Energy Focus Inc (EFOI) 2011 Q4 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 Mr. Brion Tanous. Please go ahead, sir.

Thank you, Operator. I would like to welcome everybody to Energy Focus' fourth-quarter and fiscal 2011 earnings conference call. On this call the Company's Chief Executive Officer Joe Kaveski will give a business update on the Company's solutions, products and government businesses, as well as provide an outlook for the first and second quarters of fiscal 2012.

The Company's Chief Financial Officer Mark Plush will then address the Company's fourth-quarter and fiscal 2011 financial results. We also have President John Davenport on the call with us this afternoon. Following prepared remarks we will open it 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 meaning of federal securities laws regarding Energy Focus.

Forward-looking statements include statements about plans, objectives, goals, strategies, future events, performance and underlying assumptions and other statements that are different than 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 the expectations reflected in these forward-looking statements.

Potential risks and uncertainties include change in demand for the Company's products, the impact of competition and government regulations, and other risks contained in the 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 especially expressly qualified by these cautionary statements. And since forward-looking statements are subject to risks and uncertainties then we caution you not to place undue reliance on these.

With that I would like to turn the call over to Mr. Joe Kaveski. Joe.

Thank you, Brion, and good afternoon, ladies and gentlemen, and thank you for joining our fourth-quarter and year-end earnings call. Today I would like to offer some brief comments on three specific areas of the Company's performance during 2011, specifically, our financial results, operational challenges and progress made within our business units. Furthermore, I would like to offer you some guidance towards our outlook for the first and second quarters of 2012.

So to begin, 2011 was a very challenging year for the Company. From a financial perspective the Company generated $25.8 million in sales, with overall gross profit margins increasing 2.5 percentage points on a year-over-year basis to almost 21%. Our operating expenses were cut approximately $3.9 million to $10.4 million, and our overall net loss was reduced to approximately $6 million.

Despite our growth in our product businesses, clearly our disappointing performance was a direct result of lower SRC Solutions sales. In 2011 SRC Solutions felt the impact of being too reliant upon too few customers. Specifically, one of our larger ESCO customers changed its business model and is now self-performing the majority of its turnkey lighting and retrofit work. As a result, the number of new projects in 2011 from this ESCO was significantly reduced from prior-years.

Furthermore, two of our other larger ESCO customers, one serving the public sector and one serving Fortune 500 companies, had many project delays. Although contracts were not let in 2011, we developed many new additional projects with these ESCOs that we expect to come to contract in 2012.

In spite of our SRC Solutions shortcomings in 2011, the Company has implemented many improvements at SRC Solutions, and notable -- made notable progress in our US Product and Military businesses that will yield results in 2012.

At SRC we have hired new sales executives and expanded our geographic coverage, which has resulted in more than tripling our 2011 ESCO customer base. And we continue to increase the content of EFOI LED products into our turnkey retrofit projects. In fact, we are now proposing all LED lighting retrofits in some markets.

As a result of our improvement our sales teams have developed more than double the amount of projects compared to this time last year. Within our US Military business Energy Focus won a critical $23 million contract with the U.S. Navy to supply our new proprietary IntelliTube product as an LED plug-and-play replacement for existing fluorescent lamps in approximately 7% of the US fleet. To date we have filled over $2.6 million of our $23 million contract.

And as equally exciting, just this month the U.S. Navy certified IntelliTube as 100% mil-spec qualified, and therefore it can now be purchased by the remainder of the fleet. This opens up the entire $300 million opportunity to Energy Focus as we are now the only mil-spec qualified supplier for LED replacement lamps to the U.S. Navy.

Additionally, our LED products are gaining increasing interest and traction in the existing building market. Today I'm delighted to announce to you that we've received our first sizable $1.8 million product-only order with very large ESCO -- with a very large ESCO customer for our LED replacement lamps. This order is expected to be 100% fulfilled this year.

