Energy Focus Inc (EFOI) 2009 Q3 法說會逐字稿

Good day, and welcome to the Energy Focus quarterly earnings release conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Joe Kaveski, CEO. Please go ahead.

Thank you, Stephanie. Thanks, everyone. Thank you to our listeners for joining Energy Focus's third quarter earnings conference call. I would like to start today by reviewing our company's Safe Harbor statement. Please note that today's discussion may contain some statements that may be considered forward-looking in nature. These forward-looking statements may include comments relating to 2009 and beyond financial projections or other comments relating to the company's strategic plans, objectives, expectations or intentions. These matters do involve risks and uncertainties and actual results may differ materially from those projected or implied in the forward-looking statements. Factors that could cause actual results to materially differ from the forward-looking statements in this presentation are set forth in our most recent annual report on Form 10-K.

So, with the housekeeping over with, I would like to begin today and make a few brief comments concerning our third quarter financial results then turn the call over to Nick Berchtold for a deep dive on the numbers. Nick will then turn the call back over to me for some concluding remarks. As you probably read in our press release today, our performance remains depressed as we have been working through the difficulties of selling into the residential pool market and the commercial new construction industry. As I have previously stated, our sales remain between 40% to 50% off last year and I don't see this changing until we complete our transformation into serving the existing public sector building market. This is further reinforced by the American Institute of Architect's recent architect's billing survey that indicates the commercial construction industry is still continuing to shrink.

Furthermore, the CEO of Pool Corporation, one of the largest pool companies in the US, recently commented that he really doesn't see a recovery in the pool and irrigation business beginning until 2011. Clearly, the pool and commercial construction industries are difficult markets for the foreseeable future. This is exactly why we have accelerated our plan to move out of these industries and into the existing public building market where we can provide comprehensive lighting retrofit solutions that help them leverage stimulus money to modernize their facilities while reducing energy consumption. So, before we talk about our progress on our plan, I would like to turn the call over to Nick Berchtold, our Chief Financial Officer to review our third quarter results. Nick.

Thanks, Joe. I would like to thank you again, our listeners, for joining our conference call today. I will now provide you with an overview of the results obtained during the third quarter of 2009. Specifically, I'll be reviewing the divestiture of and accounting treatment for our German subsidiary LBM, GMBH, third quarter revenues and gross profits, third quarter operating expenses, net income and earnings per share and then selected working capital items and finally the status of our bank relationship. So, first, let me discuss the divestiture in the related accounting treatment of the German -- of the company's German subsidiary.

As previously announced, the company has been evaluating each of its business units in correlation to the company's strategic objective of becoming a leading provider of turn-key comprehensive energy efficient lighting systems. During the third quarter 2009, the company entered into a letter of intent to sell its German subsidiary. As a result of signing the letter of intent, the company has classified in its 10-Q the results of its German subsidiary as a discontinued operation. All associated results of operations, financial position and cash flows have been separately recorded on the 10-Q as appropriate. The company does expect to complete the transaction for this business unit in the fourth quarter of 2009 subject to regulatory approvals and customary closing conditions. And, further, the company continues to explore and analyze the potential divestiture of other business units within its portfolio and will provide additional information as appropriate.

So, next, let me discuss please the third quarter revenues. The third quarter financial results continue to reflect the challenging environment which confronts both our company as well as the entire global economy and continues to reinforce our absolute need to dramatically change the strategic focus of our business. Specifically, third quarter revenues were $3.536 million including discontinued operations which represented a 44.3% decline from third quarter 2008 revenues of $6.357 million. Third quarter revenues from continuing operations were $3.023 million which represented a 46.9% decline from third quarter 2008 revenues of $5.691 million. It is important to note that approximately $691,000 of this year-over-year decline was the direct result of the devaluation of the British pound relative to the US dollar which resulted in lower US dollar reported revenues coming from our UK operations.

