Energy Focus Inc (EFOI) 2011 Q2 法說會逐字稿

Good day, and welcome to the Energy Focus second quarter 2011 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference to Mr. Joe Kaveski, Energy Focus CEO. Please go ahead.

Thank you, operator. I'd like to welcome everyone to Energy Focus' 2011 second quarter earnings conference call. Joining me on the call today is Mark Plush, Energy Focus' new Chief Financial Officer, and John Davenport, Energy Focus' President.

As most of you are aware, we've had some very exciting news with our recent $23 million US Navy contract award which you will hear much more about later in this call. But before we talk our Navy success, we would like to offer some brief comments on our second-quarter financial results and performance of our business units. Following our prepared remarks, we'll open the lines up for questions for the remainder of this call.

Before we get started, I'm going to read a disclaimer about forward-looking statements. This conference may contain, in addition to historical information, forward-looking statements within the meanings of the federal securities laws regarding Energy Focus. Forward-looking statements include statements about plans, objectives, goals, strategies, future events, and performance and underlying assumptions and other statements that may differ than from historical facts. These forward-looking statements are based on current management expectations and are subject to risks and uncertainties that may result in expectations not being realized and may cause actual outcomes to differ materially from expectations reflected in these forward-looking statements. Potential risks and uncertainties include change in demand for the Company's products, impact of competition and government regulations, and other risks contained in statements filed from time to time with the SEC. All such forward-looking statements, whether written or oral made, on behalf of the Company are expressly qualified by these cautionary statements. And such forward-looking statements are subject to risks and uncertainties, and we caution you not to place undue reliance on these.

Once again, thank you for joining Energy Focus' is second quarter 2011 earnings call. To begin, our overall second-quarter sales were $8.2 million, which exceeded our $8 million forecast and was significantly better than our $5.4 million first-quarter result. Overall, gross profit margins improved 1.4 percentage points compared to our second quarter of last year, while overhead expenses had been reduced 20% for the first 6 months on a year-over-year basis.

From a products perspective, our sales increased about 21% as compared to our first-quarter sales of last year and over 8% on a 6-month, year-over-year basis with our government product sales producing the largest gains. Our legacy pool sales and decorative lighting unit sales were up roughly 5% on a 6-month, year-over-year basis. And some encouraging news is that our overall product margins increased 7.5 percentage points to 22.8% on a 6-month, year-over-year basis, as a result of the consolidation of all of our manufacturing into a single location.

From an SRC solution perspective, we are experiencing delays in contract awards and will likely see lower solution sales in the third quarter. As you may recall, solutions contracts are typically large and lumpy and can have a meaningful impact on forecasted revenues. However, we do expect our solutions sales to significantly increase in our fourth quarter and into next year. Late last year, we hired additional sales personnel and have focused on new customer development. Our development activity has considerably increased, especially in our second quarter, and the quality and quantity of projects in the sales pipeline has notably improved. Barring no further delays in contract timing, our efforts should lead to a recovery of the solutions business in the fourth quarter and provide good momentum moving the Company into the next year.

From a government R&D perspective, 2011 is proving to be a banner year. In the second quarter, Energy Focus was awarded a one million-dollar grant from the state of Ohio Third Frontier program to develop CRICKET, Our wireless light level sensing technology. What makes CRICKET so special is its ultra-low cost and its unique way of communicating with Intellitube, which is Energy Focus' LED plug-and-play replacement for a linear fluorescent lamp. With the addition of CRICKET, it will be possible for Intellitube to achieve a higher level of savings not currently available through any legacy or LED lighting systems. For example, a T8 linear fluorescent tube consumes 32 watts. Our base Intellitube will consume less than 14 watts. With the addition of CRICKET light level sensing, it will be possible for Intellitube to reduce its average power consumption by another 30% to 40%, or to about 8 watts. This represents a 75% reduction in energy consumption when compared to a typical 32-watt fluorescent lamp.

And last week we were the delighted to receive a $23-million supply contract to be converting the Navy sweep to LED lights. This seed contract covers about 7% of a Navy fleet. We estimate the US Navy opportunity to be in excess of $300 million, and we expect additional contracts for the vast majority of this opportunity over the next 5 years.