Now this sale is very significant as it represents a real beginning of the ESCO market's transition to LED. We are now able to offer LED solutions that match or better the simple payback of traditional fluorescent lamps. Furthermore, this $1.8 million order demonstrates the ESCO market is an early adopter for LED lighting and confirms our view that ESCOs and SRCs are key vehicles to drive large LED product sales.

Now as we look to 2012 we see meaningful changes in sales growth and gross margin improvement while we continue our vigilant overhead cost control. The Company's outlook for the first quarter of 2012 is for sales to range between $5 million to $6 million.

We expect sales to increase in the second quarter as a result of improvements in the Company's SRC Solutions and US Product businesses. Furthermore, we expect sales for the second quarter to range between the $7 million to $8 million range and forecast to be EBITDA positive in the second half of 2012.

For the year we forecast that our overall sales growth will be the result of increasing IntelliTube sales to the U.S. Navy, higher commercial LED product sales, and growth from our SRC Solutions business.

Most notably, we look to benefit from our technology position and recent success with the U.S. Navy. We have already experienced sales beyond our current $23 million contract and are expanding our sales organization to pursue additional sales of IntelliTube to militarized and non-militarized vessels.

We are encouraged by the fact that the National Shipbuilders Research Program has just recently issued a report concluding that EFOI's IntelliTube is the best alternative for active ship platforms. Needless to say, we have already given sizable quotes for IntelliTube to shipbuilders.

Also, we are excited to be an integral part of the Navy's high-priority, Task Force Energy, which is designed to advance our Navy's energy independence. We recommend that you view the Navy's most recent YouTube video that is referenced in our press release today.

Furthermore, we are adding additional sales resources to SRC Solutions to build and to strengthen our ESCO customer base, and in doing so we will continue to significantly add more and more EFOI LED product content into our project.

And within our Products division we are focusing on increasing LED product-only sales to our ESCO customers, directly with large national accounts, with key online Internet retailers, and new strategic partnerships.

So now I would like to turn the call over to Mark Plush, our Chief Financial Officer, for further details on our 2011 financial results. Mark.

Thank you, Joe. Good afternoon everyone. Net sales of $6.1 million for the fourth quarter of 2011 decreased $2.7 million compared with the prior-year second-quarter sales of $8.8 million. The decline in sales was due primarily to $3.5 million of lower sales from our SRC Solutions business. This was partially offset by an $891,000 increase in our US Government business as we recognized $1.6 million of revenue from the $23 million U.S. Navy contract.

Gross margins were 20.6% of net sales versus last year's fourth-quarter gross margins of 18% of net sales, a 2.6 percentage point improvement. Other manufacturing costs decreased approximately $326,000 as a result of cost reduction efforts. Overall, gross margin dollars decreased $329,000 as a result of lower sales.

Operating expenses for the fourth quarter of 2011 were $1.6 million compared to the prior-year's $3 million, a $1.4 million improvement or a 49% decrease. Costs were reduced across all functional areas. Included in the reduction was a $411,000 credit for an earnout adjustment related to the SRC Solutions acquisition.

The fourth-quarter loss before taxes was $625,000 compared to a loss before taxes of $1.6 million in the prior-year's fourth quarter. This reflects an improvement of $945,000 even though sales decreased $2.7 million. The improvement was due to lower operating costs, which were partially offset by lower gross margins as a result of lower sales.

For the year ending December 31, 2011, net sales were $25.8 million compared to $35.1 million for last year, a $9.4 million decrease. The net sales was primarily the result of $10.2 million of lower sales from our SRC Solutions business, partially offset by a $1.2 million increase in sales from our Government business. The Products business was down slightly compared to 2010.

Gross margins decreased $1.2 million on $9.4 million of lower sales. Gross margins as a percentage of net sales for 2011 were 20.1% compared to the prior-year's 18.2%, a 1.9 percentage point improvement. The improvement in gross margins as a percentage of net sales was the result of cost reductions in other manufacturing costs amounting to approximately $1.5 million of lower costs versus 2010.

Operating expenses for 2011 were $10.4 million compared to the prior-year's $14.3 million, a decrease of $3.9 million or 27%. Costs decreased across all functional areas.