To put it in perspective, the 2008 average reported exchange rate on a year-to-date basis was 1.94 US dollars per British pound versus the 2009 average reported exchange rate on the year-to-date basis is 1.54 US dollars per pound. Additionally, although third quarter 2009 revenues from our government business unit were nominal, the company did invoice and expects to collect approximately $800,000 in government revenues in the fourth quarter of 2009. So next let me discuss gross profit.

The third quarter gross profit excluding discontinued operations was $323,000 or 10.6% of revenues versus $1.779 million or 32.1% of revenues for the comparable quarter 2008. Third quarter 2009 gross profit does include a noncash inventory charge of $180,000 resulting from the revaluation of selected inventory on hand in the United States. Excluding this noncash charge of third quarter 2009 gross profit increased to 16.6%. Again, approximately $290,000 of this year-over-year decline in gross profitability was the direct result of the devaluation of the great British pound relative to the US dollar which resulted in lower US dollar reported gross profitability from our UK operation. Additionally, during the quarter the company effectively completed its relocation of all manufacturing operations to its Mexico facility for which it recorded a $125,000 restructuring reserve. Next, I would like to discuss operating expenses with you.

Third quarter 2009 operating expenses, excluding discontinued operations and restructuring charges, decreased $428,000 or 13.3% from the third quarter 2008 levels. It is important to note that included in the third quarter 2009 operating expense results are $289,000 of one-time acquisition and equity finance-related professional services and legal fees. Third quarter 2009 operating expenses declined 22.3% excluding the impact of these charges and are the result of significant reductions in head count and nonproject specific overhead expenses. Putting it in a different perspective, on a year-to-date 2009 basis, operating expenses, excluding discontinued operations and restructuring charges, has decreased $2.366 million or 22.7% for the nine months ended September 30, 2009. In this regard, the company will continue to aggressively manage all operating expenses as it executes its transition into a turnkey lighting systems provider.

And now I would like to comment briefly on net income and earnings per share. The net loss for the three months ended September 30, 2009, was $2.618 million which equates to a $0.17 loss per share. This is compared to a third quarter 2008 loss of $1.584 million which equates to an $0.11 per share loss for the third quarter 2008. I would also like to note that on October 30, 2009, the company did complete a rights offering whereby it successfully sold 4,998,880 shares of its common stock. Total shares outstanding after the issuance of those shares now stands at 20,077,859 shares which would make the pro forma net loss for the third quarter equal to $0.13 per share.

Now, I would like to spend a few minutes reviewing selected balance sheet items. I'm pleased to report that the company continues to make progress from its intense focus on cash and working capital management. From an accounts receivable standpoint, the company continued to improve accounts receivable velocity versus the third quarter 2008 and the second quarter 2009 metrics. Accounts receivable velocity improved 32.4% to 35.8 days. Sales outstanding at the end of the third quarter 2009 versus 53 days at the end of the third quarter 2008. Similarly, accounts receivable velocity improved 22% versus the second quarter 2009 days sales outstanding and as discussed previously, the intense focus on cash management continues to permeate our entire organization and these accounts receivable results reinforces our commitment to the preservation of working capital.

From an inventory perspective, inventory on hand net of reserves from continuing operations decreased $864,000 from its December 31, 2008, level. Excluding the previously-mentioned $180,000 US operations inventory impairment charge recorded at September 30, 2009, the reduction in inventory was still an impressive $864,000 or 12.3%. Unfortunately, improvements in inventory velocity did not continue at the levels expected as sales volumes continue to be significantly depressed from 2008 levels in the company's development of an introduction of new products into the market continues.

In terms of our banking relationship, on November 9, 2009, the company received an informal notification that Silicon Valley Bank, its current lender, intends to extend the company's current line of credit facility through the end of 2009. This extension will facilitate the company's ability to continually -- continue to pursue other means of financing. Although we have not received the final documents for signature, we anticipate the execution of these documents within the next two weeks.

Related to external debt, during the third quarter 2009 the company reduced its third party debt by an additional $530,000 from its June 30, 2009, levels and $917,000 from its December 31, 2008, levels. Total outstanding third party debt as of September 30, 2009, was $1.365 million and represents a pay down of approximately $1.572 million from September 30, 2008, levels.

