graphic.

Rick D’Auteuil

Is it still under consideration?

Bob Ready

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

Scott Ready

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

Rick D’Auteuil

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

Scott Ready

They’re chained with somewhere between 100 and 500 units. And it isn’t necessarily a total rollout of every site, but it’s – again it’s a nice meaty project.

Rick D’Auteuil

So this isn’t just the testing phase?

Scott Ready

No.

Rick D’Auteuil

These are committed to the –

Scott Ready

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

Rick D’Auteuil

And these are menu boards or –

Scott Ready

Yes, outdoor menu boards.

Rick D’Auteuil

Outdoor menu boards. And how many chains were there?

Scott Ready

Again, they were in that 100 to 500 range.

Rick D’Auteuil

They were two.

Scott Ready

Two chains, two new customers. Two chains in the second tier, the 50 to 100 top 100 QSRs, they were in that second tier.

Rick D’Auteuil

Okay. I appreciate it.

Bob Ready

You know, Rick, as you ask these questions, I think it is all in our minds what this change over at Burger King. I mean, let’s just say where it is, going from a public company to a privately-owned company, lot of articles have been written in a way out weeks about a new look and what it’s going to cost and this and that. And there’s no way to tell what these guys are going to do.

I don’t think they really realize at this point what they are going to do. But what has happened is there is a change, it’s a very, very, big customer, a very important customer to LSI. And our role will be – our role will continue to bring to them as much as we can in both of the menu boards and the lighting and so forth. And so if there is an opportunity out there, we’re going to be sitting right at their doorstep to be sure that they’re fully aware of what kind of products and services that we’re going to be able to offer if that continuation is going to be part of their plan.

Rick D’Auteuil

Okay. And just so you know this is more an investor relations kind of question. But we’re not seeing press releases regarding these new business opportunities. What would it take to – is there a minimum level of revenue that a new customer has to be there to make a press release.

Bob Ready

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

Rick D’Auteuil

So there’s likely to be some announcements, because you said you had some pretty nice opportunities to fill the 7-11 eventual hold, right?

Bob Ready

It’s been a couple of years since we’ve kind of had the cup starting to fill up with the direction. And it’s all been part of this new technology, this new Generation 3 – either we don’t have enough time on the phone to go through what Generation 3 has brought to LSI, but it has definitely established a very strong [inaudible].

These folks that are in from Canada for day and a half are coming into see what this Generation 3 technology will bring to the marketplace. And it doesn’t stop there, I mean we’re putting more and more efforts into what the – whether we call it generation four or whatever we call it is it’s an ongoing improvement of the product line and it falls all the way through the graphics as well as the lighting, because LED is now in both markets.

Rick D’Auteuil

Okay, thank you.

Bob Ready

Thanks Rick.

Operator

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

Glenn Wortman

Yes, good afternoon, guys.

Bob Ready

Hi Glenn.

Glenn Wortman

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

Bob Ready

I can’t tell you that exactly based on the number of stores. I think we have about 1,300 guys, is that right?

Scott Ready

It’s less than that, about 1,200 Bob.

Bob Ready

1,200. And there’s no way that I can give you an accurate figure on that, Glenn, because we really don’t know. The only reason we brought this out is that the program at this point is not going to be completed December 31st.

We will see some activity in the third quarter, depending on the weather conditions and depending on whether it’s in the international one like Scott pointed out Mexico or Canada and versus the US. And until we really have clarification where that’s going to be, we’ve just been put on alert to say there’s going to be more coming.

We want to be sure that you’re going to be in a position to service those needs, which we obviously will be. And we just wanted to share that with you at this point.

Glenn Wortman

Okay. And then, and this might have been in reference to Burger King, I understand if you can’t maybe mention the specific name. But on the last conference call, David mentioned that you guys were getting closer to a large graphics program, perhaps someone sized to Dairy Queen few years ago, is there a separate update on that particular point?

Bob Ready

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

Glenn Wortman

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

Bob Ready

David you would?

David McCauley

Yes, sure. The clock ticking there when the order stopped coming into – the pie got smaller as Bob said. And some of them didn’t have the financial strength and weren’t positioned as we were and therefore in the menu board side of the business we lost two competitors. But there are still a lot of them out there competing for this business.

But the larger the program, the better are our opportunities are as you know because when it gets to that scale, that’s when we’re able to beat it in implementation, pricing, inventory, storage. So we like the position we’re in. We just – we need that capital to release, we are ‘70s companies and have those programs going forward.

The nice thing that we know about the industry though, the menu boards, menu boards are usually 10 years and then changed out. But it’s hard to see anyone going 20 years. There are lot of programs that are 10 or more years older and it has to change. They just can’t keep fixing and repairing those things daily. So when you like the position we’re in, we like where the market is, we just want that capital to release.