The loss before taxes for 2011 was $6.1 million compared to $8.5 million for 2010, a $2.5 million improvement on a sales decrease of $9.4 million. The improvement was the result of $3.9 million of lower operating costs, partially offset by $1.2 million of lower gross margins as a result of lower sales. Additionally, interest expense increased $288,000.

Cash at December 31, 2011, was $2.1 million versus $1.9 million at September 30, 2011, a $200,000 increase. Cash used in operations for 2011 was $2.6 million. Inventory turns at December 31, 2011, were 7.9 turns, and DSO was approximately 48 days.

On March 2, 2012, we received a $4.9 million equity investment from a group of 10 investors. The capital infusion was very timely as it provided a source of cash to retire debt and meet other obligations due in March. This investment, along with the credit facility, provides capital needed for 2012.

Melanie, we will now open the call for questions.

(Operator Instructions). Ted Brown, Private Investor.

Stones River seems to be a real problem and you were so high on them, particularly going into the acquisition. Are you sure that you have got some of these things under control that are troubling us?

Ted, emphatically yes. Stones River is very strategic to our Company. We did experience contract delays, and as I stated, the challenge in the business was a direct result of just fewer customers that experienced big business downturns or decided to self-perform the work themselves.

We did a lot in 2011 to basically expand the number of customers, ESCO customers. As I have stated, we nearly tripled the customer base and expanded the geography in the process, and are continuing to work on that.

So, yes. I am confident that basically that is behind us. And that as we look to the future and even look to the present, the SRC Solutions business and the entire ESCO market is absolutely critical to -- and strategic to basically driving big sales of our LED products.

You know, I might just mentioned to you that, as I have kind of stated in my preamble, the $1.8 million order, that is outside of the $23 million order we received from the US government, the Navy. That is the single largest order -- product order this Company has ever got. And that is just one single order, and with more to come.

Okay, that is great. Now, Joe, we just got something the other day on a 13G filed by CoStar, which now -- I guess he represents the largest shareholder that you have around. And since we had such a disappointing experience with Mr. Gelbaum, could you tell us a little bit about the CoStar, the character of the people, are they durable, et cetera?

The answer to that is -- this is John. Yes, the answer to that is absolutely yes. They are quality folks, and folks who are in it to win it. And in fact, the head of CoStar actually gave us a very viable lead into a business -- a large business of which he is on the Board of Directors -- so -- in terms of lighting retrofit.

So he not only was very careful in terms of his investment, but is very supportive and wants the Company to succeed. He, incidentally, is not the largest investor. There are more filings to come, and you will see that we have three or four investors now who are about that 8% level.

Okay, swell. That sounds great. You know, it has occurred to me time to time that you are so busy with the Navy that you don't have really time to develop commercial customers. I remember when we were at the annual meeting, we had a wonderful little tour around a plant -- a parts manufacturer, who had just installed your stuff. And it seemed to me like every factory in America could get that stuff, and I don't see signs of it getting there. Could you (multiple speakers)? Go ahead.

Absolutely, it is happening. This is John again. This $1.8 million order, imagine that factory and multiply it by 100 and you will get an idea of the size of the order we are talking about. So that is why this is so significant.

And those are the kinds of chunks that we are working very hard on that can be gotten in this lighting retrofit world. That is very, very exciting. It is happening in 2012. And, fortunately, we are here with product to be part of it.

Okay, great. Listen, I saw Nexus' results yesterday. The results didn't look bad, but they were downgraded. And one of the reasons is that Philips has sued the pans off them. Are we vulnerable to any suits of that sort?

That has just come out, and so right now we basically are trying to understand what -- the merits of the Philips claim. But I what I would like to assure you is that as a company we take patent infringement and having our own patents being infringed upon as always a very big concern for the Company. And so from that perspective, again, we are trying to understand. It had just come out here, so I can't really comment any further than that, because there is a filing and there is multiple claims and multiple facts there. (multiple speakers).

