Energy Focus Inc (EFOI) 2012 Q2 法說會逐字稿

Good day, and welcome to the Energy Focus second-quarter earnings release conference call. As a reminder, today's conference is being recorded. At this time, I'd 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's fiscal year 2012 second-quarter 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 third quarter of fiscal year 2012.

The Company's Chief Financial Officer, Mark Plush, will provide greater details surrounding the Company's second-quarter financial results. We also have John Davenport and Eric Hilliard on the call with us this afternoon. Following prepared remarks, we'll 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 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 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 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.

With that, I'd 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 second-quarter 2012 earnings call. Today, I'd like to offer some brief comments on the Company's second-quarter financial results, progress that we've made in some of our business units, and an accelerant that is likely to increase our LED products and SRC solutions sales. I would then like to offer you some guidance towards our anticipated third-quarter and year-end results.

So to begin, I'm very pleased to report that our second-quarter sales were $7.7 million, and fell within our guidance of $7 million to $8 million. This represents a 45% sequential increase in overall net sales from our first quarter and was driven by strong growth in our LED product sales.

And our overall gross profit margins for the second quarter improved over 7 percentage points from our first quarter, and are up over 3 percentage points over our second quarter last year. Furthermore, our operating expenses for our second quarter were slightly less than our first quarter.

Additionally, our year-to-date operating expenses are down over 23% when compared to the same six-month period last year. Those increased sales and gross margins, coupled with our expense reductions, all contributed to the narrowing of our EBITDA loss, which was $470,000 for our second quarter. This represents a $1.1 million improvement for the first six months of this year when compared to the same period last year.

So as we look to the performance of our business units, our R&D team made good progress on two fronts during our second quarter. First, they've secured another contract for the military. This contract, worth approximately $900,000, is to develop a next-generation lighting fixture for the US -- for a future US Navy vessel.

Like our smaller berth light that has been selling in the Virginia Class nuclear submarines for almost two years, this new fixture will utilize a larger version of Energy Focus's, IntelliTube's optical waveguide technology.

I'm also pleased to announce that our R&D team made significant progress on the development of a 4 foot commercial version of IntelliTube. We've already confirmed its superior construct and are now working with our suppliers for a commercial launch anticipated to be late 2012, early 2013.

As for our existing military version of IntelliTube, sales are progressing as expected. During our second quarter, the Company secured another large release for IntelliTube under our $23 million Navy contract. We expect to ship the majority of this release within the third quarter.

And the Company continued to make progress on our SRC solutions business. As we previously communicated, we've added new sales representation, expanded our geography, and more than doubled our customer base. As a result, the quality and quantity of the projects in our sales pipeline have dramatically improved and is growing.

And last month we hired a new General Manager, James Kiriazes, to lead the SRC solutions business. James brings with him extensive knowledge and experience in the energy services industry. Prior to joining Energy Focus, he dramatically grew public sector sales with one of the larger energy services companies. His background will surely benefit Energy Focus as the Company seeks to create competitive advantage and growth by promoting our LED products into the public sector building.

To that end, it appears that the stars may be aligning for Energy Focus. On December 2, 2011, the President issued a memorandum to the heads of all federal executive offices and agencies. In the memorandum, the President stated that the federal government shall enter into a minimum of $2 billion in energy savings performance-based contracts in federal buildings prior to January 2014.

Because of this, the US government has just launched their energy saving performance contracting ENABLE initiative to fulfill the President's directive. The ENABLE initiative is designed to reduce the award time to less than 15 weeks in implementing energy-efficient lighting upgrades, water conservation, and basic control in federal buildings under 200,000 square feet, which, by the way, represent the vast majority of federal buildings.

Now, we expect to see these projects start to enter into our sales pipeline in our fourth quarter. Clearly, Energy Focus through its ESCO partners is well-positioned to excel in the federal ESPC ENABLE initiative because of our leading energy-efficient LED lighting products and our ability to provide their turnkey installations through our SRC solutions business.