Bob Ready

And Glenn what we have to do is take our graphics business and adjust it to the size of what the real economy is. And obviously with our financial strength as a corporation as we have made some major investments in our internal manufacturing process, so that when this economy does turnaround and get back to a more – gets back to a more normal level, we’ll have the ability to service those markets.

We still have the ability to install. We have the greatest ability to print at the highest level in resolution of any type of graphics needs. We have this tremendous support mechanism in place as it relates to the history of the company, so we pull together.

And we’ve kept them financially strong enough, so that they’re not going out of business, our competitors are going out of business, and with a strong marketing direction that David and his team has now implemented is to get that message out to those respective customers and existing customers that we are hear and we’ve got the ability to do whatever you need is to do, even if it’s a smaller, smaller pieces, and that’s what these graphics guys have had to do.

They had to adjust their whole strategy by having smaller pieces of the pie, and hopefully, getting a larger number of those smaller pieces in order to keep the strength and the financial stability of the company in place, until when another Dairy Queen comes out with another 5,000 stores, we’re right there and there isn’t anybody else out there that can do it better than us.

Glenn Wortman

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

Bob Ready

Yes, I think it’s very simple to say that based on what we’ve created for retrofit business, based on energy savings, that market in the Middle East, the market in Europe is no different than the market in the domestic as it relates to the market. Now that we have the product line certified and we’re building the sales force.

And, more importantly, not only are we building the efforts on the sales side of it, but the service of it, having the right people in place, so that one you sell it, you have the ability to service it. All of that is part of the strategic building plan. And as I pointed that out that’s where we were 24 months ago on the domestic market. And now that we have certification, we can start moving forward in the same similarity in the European and in Middle East. Isn’t that Jonathan pretty much where we are?

Jonathan Labbee

Yes, absolutely.

Glenn Wortman

Okay, thank you very much.

Bob Ready

Thanks Glenn.

Operator

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

Dick Ryan

Thank you. Let’s say Bob you have a very large install base of the older Scottsdale lights, can you quantify if it’s maybe – it’s not even starting to contribute yet. But the Gen 3 retrofit opportunity there is that starting to kick in yet and can you quantify as yet?

Bob Ready

Let Scott handle that one, Dick.

Scott Ready

Unequivocally yes. It has started to contribute. We’re not prepared to quantify it for you. But the product designs and the development of the technology has been geared directly towards replacing those Scottsdales from the mechanical features and the ease of installation all the way through the performance characteristics of the product.

So that the client has enjoyed the benefits, the marketing benefits, the maintenance benefits of the Scottsdale for the past 15 years can enjoy an improved level of those same benefits through the Crossover Generation 3. It’s been well received and understood by the market that that product has geared – has been geared directly to do that replacement. And certainly a good portion of where that market opportunity exist and where it’s been beginning to contribute especially in this last quarter comes directly from that market space.

Dick Ryan

Has there been a demonstrated or live that you have able to show your – these customers?

Scott Ready

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

Bob Ready

A lot has to do with the energy costs. And the most important thing to remember Dick is that the Scottsdale product was the most successful petroleum canopy ever produced. And we took a little bit longer in bringing the Generation 3 into play.

Obviously it opened up the door for competitors to come in and everybody is looking at this market. I mean this is something that we understand. But when we did it, I wanted and this is a direction that I couldn’t play, this had to be something so much better than anything that anybody else could produce and truly a replacement of the Scottsdale.

And we – if you look at our literature we relate the new Generation 3 Crossover canopy fixture for example to the Scottsdale replacement. I mean we were right into our marketing theme and say we built the Scottsdale, we brought it to you, now we’re bringing you a new Crossover of replacement which gives you all these other benefits.

And I’m telling you right now that what you’re beginning to see and what happened in this first quarter is and I believe will continue on based on the new products that are coming behind these that have the Generation 3 technology into it and expanding into the parking garage markets in the side lighting, in the street lighting, into the high-volume retrofit markets, it’s all part of the strategy that’s going to place for 24 months.

And even though we understand the anxiety of the market, it was all part of the strategy to say we’re going to do it right and we’re going to do it better than anybody else can do it, and we’re going to setup a production process that can service the market, and that’s where we are today, we’re going to continually expand on that.

Dick Ryan

Great, great. And a question for Dave, if I may. Dave on the outdoor menu boards, can you kind of walkthrough the thought process of the customers. It looks like you’re talking about some of the smaller QSRs that probably have a little more flexibility and less beaurocracy to make a decision to move. But do they need – I mean when they look at their outdoor menu boards, is that something they look at after they do some upgrading to the insight or can these outdoor menu boards be sold kind of independent of having to do something inside the restaurant?