We believe this for a variety of reasons. First, the Navy has made a real commitment to reducing its energy consumption as part of its green initiative. Recently, Secretary of Navy, Raymond Mabus, reported that the Defense Logistics Agency raised the cost of a barrel of oil to the Navy by $39 per barrel, or a $562 million unplanned increase for just this year alone. He stated that this unplanned increase is equivalent to the cost of the littoral combat ship, or LCS, which the newest Navy ship. For the Navy, energy is a vulnerability. Making energy efficiency is a military imperative.

Now, the Navy's commitment to energy-efficient lighting started over 8 years ago when Energy Focus received its first contract to develop LED prototypes for Navy vessels. Today, LED lighting is a proven technology within the US Navy and ready for full deployment. I'm proud to share with you that Energy Focus LED lights have been installed on Navy vessels since 2007 and have functioned without a single failure.

Second, the Navy's value proposition for converting the fleet to LED is very compelling. Because of the high cost of electricity and shortened life of legacy, incandescent, and fluorescent lamps, the average simple payback of our LED lighting is around 3 years.

Third, there are tremendous competitive barriers to entry. LED lights for Navy vessels must meet stringent optical and electrical requirements that far exceed those found in the commercial world. For example, Energy Focus has developed its own proprietary low-power driver to make the Mil-Spec because no commercially available off-the-shelf driver exists.

And lastly, Energy Focus proposed a solution that works with the Navy's current investment. Rather than propose a costly, permanently mounted LED fixture replacement, Energy Focus proposed they use Intellitube as a plug-and-play LED replacement lamp that will work in any of the Navy's new or existing linear fluorescent fixtures and use about half the energy of the existent fluorescent lamps. This is key to helping the Navy do more with less because the Navy does not have to wait 5-plus years for a total ship refit to benefit from the energy efficiency and robustness of LED lighting. Instead, the Navy can benefit now by simply having sailors change burned-out fluorescent lamps at sea and replace them with Energy Focus' LED Intellitube. Now, in order to fulfil the Navy contract into working capital, the Company will be raising money over the next 2 quarters.

So in conclusion, the Company is excited about our recent Navy contract win. We believe Energy Focus is in a premiere position to fulfill the $300 million opportunity created by the Navy and converting its vessels to LED lighting. We are pleased that the Navy has validated Intellitube's superior plug-and-play approach and to upgrading existing fluorescent lighting fixtures. We expect that our fourth quarter to be one of the best of the year. How good it will be depends upon the timing of the Navy shipment and no further delays in our SRC solutions contracts. As we look to the fourth quarter and beyond, we are confident that our strategy of bringing Intellitube to the existing commercial buildings market initially to the existing building through existing building (inaudible) companies will yield dramatic improvements, sales, and profitability.

As I stated earlier this year, the single most important thing that happened in 2011 is the commercialization of Intellitube into the US Navy. Intellitube is truly a game changer, and now with the Navy's award, 2011 is truly the beginning of changing the game.

So now, I'd like to welcome into the call over to Mark Plush, our new Chief Financial Officer, for further details on the second quarter. Prior to joining Energy Focus, Mark was at Keithley Instruments for nearly 28 years and served as their Chief Financial Officer for more than 12 years. Keithley is an electronic test and measurement equipment company that was publicly traded on the New York Stock Exchange and had a market cap of over $300 million prior to being acquired by Danaher. Mark, welcome to the Energy Focus family.

Thank you, Joe, and it's truly a pleasure to be here. And good afternoon, everyone. Net sales of $8.2 million for the second quarter of 2011 decreased $800,000, or 9%, compared with the prior year second quarter sales of $9 million. The decline in sales is due to lower sales from our solutions business. However, sales from our products business increased 21% as compared to the prior year second quarter. Sequentially, sales increased 50% from the first quarter of 2011, and all business units reported higher sales.

Gross margins decreased $20,000 on $800,000 lower sales. Gross margins as a percentage of net sales improved to 18.9% of net sales as compared to 17.5% of net sales for the second quarter of 2010, a 1.4 percentage point improvement. Gross margins as a percentage of net sales improved as a result of higher gross margins in the products business, the result of cost reduction actions. Operating expenses for the second quarter 2011 were $2.5 million compared to the prior year's $3.2 million, a 21% decrease. Lower G&A and equity revaluation costs were the primary reasons for the improvement.