Okay, and just one more quick one. Some time ago you had a research grant from the State of Ohio, and I am curious as to what progress has been made along the lines of that grant.

Ted, if you don't mind I also have with us in the room Roger Buelow, our Chief Technology Officer, who handles the State of Ohio directly. So, Roger, if you wouldn't mind answering Ted's question.

Hi, Ted. It is good to talk to you again. So we are actually -- we are operating under two Ohio Third Frontier research grants. One of them is underneath the State of Ohio's Third Frontier photovoltaics program, where we are developing an integrated system that uses our PV technology and couples it with our LED technology to make an off-grid wall path for your fixtures that go on the outside of building.

Our partners on that include Ohio State, and they have been a great partner so far. We are about halfway through with that contract. We have made good progress. We are on schedule now. And we should have a product resulting from that on the market next year.

The second one is funded under Ohio Third Frontier Sensor program. And that is -- this project is developing the sensor we call CRICKET, and it is part of our IntelliTube technology. It is a sensor that is paired with the fixture.

Our partners on that include Ohio State and also University of Dayton UDRI Lab, which is fantastic in terms of its sensor research. So on that one it started -- that one has only started out really three to six months ago. We had the State of Ohio here a few weeks ago, and we did our first update directly with the State of Ohio. They are happy with their progress; I am happy with their progress. And those things are going well.

Thank you very much. I will just listen from here on. Thank you.

[Alan Steiner], Oppenheimer & Co.

Gentlemen, congratulations. And what more can I say? I really don't want to take a lot of your time, but just more of a congratulatory thing for everybody.

Thank you, Alan, we appreciate it.

You're welcome. About 50 years ago as a college student I worked at -- I was at Rutgers -- I was fortunate to be offered a summer job. This was in the research lab of the Westinghouse Lamp Division in Bloomfield, New Jersey.

And basically I just remember how excited and enthusiastic everybody was at that facility. And one of the projects I was assigned to was this electroluminescence work that they were working on with phosphorus and sheet glass, and it was exciting stuff. And I thought it was the greatest thing since sliced bread.

But moving forward, I feel as if I am back in the lab again smiling when I think about you guys, and the prospects basically of seeing some major success, because I've had the pleasure of meeting you guys on a number of occasions. And I have always come away extremely impressed by your enthusiasm, your sincerity, and what I really believe is a deep determination to make Energy Focus a major success.

So I just want to congratulate you on your achievements, and I look forward to more good things to come.

Thank you very much, Al.

You are welcome.

I appreciate it. And we too, we share that enthusiasm. The Navy was a big win for us. Not only does the Navy represent a very viable bridge market to the broader commercial market and it is here today, but the Navy validates our technology. And I can assure you that our R&D staff is smiling, and we're very proud of what they have been able to accomplish. So thank you for your (multiple speakers).

That is great. You are welcome.

Peter Field, Merryfield Investment Management.

Thanks for taking my call, and I too would like to underscore the congratulations on all of your accomplishments.

Thank you, Peter.

Now, of course, I personally am excited about trying to get this Navy contract ramped up as quickly as possible. So could you give me some feel for how quickly you think you're going to ramp this up, and also what the operating cost requirements would be, especially in terms of anticipating any additional raising of capital through other stock offerings or other means?

Okay. Well, let's -- those are two different areas, so let's try to talk to the Navy first. As I communicated, the $23 million -- and I referred to it as a seed contract -- represents about 7% of the Navy fleet -- converting the Navy fleet. It truly is a ticket to the broader $300 million opportunity, because the predominant technology used in Navy vessels is a two foot linear fluorescent lamp. And what we have created is literally a plug-and-play replacement for that linear fluorescent lamp that works in any of their ballasted circuits, in any of their fixtures on these vessels.

It makes conversion to LED and all its benefits so much easier and so much less costly than physically replacing the fixtures within the fleet. And best of all it uses less than half the power. So the economics are there for the Navy to basically move forward and move forward quickly.

Having said that, there is really three ways the Navy can buy IntelliTube -- and by the way, we have other Navy-specific LED products to support that make us uniquely qualified to fulfill the majority of the U.S. Navy's lighting needs.