Now, as we look to our third quarter and year end, the Company expects to see significant increases in sales and notable gross margin improvement with continued emphasis on spending control. This is due to the strengthening in our solutions business as a result of dramatically improved sales pipeline and the improving market conditions, additionally, military LED product shipments to the Navy from our $23 million contract, and from continued sales of our commercial LED products.

In our third quarter, the Company expects sales to range from the $9.5 million to $10.5 million range, which will be more than a 20% improvement over our second quarter. Furthermore, the Company expects to be EBITDA positive in the second half of 2012.

In conclusion, the Company recognizes that there is a great deal of uncertainty in the world's governments and economies that could temper the timing of our anticipated results. Recognizing that, I remain very excited about our team's progress in positioning the Company for significant growth, especially in penetrating the $300 million US Navy opportunity, as well as the multibillion dollar opportunity to upgrade lighting in existing buildings.

I believe that today the Company is at an important inflection point as we become EBITDA positive. Quite simply, the Company has developed the right products for the right markets and at the right time. I'm looking forward to an exciting second half of the year, 2013, and well beyond.

So now I'd like to turn the call over to Mark Plush, our Chief Financial officer, for further details on our second-quarter financial results. Mark?

Thank you, Joe. Good afternoon, everyone. Net sales of $7.7 million for the second quarter of 2012 decreased $521,000 compared with the prior-year's second-quarter sales of $8.2 million. The decline in sales was due primarily to $1.2 million of lower sales from our SRC solutions business, which was partially offset by a $718,000 increase in product sales as a result of higher sales of LED products.

We did not record material sales during the second quarter for U.S. Navy products, as the current release date calls for shipping products during the third quarter.

Gross margins were 22.2% of net sales versus last year's second-quarter gross margins of 18.9% of net sales, a 3.3 percentage point increase, or $156,000 increase.

The increase in gross margins was due primarily to higher gross margins at our solutions business, which was 20.3% of net sales this year compared to 11.9% last year. Additionally, there was favorable mix as product sales represented approximately 72% of total sales, and that segment has a higher gross margin than the solutions segment.

Operating expenses for the second quarter of 2012 were $2.4 million compared with the prior-year's $2.5 million, a 4% decrease due to lower sales and marketing expenses.

Second-quarter's loss before taxes was $897,000, compared to a loss before taxes of $1.2 million in the prior-year's second-quarter. This reflects an improvement of $272,000, even though sales decreased $521,000. The improvement was due to higher gross margins and slightly lower operating expenses.

It should be noted that sequentially, compared to the first quarter of 2012, net sales increased $2.4 million, or 45%. Gross margins, as a percentage of net sales were 22.2%, compared to the first quarter's gross margins of 14.8%, a 7.4 percentage point improvement. Further, the loss before taxes narrowed to $897,000 versus the first-quarter's loss of $1.9 million.

At the six-month period ended June 30, 2012, net sales were $13 million compared with $13.7 million for last year's comparable period, a $679,000 decrease. The decrease in sales was primarily the result of $2.2 million of lower sales from our SRC solutions business, partially offset by a $1.5 million increase in sales from our products business.

We recorded revenue of approximately $1 million for the six-month period related to the U.S. Navy contract. Gross margins decreased $218,000 on $679,000 of lower sales for the six-month period ended June 30, 2012 compared to the prior year.

Gross margins were 19.2% of net sales, compared to the prior-year's 19.8% of net sales, a slight decrease. The decrease in gross margins was due primarily to lower sales.

Operating expenses for the six-month period ended June 30, 2012, were $4.9 million, compared to the prior-year's comparable period of $6.4 million, a decrease of $1.5 million, or 23%.

Cost decreased across all functional areas. The loss before taxes for the six-month period ended June 30, 2012, was $2.8 million compared to $4 million for the prior-year's comparable period, a $1.2 million improvement on a sales decrease of $679,000. The improvement was the result of $1.5 million of lower operating costs, partially offset by $218,000 of lower gross margins resulting from lower sales.

Cash at June 30, 2012 was $627,000. The decrease in cash was due to cash used for operating purposes, including a $2.3 million decrease in Accounts Payable and accrued liabilities.