The second-quarter loss before taxes was $1.2 million compared to the loss before taxes of $1.8 million in the prior year second quarter. This reflects an improvement of $600,000 even though sales decreased $800,000. The improvement was due to higher gross margins in our products business and lower operating cost. Sequentially, compared to first quarter 2011, the loss improved -- the loss before taxes improved by $1.6 million. The improvement was the result of higher gross margins on $2.7 million higher sales and a reduction in operating expenses of $1.3 million, or 34%.

Now, for the 6 months ending June 30, 2011, net sales were $13.6 million compared to $17.3 million for the same period last year. The decrease in sales was primarily the result of lower sales from our solutions business. This was partially offset by a 9% increase of sales from our products business. Gross margins only decreased $256,000 on $3.7 million lower sales. Gross margins as a percentage of net sales for the first half of 2011 were 19.8% compared to 17.1% for the prior year's comparable period, a 2.8 percentage point improvement. The improvement in gross margins as a percentage of net sales was the result of higher margins in our products business.

Operating expenses for the first half of 2011 were $6.4 million compared to the prior year's first half of $8 million, a decrease of $1.6 million or 21%. Reduction was primarily the result of lower G&A costs offset partially by higher R&D and sales and marketing costs. The loss before taxes for the first half of 2011 was $4 million compared to $5.4 million for last year's comparable period, a $1.4 million improvement on a sales decrease of $3.7 million. The improvement was the result of lower operating costs. Cash at June 30, 2011 was $1 million, and we used $600,000 of cash during the quarter. Now, I will turn it back to Joe.

Thank you, Mark. And I think at this time, operator, we would like to open up the lines for any questions from our listeners.

Thank you. The question-and-answer session will be conducted electronically. (Operator Instructions) Our first question comes from [Steven Sho] with San Francisco Century.

Hi, Joe.

Good afternoon, Steven.

My question has to do with how the light sensor works. You put out a press release excited about a low-cost light sensor, a little button product. And does it turn the light off when it is light outside? Does it turn it down when there's ambient light? And when the light's on, how does it sense the ambient light? Is it out the side of the fixture, i.e., how does it work in connection with the tube?

Sure, Steven. Sounds technical. I'm going to flip that to John, and he will give you a technical answer here.

Yes, sure. It's great talking to you. That's a good question. There are no batteries involved. This is a solar sensor. So we embed in this thing about the size of a dime, actually a small solar cell. We charge a capacitor, and based upon the amount of energy, and therefore, the amount of light striking the sensor, the sensor chirps at high frequency and sends that signal to the lights above it. The lights above it will adjust their light level based upon the amount of energy that they detect. If there's more light coming in, say, from the windows, then we've got to turn the lights down to get the sensor to be operating at its stamped value, say 50-foot [candle]. If the sun is setting, then we need more energy from the overhead light. So basically, it is to dim the lights and therefore the power with them while maintaining a constant light level in the spaces that we are illuminating.

So it is a remote, i.e., away from the Intellitube, self-charging in that there is no battery needed, sensor that communicates wirelessly, if you will, up with the light and just reacts to -- so in a room that's dark all the time, or if you're in a submarine or whatever, you're not going to use it, but if there is a room where it is light, or it's the outside of a ship, or it's a room with some windows, then it comes into play, right?

That's correct. It's primarily for the commercial world. About 30% of the lighting is accessible to the outside world, and so it gets solar light augmenting the light. This takes advantage of that free light, if you will. We can save -- in those areas, we can reduce the lighting by another factor half -- .

It sounded like down to 8 watts from 14.

On the average, yes.

Okay, great. That explains it, thank you.

Thank you, Steven.

The next question comes from [John Bauer], a private investor.

Thanks for taking my call. Can you give the status of your skylight business?

Sure. The status of the skylight business is actually -- it is a re-marketing agreement with Entech Solar. Entech is in the process of introducing a skylight to market, which utilizes their culminating technology, which truly, the implications are that for the same footprint, you can almost have double the light with the light directed downward and with the elimination of glare. So in our business model of being able to expand our solution set to our customers, we are actually bundling in Entech's solar skylights with our lighting and lighting controls to be able to help our customers basically illuminate their buildings in the most efficient way. But it is a marketing agreement where we actually purchase their skylights, and we resell them as part of our solutions business.