Related to cash and cash equivalents, at the end of the third quarter 2009, cash and cash equivalents on hand were $3.1 million excluding cash from discontinued operations. Including cash from discontinued operations, our cash and cash equivalents on hand were $3.3 million. Cash usage for the third quarter 2009 from continuing operations was $2.3 million which included approximately $1 million of restructuring, acquisition, debt -- excuse me, equity financing and bank debt reduction-related payments. Further, as stated earlier, the company's cash position did increase by $3.749 million in November 2009 as a result of the recently-completed rights offering.

So, in closing, although third quarter revenues continued to be a significant disappointment, the company continued to show improvements in cost structure and working capital velocity. Concurrently, the company implemented multiple strategic and tactical initiatives designed to support and fund its corporate strategy. We will continue to position the company for the global economic recovery and will continue to restructure the strategic footprints of energy focused assurance sustainability into 2010 and beyond. And now, I would like to turn the conference call back over to Joe Kaveski. Thank you.

Let's put the past behind us and look to the present and our exciting future. I would like to now update you on our progress on our five point plan for profitable growth by transforming our company into an integrated lighting energy systems and solutions provider serving the existing building market. First, we continue to make progress on reducing our fixed costs. As Nick previously discussed, we are favorable in the third quarter by 13% and almost 23% year-to-date excluding discontinued operations and restructuring charges. I commit to you that we're not done and we will continue to reduce our overhead as we go forward.

Second, we have made good progress toward potentially divesting our pools and our decorative lighting business units. As Nick stated, we have reported our LBM business unit as a discontinued operation and anticipate closing on the sale of this business in the late November, early December time frame. Also, we have received a number of offers that are under consideration for our pool business. We're optimistic that this transaction can be completed by the end of the year.

Third, we have made major strides in refocusing our R&D efforts toward endeavors that create commercial products for existing buildings. During our recent rights offering Road Show, we demonstrate a working LED plug-and-play replacement for a four foot linear fluorescent larch that included embedded controls. We also received two recent contracts totaling $3.2 million to support the commercialization of DARPA's very high efficiency solar cell technology and we received our first major order for LED outdoor lighting, primarily funded by stimulus money utilizing our GSA federal supply schedule listing.

Fourth, the company raised approximately $3.75 million through a broad participation in our rights offering. I would like to take this opportunity to thank all of our investors who participated in this offering. The money raised in this offering will enable the acquisition of a sales and delivery channel into the existing public building market which is exploding right now.

Fifth and finally, speaking of acquisition, we did announce a letter of intent to acquire the Stones River Companies which is a premiere lighting energy retrofit and services company. As I communicated during our rights offering, SRC has a fantastic relationship with the major ESCOs and a very, very robust sales proposal pipeline, excuse me, which is a significant portion which will be generating revenue for the company in the first quarter of 2010. We're now working to complete our detailed diligence and finalizing the definitive agreement. We anticipate closing this transaction within the next 30 days.

So, before I open up the lines for questions, I would like to summarize my comments by saying, again, that in light of our current sales channels, this is a very difficult business environment for energy focus and our results clearly demonstrate this. However, it is clear that our five-point plan to transform the company into an integrative lighting energy services provider is the right path at the right time to ensure sustainable and profitable growth. And, finally, I remain excited about the future of Energy Focus and feel that we're well on track to complete our transformation by the end of 2009 and be able to show positive results early in 2010. So, at this time, I'd like to open up the telephone lines for discussion. Operator.

Thank you. (Operator Instructions) We'll take the first question from Robert Smith with Center for Performance Investing.

Hi. Good afternoon.

Hi, Robert.

Can you tell me something about the Stones River numbers?

Stones River, we had shared that they are one of the major lighting retrofit companies that support the energy services companies in their performance contracting with the public sector. We have not given specific numbers relative to their size. However, I would share with you that in terms of their pipeline, it is a major pipeline with the majority of the ESCOs that is literally receiving contracts as we speak.