Cash used in operations during the three-month period ended June 30, 2012, was $1.7 million, $1.1 million of which was for working capital increases, and $673,000 in losses incurred during the quarter.

Inventory turns at June 30, 2012 were 10.1 turns, an improvement from 7.4 turns at March 31, 2012. And DSO was approximately 58 days. DSO decreased 12 days from March 30 -- March 31, 2012, as a result of collecting receivables from the early buy program that we offered to our pool lighting distributors.

Third-quarter sales guidance of $9.5 million to $10.5 million reflects projected sales to the U.S. Navy under the $23 million contract, as well as an increase in our SRC solutions business.

With that, I'll turn the call back to Kevin for questions. Thank you.

(Operator Instructions). Robert Smith, Center for Performance Investing.

So, guys, do you think you could share some gross margin targets for the third or fourth quarter?

Yes. Robert, we do not forecast. We do not give specific guidance to our gross margin targets. What I can tell you is longer-term, what we are looking for, for running this business are gross margins in the upper 20% to lower 30% range. But again, we are not giving specific targets for the third or fourth quarters. We just don't give that guidance.

Okay. So when you say longer-term targets, reachable in what kind of timeframe?

Clearly, in the next 12 months.

Okay. That's -- I heard the kind of caveat about the so-called -- I guess, the world facing the fiscal cliff and government -- lack of a government budget and continuing resolutions and all this. So how much of the third-quarter revenue range is really firmed out? In other words, is $9.5 million truly a bottom?

That's the guidance that we've given, Robert.

But so would you say that's not dependent upon the idiosyncrasies of the government's situation at the moment in spending?

Well, Robert, your guess is as good as ours. But, you know, I mean, you've got effectively potential administrative change, which would occur in the fourth quarter. You've got the potential fiscal cliff that, hopefully, will be avoided in the first quarter of next year. So, you know, your guess is as good as ours, but I think we all just have to recognize that and continue to strive to grow our businesses.

But I mean the third-quarter range, I mean, the bottom end of that range, is that -- can that be influenced?

Well, we feel pretty good about the range that we've given on the third quarter.

Okay. And how about your cash position going forward? I mean, about the ability to fund the business through --?

Robert, we have a credit facility where we are basically providing collateral with our receivables. So we borrow what we need, and we don't want to pay any more interest in what we have to pay so our cash position is really -- at any given point in time is really more of a function of what we need to run the business for the next week.

Okay. So there are no fears in that respect near-term?

No. We think that our current financing is sufficient.

Okay. And can you give some color about the present state of the R&D effort?

Beyond what I've already given?

Yes.

You know, as I mentioned, we are delighted by the progress that the R&D group has made in the development of a 4 foot version of IntelliTube. I mean, that is truly the Holy Grail. We've actually expedited the development of that. We are utilizing what we believe are the absolute state of the art, pushing the bubble there. So we are on track to basically bring that product to market in the near term.

And by taking it to market, how do you create a sizable market?

I think the sizable market exists already out there right now. I mean, the fact is is that in the US alone there is over 70 billion square feet of nonresidential lighted space. And out of that 70 billion square feet, the predominant technology is the 4 foot linear fluorescent.

So how are you going to tap into it? That's, I guess, the better question.

Well, we believe that the government sector will be one of the first to tap into it because of their value equation. So the evidence that we think we're on track here is the fact that last quarter we announced a $1.8 million order for basically a large LED product sale.

So with a large market opportunity like that, I mean, how much of the -- how much is possible of government business that is presently there? I mean, what is the size of the government market that could (multiple speakers)?

Well, let me just tie it back to the program that I just announced. I talked about the fact that the President had issued, basically, a memorandum to heads of government agencies and executive officers that basically said -- hey, you need to move forward with basically doing $2 billion minimum in performance-based contracting in these federal facilities and get them under contract by the end of 2013.

So it basically -- there are three scopes of work under this ENABLE pro-gram. One of them is water conservation; one of them is rudimentary controls; and the third one is lighting. So if, at minimum, one-third of that $2 billion was lighting, that's a big number.

So if all the government facilities would change their 4 foot fluorescent lighting today, what kind of a market size is that? Do you have any idea?