So have you actually installed any of these yet?

We have, in fact. And there is a large university in the southeast where we put in quite a few of their skylights, and have just had a terrific result in terms of energy reduction as well as a quality of light.

Did this complement an existing skylight business that you had, or is this something brand new for you?

It did not. Again, we are looking for all ways we possibly can to increase the bundle, if you will, that we provide to our customers. And skylights, especially one that had the ability of really helping to reduce energy costs, such as the Entech Solar skylight, seemed like a natural fit for complementing that business.

Okay, thank you very much.

Thank you.

And next question comes from Peter Field with Merryfield Investment Management.

Hi, John and Joe. How are you? Welcome aboard, Mark. I'm looking forward to your energies and values to be added to the Company. I think that's a great addition. Congratulations, gentlemen, on accomplishing much this past quarter. I'm very impressed.

Now, I really want to focus and drill down on this new Navy contract, and try and put you down -- put the screws down on you guys. And I want you to tell me just when we can expect to see some of that $23 million coming through sales. And then I want you to talk about the bigger picture of the $300 million, and what percentage of that you reasonably think you can capture, and over what time frame other than just saying 5 years?

I'll attempt, Peter. That's a big question, but we will start shipping lights under this contract to the Navy this year. We expect to see an impact in the fourth quarter. To what degree -- I would just love it if they open up the spigots, so we will just see how that plays out. But there will be shipments in the fourth quarter.

So, as it looks to the $300 million opportunity, I honestly wish I could give you a better answer at this point in time. We do expect to receive here in the near term more transparency into their deployment within that contract over its 4-year term. However, what has been communicated to us, and what we have seen historically is that we expect to receive contracts in parallel with this 1, which will cover the remainder of the $300 million beyond the $23 million. And again, because the value proposition of going to this LED lighting, our IntelliTube, and because of the ease of conversion to IntelliTube to receive the benefits of LED is so compelling, we do believe that a 5-year time horizon for a total conversion is well within reach, and that we are the Company that is absolutely best positioned to be able to do that for the Navy.

I love the sound of that. In fact, I'd love it if you'd capture 100% of that $300 million.

That's the goal.

That's great. I think you guys have done a great job, and I also like the sound of the fact that you've put some effort into hiring a sales force, and I'd like to see that continue because you've got great product, you've got great research. And there are high barriers to entry, but there are a lot of competing companies out there that are going to try and eat your lunch if you let them, so just keep moving forward, and don't look behind you because somebody might be gaining on you.

Very good, Peter. Thank you very much.

Keep up the good work, gentlemen.

Thank you.

Moving on to [Paul Rubenstein], a private investor.

Hi. Actually, I think Peter's question covered what I was wanting to know, basically how that $23 million contract was going to play out in terms of time.

Okay. Thank you for joining us today.

Next question comes from Larry Southam with My Broker, LLC.

Good afternoon.

Good afternoon, sir.

Congratulations on the Navy contract. I wondered if you would take a little while to address some of your other commercial business. You've got a -- you show a lot of product lines on your website, and I don't hear too much about them. What's going on?

Sure. Maybe it would be just really a good opportunity, if you wouldn't mind, just to give you a highlight of really the 3 foundations of the Company strategy. Then we will address the individual business units.

The first point is that our goal, our strategy, has basically been to use government funds to help pay for the development of energy-efficient LED lighting that is used by the military, and where we were asked, which is in all cases, to basically commercialize towards existing buildings. The second part of our strategy is to basically use those LED products and capture the $300 million-plus opportunity created by converting the Navy to LED lighting. They are early adopters in LED lighting.

Then the third, basically to create a sales and delivery vehicle into the existing building market so that we can, in essence, utilize this great technology that was developed for the military, and in particular, this 4-foot linear fluorescent IntelliTube replacement -- excuse me, LED replacement for a linear fluorescent tube to be able to capture that existing building market.

Having said that, the Company still does operate its Fiberstars division, which basically was a fiber optic lighting system designed primarily for residential pool market. This particular business unit, as you can imagine, has really been severely depressed because of the mortgage industry and the slow down in the residential housing construction.

Having said that, what's rather interesting is that division has historically provided fiber optic lighting, but now that is in the process of really being converted over to all LED. As a result of that, we are able to leverage the manufacturing capability of that division toward serving basically the military markets and the broader existing commercial building markets. So we are still in that business right now. It represents a very small portion of the overall business.