Three ways that they can procure us -- when they build a new boat. And I can assure you that our team is working very, very hard with the shipbuilders right now. And as I mentioned, we have given some quite sizable quotes for this technology for new vessels.

The second way is basically Navy vessels come in every five years for a refit. And so they kind of cycle through and they refurbish the boats every five years. And the Navy has stated that they basically want to have a green fleet by 2016.

What a coincidence in the timing. And so it is very conceivable that that $300 million is harvested within that five-, maybe six-year time frame as these boats come in for total refit.

The third way the Navy can procure us is -- you know, existing -- it is basically as a replacement lamp for those lamps that burnout while they are at sea. One of the big issues with a fluorescent lamp is that they are very, very prone to vibration. And their lives are very, very short. When they go out on a deployment they will replace a lamp typically at least one time.

And so as they are basically pulling into port then for supplies, rather than loading up pallets of replacement lamps and offloading the burned-out ones, they can basically load up new IntelliTubes as the new lamps going on the ships and offload those burned-out fluorescence, and replace while they're at sea. And so when we think about just the U.S. Navy fighting fleet we feel pretty good about that total conversion five-, six-year timeframe.

I am sorry for taking so long with the answer to your question here, but it is also very, very important to note that the bottom line of what we do with our IntelliTube and our LED product is save our nation on fuel costs. And there is a very high importance by the Navy right now to basically get energy independence.

In fact, it is part of their Task Force Energy that Secretary Mabus has talked about many, many times. And so we are an integral part of that. As I mentioned, there is now a YouTube video that was just posted on the Web by the Navy where literally they are highlighting our products as part of that video. And so we feel very, very good that the Navy is converting and that the Company is uniquely qualified to basically be their supplier for hopefully the next 50 years.

So the second part of the question, I am going to turn over to Mark here. And, Mark, if you would, if you could answer Peter.

Sure. Peter, clearly we were very pleased with this latest round of capital that we raised. In terms of additional capital, it really is going to be a function of the growth. If we have significant, accelerated growth then clearly we are going to have to assess our working capital but that would be a really good problem to have And we will address it at that time.

All right. Thank you, gentlemen.

Paul Rubenstein, Private Investor.

Thank you for taking my call.

It is our pleasure, Paul.

I would like to say it sounds like you guys are making all the right moves as far as thinking long term, and I would like to see that in a company.

What I would like to know is if I can get an update on both the infrared flares project and also the very high-efficiency solar cell?

Sure. I am going to ask Roger Buelow, our Chief Technology Officer, to speak to those two. Roger?

No problem. Okay, Paul, you asked about the IR flare. That was an SBIR Phase I contract that we had with the Army through Redstone. We completed Phase I, and at that time the Army decided to go a different way with Phase II. So we are not currently working on that research at all.

For VHESC, we finished the VHESC project at the end of 2011. And we are in the process of applying to be named the commercialization entity for VHESC. But in terms of active research we have a few things that we are working on quietly that we really have not announced yet.

I think that is the best way to put it is that we are -- you asked about VS. We are through with VS. We are proud of the achievements that we have for product that set the world record for solar cell efficiency. And this technology that we develop is going to prove valuable in the solar industry and in the lighting industry, but that particular project is done.

Okay. As far as moving forward with that as far as commercialization and the patent involved, could you give some kind of timeframe or is there anything you can say about other projects or are there other companies that might use your patents going forward?

We are not really discussing that at this time. There are a number of options open to us, is a good way to put it. And that is not something that we are ready to talk about right now.

Okay.

John Bower, Private Investor.

Thanks for taking my call. I had a quick question about how many employees are currently involved with the manufacturing of IntelliTube, and where is the factory?

All of the manufacturing of IntelliTube today is based out of our Solon headquarters. And in terms of number of employees, that is not a number that we have posted, and at this particular point in time I would just like to refrain from providing that.