Are they profitable?

They are profitable. Absolutely.

The way I read the economy, the banks are not loosening on lending. So you guys are really up against it as far as continuing extensions. My own fears about this and my question is can you somehow accelerate the expense cuts? Is it a possibility of placing executive salaries on hold or putting them in abeyance until the end of the year?

Okay. Robert, you made a couple of statements there that I would like to comment to and then answer your question. The first one deals with lending. The great news is that the public sector market primarily uses tax-exempt municipal leases to fund their contracts. Even in this depressed economic environment, that has not been a problem for public sector. They are actually able to get these tax-exempt municipal bonds, if you will, or these tax-exempt leases to fund energy efficient projects. The second component I would add to that is we are just now beginning to see stimulus money trickle into the public sector hands and so that is primarily why all of the ESCOs who SRC serves at the current moment are beginning to really accelerate their award of contracts because they've received them from the public sector. So, that's number one.

Number two is you asked about our overhead and what I would share with you is that we are doing everything that we can to accelerate the rationalization of our business and into the transformation of where we're headed and specifically management has already taken salary reductions and we see that continuing into 2010.

And your relationship with SVB, what happens after the end of the year?

Robert, I'm going to take a stab at that. If Nick wants to add, he'll offer a little more. But I got to tell you, I'm encouraged that SVB continues to, in essence, work with us and extend that loan. In parallel, we're also pursuing other potential lines of -- a replacement facility. But the mere fact that they are willing to continually extend is a very encouraging sign to me. So, Nick, maybe you want to add something?

Let me add to that. Robert, just to mirror what Joe said, Silicon Valley Bank has worked with us and, again, most recently, by offering or working with us to extend the end of the year, that's great, good news for us. Also, I want to make it clear, while I'm not going to give names, we have received two other replacement line of credit offers that we as a company chose not to pursue for a couple of reasons. We are exploring additional and different types of financing structures other than traditional commercial bank lending and we feel comfortable that we have some investors who are interested in pursuing a replacement line or replacement debt instrument. And we're working aggressively on those and we'll have more to report.

How long do you think your recent financing will carry it?

In terms of Silicon Valley Bank?

No, with the rights offering and the money you've got. How long will it carry you into 2010?

Well, Robert, I think it is what we need to get us into 2010 and to do exactly what I communicated in the rights offering. That was actually generate cash in 2010 and achieve significantly higher sales. We are significantly reducing our burn. We are talking about that we will be selling our businesses and we anticipate having those completed by the first of the year. And so for that matter, we gave year end guidance and said we would have a large portion of revenue from the acquisition begin to be harvested in the first quarter of 2010. So, when you put all of that together, I believe that it is sufficient.

So, you said that you expected profitability early in 2010? What do you mean by early?

Well, I did not say I would expect profitability. I haven't given guidance there, Robert. What I did say --

I thought that was one of your statements.

Well then, I would like to clarify that. What I did say was that as it relates to the acquisition of SRC, there is a significant amount of work within their pipeline that will begin to revenue out early in 2010. And that's good cash flow. Good cash generating activity.

Okay. I'll step back in the queue. Thank you.

Thank you, Robert.

(Operator Instructions) We'll take a question from Seth (inaudible) with [Wilson Forbes].

Good afternoon.

Good afternoon.

I guess I want -- I still want more information about Stones River Companies and maybe there is a different way to ask about it.

Okay.

Stones River Companies appears to be in many different electrical-related businesses. They're in electrical construction company, a lighting and sign service company, they do the energy services stuff. Is this all now going to be part of energy focus or is this parts of it or is it just the part of it that is the energy services part? And so maybe you could just describe in a qualitative sense more exactly what parts of this company are going to become part of Energy Focus and just exactly what they're going to be doing.

Thank you, Seth. I appreciate that.

I don't know if I asked that very well, but I think you get the gist.