The Company also has a division called Crescent Lighting Limited, which serves basically the rest of the world. They are based out of the UK. And Crescent is actually -- sales are up this year, and its focus is primarily LED lighting serving the new construction marketplace. And Crescent is in the process right now of putting a major emphasis on the existing commercial building market as well. So those are the 2 businesses that are in addition to our SRC solutions business, which focuses on turnkey lighting retrofit into commercial existing buildings, primarily focused on what you might call the mush markets, or government markets -- municipalities, universities, schools, and hospitals, and federal and state office buildings, as well as Fortune 200 publicly traded companies.

And then of course, the last unit, which I just briefly offered some flavor on, is our government R&D military business, which we are delighted to see has made significant inroads into capturing the US military. Hopefully that's helpful.

It is. I'm also seeing the applications in the dock lamps that sound interesting, and refrigerated case lamps. Those moving ahead?

They are. And they are selling well. We are very fortunate to have one of the largest dock leveling companies as a major reseller of our product for a distribution center, as well as one of the largest transportation companies that is retrofitting all of their existing distribution centers to our LED dock light. So those products are moving ahead, and selling well, as well as variations of those products which are gaining steam. Specifically, we have a whole family of exterior LED landscape lights that, for instance, at Cuyahoga County here in Cleveland, the coroner's office, they replaced 175-watt and 250-watt metal halide exterior lamps, and replaced them with our 26-watt landscape light.

Probably what we are most excited about is the fact that -- actually 2-fold, the first one is we have introduced to market and are having great receptivity and a good volume of orders coming in for our LED retrofit kit for wall packs. That's coming online right now. We expect that product to be a multi million-dollar product. And I'm delighted to say that that product was actually just certified by the DesignLight Consortium. And what that means, which is very significant, is that in many locales, such as in the Ohio area, it qualifies for utility rebates. And in some case, that rebate actually covers the actual cost of the product itself. So that's very, very exciting and important to us.

And then here recently, our first-generation LED tube light, we call it Gen1 internally, but we are selling that commercially right now. It is great for parking garages and the like. We just had the LTL Labs basically do its independent testing on that. They certified it to LM-79 standards, and in fact, I was delighted to see that they actually certified the lamp output to be 103 lumens per watt, which was about 3 lumens per watt greater than what we had seen in our internal testing. And of course, efficiency, every watt you can save in the existing building is money back in our customer's pocket. We are delighted to see that, and we are seeing sales on that particular lamp pick up. So, many products that are right in time for helping existing building owners lower the cost of owning and operating their buildings.

Thank you.

Thank you.

Next question comes from Joseph Guilmette, private investor.

Hi, Joe. You've answered most of my questions here. My questions concerned with CRICKET. Will that be available as an option on the IntelliTube, or will it impact delivery or designs of the IntelliTube? Are you going to have 2 different versions of IntelliTube, one with and without the CRICKET?

We actually envision having 2 versions of IntelliTube, and one of them that can take advantage of the remote sensing technology afforded through CRICKET.

Okay. I was impressed by the number of companies in Ohio that could have qualified for this grant. It seems like the list was about 15 different companies, and it is good to see that technology in the United States is still alive and well.

Absolutely.

Hopefully the investment will follow along as it was 20 or 30 years ago in that field. When do you expect the 48-inch IntelliTube to be on the market?

Commercially available in 2012 is what we are seeing right now. We had kind of stated earlier this year that the military version of IntelliTube would be the first one out. And I'm delighted to be able to report that we are going to be delivering that to the military in this fiscal year.

Your press release, I remember it said you had to sign -- you have to deliver fixtures as well for that contract; did I misread that?

That is correct. This is John. The basic contract is for fixtures, and it also includes some of our other LED-based fixtures -- the berth light, some of the colored lights that replace incandescent bulbs, as well as new fixtures which can utilize IntelliTube. The neat thing about this, of course, is the old fixtures can use it as well. The new fixtures won't have any magnetic ballast at all inside of it. The old fixtures, of course, do, and they have a slight -- they're slightly less efficient. So the government wanted us to have a version which incorporated a new fixture, which would make the energy usage even lower.