Bob Ready

Hey Dick, the second statement they can be sold independently. What’s usually happening out there is one of two things when it becomes to the outdoor board. One is old and tired. Its 13 years old, it’s weathered, it needs repainted. The slots are bent, curved. It just looks shabby. But rather than just take their chain and order all new menu boards for them of like product usually their menu has changed tremendously over those 13 years. There is not enough space or the space isn’t divided right. And they can retrofit that outdoor board.

So they’re into generation two board. And that’s what’s happening now. They either they are too old or they are not – they can’t be retrofitted so they ordered a new ones. And we see this in a lot of cases. And it somewhat holds true for the inside. The inside board is a lot more protected from the elements. It might have a longer life unless again it’s a space problem. How they divide their menu boards up so.

Dick Ryan

What sort of warranty – David isn’t 60% of that fast food store today still goes through.

David McCauley

65% is the number of the revenue stream comes from the orders placed outdoors versus the counter.

Dick Ryan

I know I mean I get much traction and tell the healthcare bill goes through but the calorie information are any of these that you’ve signed up or that you’re talking to. Are they starting to put calorie on the outdoor boards and is that creating any issues for you?

Bob Ready

We have a few that have a bit on the outdoor boards, the caloric and nutritional information and when I say the indoor boards, we have a lot more of those. The indoor boards though, they have gone to the digital aspect where they can change on the fly versus just a slot or pattern, that Dave part them all the time. So this caloric information that probably you won’t really see required out there for two years by the time it gets settled. Digital, active digital becomes the real player there. And that maybe the trigger point from born from conventional backlit boards to LCD screenings. But we have markets out there that already have incorporated them.

Dick Ryan

Okay, good. Thank you.

Bob Ready

Thanks Dick.

Operator

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

Jim Ricchiuti

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

Bob Ready

Great question. I’d say Jim rather excuse me, when these guys finally make a decision, meanwhile yesterday. That’s a two part answer. There are customers out there that are getting to a point where they are looking at this and saying we need to get our ducks in a row and it could be three or four months before they start up. So others who are out there say we made a decision, now we want them yesterday. It has been a tremendous struggle to keep up with the demand based on the shortage of electronic parts.

And it’s really, really challenging our manufacturing and operation folks in order to stay on top of this and meet the demands of our customer. One of the things that really that I’ve got to give a tremendous amount of a plot to is the manufacturing part of LSI in its ability to handle the demand and the volume that we’ve had that had been put on us in the last six months. And Scott you might want to allude more because that’s part of your life now.

Scott Ready

Well absolutely, I mean I think as we’ve talked in the past it’s always been our goal to be able to begin to ramp down one program and ramp up another program to fit dovetail beautifully into its place. And I’m not saying that we’re able to achieve that at this point but we have spent a tremendous amount of time gearing our operational side of the business, support high volume production. We’ve increased our investment in the level of actual production space that we’re using to support solid state lighting. And with the program opportunities that we have looking forward, I think we’re going to be better suited than anybody else out there to service that business at a high volume, fashion in a very, very high quality and reliable way.

I think Bob is absolutely right. It is difficult, if not possible at this possible to tell you exactly when it’s going to start. And that will remain difficult up until the day we start receiving purchase orders. But we have some very high hopes that we’ll have some great dovetail opportunity between the two programs.

Bob Ready

What’s really kind of unique Jim about where we are today. If you would ask me this question 18 months ago, where LSI would be working with overtime, working Saturdays in order to keep up with demand, we would say you’re crazy. But where we are right now, it’s a – really understand the history of the company. We were never a company to produce product that went into due into a high level of distribution like our competitors are stocking, flow as they call it.

We were always a company that were hounding that customer and getting them to make a decision and then shipping it quicker than anybody else could. That’s where this economy is right now. It’s not through stock and flow as we look at traditional, Sean support me on this or not but we now find ourselves where we were 25 years ago based on the demand and the supply and the ability to do so and we’re built to do that. We can do stock and flow but the heartbeat of this company is what it is and that is the ability to service the customer base that we’ve created. And it’s really kind of an interesting page in the history of LSI’s book as we see where we are now in a downed economy with a lot of pressure on pricing, with tremendous challenges on getting materials but we have found a way through our relationships with good vendors, certainly are understanding with our agents working closer with them to give us as much time lead time and being able to meet their customers demand.

So all different culture out there. And that’s what we’ve been working on probably for the last eight or nine months to get our company positioned and use this new LED technology as part of that spirit.