All I can tell you is -- I don't have a calculator in front of me, but out of the 70 billion square feet of non-res lighted space, the government basically said that 30% of it is government buildings.

Okay. Go and get it. Good luck.

It is enough for us.

(Operator Instructions). Ted Brown.

Thank you for taking the call. I'm confused about how many shares of stock will now be outstanding after this new registration. And I'm reckoning somewhere around 55 million shares.

Also, I'm a little curious about some of the details of the recent financing. And the fact that you're now just embarking on registering, I guess, 29 million, is any of this stock, do you think it is going to find its way quickly into the market? Let's not have another David Goldblatt situation. Could you give me some assurances about what the character of these holders is?

Yes. Ted, you have a number of questions so let me try to address the questions. Right now, we have 44,541,696 shares outstanding. There are roughly 9 million worth of warrants, which could be exercised, but that's at $0.54 a share, and they would have to take action. So the shares that are outstanding today are roughly 44.5 million shares. So that's what we have and that's what we're calculating our earnings per share numbers based on.

In terms of the shareholders -- the recent shareholders, we have been told by them that they are patient. They are long-term shareholders and they are in this for the long run. And that's what they have stated to us. So we believe them and we believe that they will be patient with us.

Did I address your questions? Was there another question that I may have missed?

Yes. Well, that's fine. But do you anticipate any more sales of common shares, because you could make 10 jillion dollars, but if you have 25 jillion new shares, it's not going to amount to much.

No, I mean, today the S1 registered B shares for this latest equity offering and that's it.

Okay. So you're really not anticipating any other expansion of common stock or equivalent?

No plans at this time. But again, recognizing there is 9 million warrants out there that they could exercise at $0.54 a share. That was part of that equity deal, but we have no other plans for issuing any other shares at this point in time.

Okay. Thanks.

(Operator Instructions). Peter Field, Merryfield Investment Management.

I just have a comment. You've answered my question, so thank you for that. The comment is that after watching you guys for many years, as you know, it sounds to me like all your hard work and dedication and commitment is finally beginning to pay off. So congratulations and keep up the good work.

Well, thank you, Peter. We appreciate that very much.

All right. Take care.

Bill Hardy.

Yes.

Good afternoon, Bill.

I think that the improvement in revs was fairly decent, and I think your forecast of $9.5 million this coming quarter is very significant. So I have a good feeling about that.

The thing I'd like to ask you about is, of course, IntelliTube, the 4 foot version. In as much as the 2 foot version has already been proven, it seems almost esoteric that the 4 foot wouldn't be that difficult. So are there problems in getting that out or is it just that you want to make sure that it's right?

Bill, we know it's right. But the reality is is it wasn't until this year that the LED chip suppliers have a chip available on the market that put out sufficient amount of light and do it very energy efficiently. And so that's really what has been holding us back. And in a 4 foot version you need twice the light of a 2 foot version, so there you go.

Yes. Based upon normal engineering, that's a fact. So you think that along about the end of the fourth quarter or beginning of 2013, we are going to be there?

That's what we are pressing hard for right now, correct.

Okay. Thank you very much and I appreciate your answers.

And that does conclude our question and answer session. I'd now like to turn the call back over to Brion Tanous for any additional or closing remarks.

Actually, it's Joe Kaveski. And thank you, Kevin. And I guess I would just like to offer a few closing remarks. And that is, first of all, I'd like to thank our shareholders that participated in voting their proxy at our annual meeting that concluded in July.

And I'd also like to share -- actually, I'm delighted to share with you that the Company will be participating in the Rodman & Renshaw conference September 10 at 1.30 PM -- 1.35, excuse me, when the conference will actually be held at the Waldorf Astoria in New York City. So hopefully you'll be able to join us.

And so with that, I would just like to thank everyone again for making time and participating in our call. Thank Energy Focus employees for their dedication and continuing hard work. And wish everyone a great evening, and I look forward to our next call. So thank you again and have a good evening.

And, ladies and gentlemen, once again that does conclude today's call. We appreciate everyone's participation.