Sounds very interesting. Have you gone through First Article testing, or will you have to go through First Article testing?

On half of the SKUs have been through First Article testing, and basically the IntelliTube SKUs are the ones that are being teed up now.

Okay. I guess that answers my question, so defer to the next caller. Thank you.

Thank you, Joe.

And William Bremer with Maxim Group will be next.

Good evening, gentlemen.

Afternoon.

Got a question. You mentioned financing throughout this year. Can you give us an idea of the magnitude of that financing? That's part 1 of my question. Part 2 goes into your underlying power drivers. How many of them do you currently develop, and are you currently selling them outside of your Company?

Sure, Bill, this is Mark Plush. In terms of the financing, as we mentioned in our press release, we expect to raise $1 million to $2 million during the quarter. For the rest of the year, the amount of cash that we will raise will be dependent really upon the amount of working capital that we need to meet our sales volume. But we are looking at $1 million to $2 million in the third quarter.

Okay.

This is Joe. In terms of the actual drivers that we have developed for the US military, bottom line is that we are not selling that just as a driver by itself. We are providing that as, and it was developed for, existing fixtures that have had First Article testing done, and currently we are selling as a standard product to the military. We are not, and nor do we really at this point have plans to sell it outside of the military market.

And I might mention that part of that thought process is that the performance specifications, or Mil-Spec in the military, for LED lighting are more or less akin to that you might find on their most sophisticated sonar equipment. The military doesn't want to have any electronic gear broadcast a signal to the enemy, so they are much, much more stringent than the old fluorescent lighting was. And application beyond the military markets, just not sure that we are aware of -- that there would be a vast market for commercialization of that driver beyond the military.

Okay, Joe, thank you. And thank you, Mark.

Thank you.

And our last question will come from Steve Hill with Union Capital.

Good afternoon guys. How are you all? Quick question. I know you are sort of building a nice little niche in the Marine space just with the military as far as the Navy goes. Have you guys really approached the Marine space -- boats, barges, since you all are seeming to create that type of product that would work well with the tough space that the boats are in most of the time? Is that something to start working towards?

I guess that's the exciting part, is you kind of identified that we've only really focused historically on a portion of the market, and that's the US military. Recently, we've had a lot of inquiries beyond the military, from, for instance, Merchant Marine that supports the Navy to actual foreign navies themselves. So we are beginning to pursue those market opportunities as well.

I will mention to you that we have though noticed that there was a lot of spin-off markets, if you will, or applications for our products. For instance, one of the previous callers mentioned the dock light, which was actually developed for the US Navy and is on vessels right now that we were encouraged and we did commercialize to the commercial markets, and now it literally is the de facto dock light for major transportation companies. We have a hazardous glows version of that light that we introduced about 6 or 8 months ago, which is the absolute lowest cost, highest performance LED light for Class 1 Div 2 hazardous location environments.

So, what's great is that we now have a very, very strong foothold. We have proven ourselves to the US military. We are the only Company right now that we believe that has a full family of products to convert their LED -- convert their existing fluorescent incandescent lights to LED, and so it is a great platform to branch out from, and a great platform for growth.

One other quick question. I'm not sure if you all can really comment on it too much. As far as the delisting notice you all got a couple months ago, have you all come up with a plan or strategy to address that, or can you even discuss that?

Sure. In terms of the NASDAQ listing, we need to trade at $1 per share for 10 consecutive trading days prior to November 14, 2011. NASDAQ allows you to present a plan to them prior to that date that would -- we would receive another 180-day extension, and we would anticipate presenting a plan to them prior to November. And we would be hopeful that they would accept that plan for another extension.

Okay, very good, guys. Thanks so much. Good work.

Thank you very much, and have a great evening.

That does conclude the question-and-answer session. I will now turn the conference back over to you.

Again, I'd like to thank everyone for joining Energy Focus's conference call today. In summary, we are just absolutely delighted by the fact that the US Navy has selected Energy Focus, and the tremendous opportunity that that particular contract creates. We are looking forward to bringing this home for our investors.

And with that, we would also like to thank the many, many employees across the globe of Energy Focus for all their hard work and dedication. And we look forward to visiting with you again during our third quarter earnings call. So thank you, and have a great evening.

And that does conclude today's conference call. Thank you for your participation today.