Okay, my next -- I just have -- I have really two short questions. Are you currently manufacturing IntelliTube 1 or IntelliTube 2? Is it the multiple LEDs or the single LED?

That's a great question. We are actually involved with both. IntelliTube, as we are shipping today, is really for military applications. And what you referred to as generation one product is the multi-LED product itself. So I hope that helps you.

Well, which one are you actually selling? Are you selling both of them or --?

We are selling both of them. That is correct. We are selling basically IntelliTube to the military right now, and we are selling the generation one technology to the broader commercial market.

Okay, is the CRICKET technology actually being sold right now?

CRICKET is not. It is at this particular point in time a development project. And so, hopefully, some time here at in the near future we will have something to report to you there.

Okay, I got one last question. Can you give me any kind of an overview on how you actually price out -- how you bill the Navy for a particular project? Because I imagine prices change. It is kind of a shifting formula. I mean, prices come down. And just in terms of how do you actually price it out the four-year -- I mean, the $23 million contract? And then if that actually a fixed contract or is that just up to $23 million?

Hi, this is Roger again. So I will give you some insight into the structure of the contract. We haven't revealed the actual prices. But the structure of the contract that is public knowledge, anybody could have responded to the RFQ.

But the Navy asked for was a series of lights binned into years. So they said year one, year two, year three, year four, and they told us how many they wanted within each of these bins. And we -- and the growth that they expected to buy them a year apart from each other. They are under no obligation to wait that long. They can speed things up and take things early, and we had to keep that in mind as we quoted it.

So we had the opportunity to quote different prices as time went on. And we had the opportunity to consider advancements in terms of our technology and in terms of the industry. That said, we gave the Navy a fair price across the board for these lights, given our position, RFP and the nature of the industry. But we have not explained how our pricing -- what our pricing is or how it changes through the years. Now we are going to keep that secret for now.

(inaudible) so in the future this is going to be bulb replacements or are they getting a combination of bulb replacements and fixtures?

Right. They are a combination of bulb replacements and fixtures.

Okay, well, I guess that is -- oh, can you -- you may not be able to answer this, but what is your manufacturing capacity right now at Solon (inaudible) at the Solon facilty?

We have plenty of capacity to grow.

Okay, thank you very much.

Blake Tobias, Private Investor.

Hey, congratulations for the Navy win and the win after that. It is exciting stuff. Just maybe could you expand a little bit more on Communal international? I saw the press release a while back and thought it sounded good, but just wondering if you can expand on how you see that playing out in the near and further future?

You bet. You know, Blake, this is really very tactical and a very strategic move for the Company. I set the stage by saying that it is really important to note that Asia has made a huge investment into advancing the whole LED lighting technology. And so with that said, basically Communal helps us lower the cost of our products today. And as well as they play a very, very critical role in terms of helping us tap into the Asian market.

So just a very simple example would be post-tsunami Japan is emerging as a huge early adopter and buyer of LED product. I heard the other day that of out of all their nuclear plants that only one now remains online, and they had over 50 of those. And so there is a huge emphasis in Japan to basically become more energy efficient. And they are really adopting LED lighting technology very, very quickly to, in essence, become a more energy efficient and deal with their energy constraints.

So, again, very, very tactical in helping lower our cost today, as well as very, very strategic in helping us and ESCO tap into those Asian markets for resale of our products.

Great. Okay, thank you, Joe. I appreciate that.

And that does conclude today's question-and-answer session. I would like to turn the conference back over to Joe for any additional or closing remarks.

Well, thank you, Operator. I guess, I would like to conclude 2011 with where I began 2011. As I stated in last year's March quarterly earnings call, the most important thing that would happen in 2011 would be the commercialization of IntelliTube into the U.S. Navy. And IntelliTube is truly the game changer, and 2011 was truly the beginning of changing the game.

So with that I would like to just thank everyone for participating on the call today, and offer a very special thanks to our customers, our investors and our employees.

So I look forward to visiting with you in May and discuss our first-quarter results. Thank you and have a good evening.

That does conclude today's conference. We thank you for your participation.