I do. Thanks for asking that question and giving me the opportunity to clarify it. Yes, Stones River Companies has many sister companies including an electrical contracting company. The entity that we are requiring is actually their lighting energy solutions and retrofit business. What these folks do is they have very qualified auditors that go out and audit existing buildings. They will come back and they will physically then cost what it takes for that building owner to operate and maintain those lighting systems from an energy perspective and an operating and maintenance perspective. Then they will design a new, improved lighting system for the building. They'll calculate the energy savings and the cost savings involved in the new lighting systems. And then what they will do is physically, once they receive a contract, they will procure the materials for installation for that new, improved lighting design and then they will provide the project management of electrical subcontractors to physically install those retrofits. So, they do not have electricians on staff. So, they act very much like a general contractor might in a new construction industry, but they are keenly focused on energy lighting energy efficient improvements in the existing building market place.

Okay. Let me ask a follow-up question then. You spoke of them as a major subcontractor to larger ESCOs. So, is this half their business, 100% of their business? In other words, do they go out and do just lighting refits for some customers? And then with other customers they do lighting refits but it is part of a total refit, part of a bigger energy services contract, so are they the prime contract. Are they a subcontractor or is there a percentage breakdown or how does all of that work?

Sure. Seth, the best way I can explain this is that the public sector entity are encouraged to utilize specific legislation called Energy Savings Performance Contracts. It is within at least 39 of the states. That allows the public sector entities to procure building improvements that are paid for out of the energy and operating savings that the new improvements create. These public sector clients utilize this legislation by contracting through request for proposals to a select group of what are called energy services companies. These are large entities like Johnson Controls, Honeywell, Siemens. They will bundle lighting with HVAC improvements and new roofs and, in essence, they sell the bundle to the ultimate entity, the governmental entity. The great news is that lighting represents about 20% of their bundle. So, it is a huge opportunity with the ESCOs and, by the way, that market today stands at about $5 billion of work being done by the ESCOs in the US and they anticipate that to go up to a minimum of $20 billion by 2020.

But anyhow, so, when the ESCOs then subcontract the lighting portion of the agreement to lighting retrofit companies like SRC who will then support them in the design and the installation of that improved lighting program, the majority, including SRC, do not physically install again the improvements themselves. They will subcontract that out. So, in the case of where SRC stands in -- with its sister company, one of its sister companies is an electrical contractor that was really focused on new construction market place as well as installing, for instance, energy management systems into existing buildings.

Another company that is within the fold there is really a services business. They do lighting maintenance for a lot of the big box retailers. And then there's SRC which provides that really that energy solutions focus. That may leverage those other two companies but it really is focused on the energy solution and the design in the materials and the project management aspect and the contracting aspect which then they subcontract out to electrical contractors like SRE which is the sister company of SRC.

Right, okay. So, when we hear about a backlog or a bidding activity, primarily what that is is the larger integrated energy services companies bidding out to Stones River and perhaps others to pick up the lighting part of a bigger contract, is that really where the business is coming from?

Pretty close, Seth, except with maybe one qualifier on it and that one qualifier is that the large ESCOs, they more times than not do not bid out their electrical portions. What they will do is they will team with a lighting ESCO, their favorite lighting ESCO who they've worked with for the last 10, 20 years that they can count on on doing a great job in the audit and a great job in the installation. So, the majority of the work that is let by the lighting retrofit companies they have been asked by the ESCOs to go develop a project, go put together the lighting piece, the proposal and when the ESCO is awarded the job, then SRC, for instance, is awarded the job.

Got it. Thank you very much.

Thank you, Seth.

It appears there are no further questions at this time. Mr. Kaveski, I would like to turn the conference back over to you for any additional or closing remarks.

Okay. Well, then, I guess at this time I would like to conclude the call today by once again thanking all of our shareholders and employees who continue to contribute beyond the call of duty and helping realize the true potential of Energy Focus. I thank you again for your continuing support and look forward to our next call when we'll review our year end financial results and our progress in transforming our company into an integrated lighting energy services provider for the existing building market. Thank you.

This concludes today's conference. Thank you for your participation.