Jim Ricchiuti

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

Bob Ready

Sean, you can handle that one.

Scott Ready

Sure, there is certainly a great deal of inflows. We haven’t talked a lot about the retail marketplace right now. And let me mention that, in the international aspect and I’ll pitch it over to Sean to talk about the commercial space. From an international – from an retail perspective, we maintain the same contracts that you’re familiar with some of the larger retailers. We do see a little more willingness to spend as David likes to refer to it, opening up their spend and their budgets as we move forward into next calendar year or the second half of our fiscal year from those existing clients. And when we – and of course that is so dependent upon the economy and the retail experience that they – that we all will see as we go through the November, December timeframe that could accelerate, it could quit at any time. We’re well aware of that.

But right now the indications are stronger than they’ve been in quite some time. Interesting to note in some of the international opportunities that we’re actually expanding some of our fluorescence sales there as well. We hooked into a good size program. It’s still early, so again we’re not had liberty to give a lot of detail but we have some great opportunity outside the country supplying a retailer, a well-known retailer with a high volume of fluorescent products that we’ll begin to ship this quarter and with all the success we expect continue on through the next year. Sean, why don’t you go ahead and address really the traditional I mean we talked a little bit about stock and flow already but we are gaining some market share on traditional fluorescent products in the commercial space.

Sean Tony

Thanks Scott. Bob, Scott I think you’re absolutely right. I think if the overall electrical market was $11 billion several years back and is hovering around 6 or 7. The hardest piece of that or the biggest piece of that its been it has been that stock and flow loaded onto electrical distributor and wholesaler shelves for discretionary or pickup business. I see that still in my travels is begin down substantially.

What, I think the business has done a nice job of service and communication some of the other tenants of LSI. We continue to communicate with our agent partners in all markets getting better understanding of what’s out there or what they can be created doing a better job of forecasting and one of the things I’m very proud about to be part of the team is we’ve done a tremendous through electronic shortages, ballast in particular to continue to leverage our strengths in manufacturing and operations in general to service demand specifically in our fluorescent products.

So of the nice diverse base of sales we got in the day-to-day C&I business, schools, prisons, hospitals etcetera. We’re in a great position through communication, through forecast into play off into that area. Scott alluded to it, what we’ve seen with our core retail partners, national accounts. We’ve seen a shift in their business, activity is up for sure. And then where they’ve split the business between us and potentially another supplier more of a migration over to LSI because of that ability to service high quality product in the shortest amount of lead time possible.

Jim Ricchiuti

Okay, thank you.

Operator

Okay (Operator Instructions).

Bob Ready

I think that probably pretty well wraps up the Q&A part of it. And just a couple of seconds on the closing remarks. This was a great quarter for us because not only improve in sales in the bottom line but from a morale standpoint to see the company start to turn around all of our employees that are beginning to see it, feel it, taste it. And that’s really important as we start down this new road based on everything that we’ve discussed today.

It was one quarter. We’ve got a lot of work to do in the oncoming quarters. We have a lot of challenges out there as we all know. It’s not going to be easy and I think we all feel, that certainly the folks who are on this line probably have a better understanding than I do, that were good two years out before we’d see any kind of a return. The bottom line of where LSI is today is that we had to slow that train down coming out of 2007 into 2008 in a different direction base in the economy.

We did it without cutting the part of the company out. We did it by keeping our financial, our company financially strong. We’ve made major investments and acquisitions and certainly in the new product development. We’ve moved into a worldwide market. There is a lot of things going on right now. And there is still a lot of unknown out there. And it’s important to know as shareholders that this company is well in control with its own destiny and there may be some more ups and downs coming that we don’t – we can’t forecast but I think where we are now – we’ve been through the worst hopefully from an economic standpoint and our company has weathered that storm as well as anybody out there.

And we’re now on the point of recovery. And we will continue to do what we have been doing and doing it well and getting better out. We have a stronger team of people. We have a stronger commitment internally as well as externally. We’ve got a larger customer base to look at and I’m just very optimistic. But it’s a very guarded optimism. And we will continue to share with you and feed you more and more information as it becomes proper and available to us. And doing the right thing so that hopefully some point in the future, we can give you a little bit better guidance that’s what we’re trying to do so that it makes your job just a little bit easier in following the company.

So with that I want to thank you for your time. We’ve got a pretty busy day and a half. So if anybody wants to call, I would suggest wait until Monday, because of the folks that are in – these folks that we’ve got (inaudible) folks as I said coming in for a specific reason and we want to spend some time with them. So with that, thank you for your time and I appreciate it. And we’ll be in touch. Thanks everybody.

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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