Energy Focus Inc (EFOI) 2012 Q4 法說會逐字稿

Good day and welcome to the Energy Focus fourth-quarter 2012 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. Brian Tanous. Please go ahead, sir.

Thank you, operator. I would like to welcome everybody to Energy Focus's fourth-quarter and fiscal 2012 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 quarter of fiscal 2013. The Company's Chief Financial Officer, Mark Plush, will provide greater detail surrounding the Company's fourth-quarter and full-year 2012 financial results. We also have John Davenport and Eric Hilliard 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 am 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 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 would like to turn the call over to Mr. Joe Kaveski. Joe?

Thank you, Brian and good afternoon, everyone, and thank you for participating in Energy Focus's fourth-quarter 2012 earnings call. Today, I would like to offer you a few brief comments on our fourth-quarter and year-end financial performance and discuss some noteworthy events that have recently occurred.

I would like to offer you a view of our overall opportunity within the LED industry and why Energy Focus is well-positioned to capitalize on this opportunity. And I would like to provide you with guidance relative to our anticipated first-quarter and 2013 performance.

So to begin, the Company achieved a 48% increase in sales compared to the fourth quarter of last year and an overall 16% sales increase over the prior year. There were many positive milestones that were achieved in our fourth quarter and they include sales in our Pool and Commercial segment, which are primarily now LED products, increased 30% compared to the fourth quarter of last year and increased 26% on a year-over-year basis.

Furthermore, our Products segment reported a $1.3 million in segment income improvement making this the first time since 2008 that this segment was profitable. This was the result of increasing demand for our LED products, including a new multiple LED tube lamp that we began selling in our fourth quarter. This super energy-efficient LED lamp is truly best-in-class as it can achieve 118 lumens per watt.

Also, the National Shipbuilders Research Program, which is an organization representing the US Navy and all of the major Navy shipbuilders, selected Energy Focus to exclusively design the Navy's future de facto general illumination LED fixture based upon none less EFOI's military IntelliTube product. This fixture will be used in the construction of future Navy ships.

So it is now fair to say that Energy Focus is well-positioned to be the Navy's primary LED lighting supplier for today's existing vessels and for all future ships. And today, we are the only mil-spec qualified provider to supply LED tube lamps.

Also, we are now receiving military IntelliTube orders outside of our $23 million Navy contract. We believe these sales will continue to grow throughout 2013 as our products are now listed on the Defense Logistics Agency, DLA, which is the primary procurement agency for the US military. And we are also pleased to announce that we received ISO 9001 certification on our Ohio manufacturing facility.

And now if we look to our SRC solutions business, SRC sequentially increased sales by 130% on a quarter-over-quarter basis and 11% on a year-over-year basis. This was the direct result of our strategy to add Energy Services Company that focuses on the public sector, expand our selling geographies and increase our differentiation and customer value through the application of LED technology.

In our fourth quarter, we grew our sales pipeline by 11% when compared to the previous quarter even after removing approximately $7 million in secured sales during the fourth quarter from our pipeline. Overall, our sales pipeline as of today is approaching $40 million.

Also, the Company raised approximately $1.5 million in working capital in our fourth quarter to support working capital requirements. Beyond the money, this is significant as it continues to demonstrate the market's recognition of the value of our IntelliTube technology.

And last but not least, the Company made substantial progress in the development of IntelliTube design for the commercial markets. We have demonstrated the four-foot version of IntelliTube to customers and it has received an overwhelmingly enthusiastic response. In fact, these customers have commented that finally a company has demonstrated an LED product that produces 360 degrees of light like a fluorescent tube and uses less than half the watts. These same customers always ask how soon can they acquire IntelliTube. And with this in mind we remain committed to launching this product late in our second quarter.

So now let's spend a few moments discussing the overall lighting industry and why Energy Focus is well-positioned to capitalize on the transition to LED, which, by the way, is happening now. If you recall, Energy Focus's strategy is quite simple. We are all about developing IntelliTube, the game-changing technology that creates significantly more economic value to the US military and the nonresidential existing building market. Indicators are that 2013 is the beginning of the transformation of the LED lighting industry, especially in the public sector.

According to experts who recently presented in the Strategies in Light Conference, the LED lighting market is expected to double in the next 12 months to approximately $3 billion. I believe this transformation is occurring because I have lived through this type of transformation before. In the early '90s, the general lighting transformed rapidly and building owners received significantly more economic value by replacing their old inefficient fluorescent lamps that used magnetic ballasts to energy-efficient T8 fluorescent lamps with electronic ballasts. This is exactly what is happening today in the public sector.

Our LED replacement lamps now offer more economic benefit over the most efficient linear fluorescent lamps in most applications. 2013 is truly the beginning of the transformation for our LED replacement tube lamp sales.

Now I would like to conclude by offering you some guidance relative to our first quarter of 2013 and beyond. We expect to see modest growth, around $5.5 million to $6 million, in our first quarter of 2013. Colder temperatures in the Snow Belt states have impacted our pool sales and the government's pending sequestration has had an impact on our first-quarter military sales.

The Company is though cautiously optimistic that this situation will rectify itself as sequester begins next Tuesday and the government restarts its spending under continuing resolution. Under continuing resolution, the Navy has indicated that we will receive approval on the delayed orders. Despite these first-quarter challenges, the Company does foresee double-digit growth in 2013.

Now I would like to turn the call over to Mark Plush, our Chief Financial Officer, who will offer further details on our 2012 financial performance.

Thank you, Joe. Good afternoon, everyone. Net sales of $9 million for the fourth quarter of 2012 increased $2.9 million or 48% compared with the prior year's fourth-quarter sales of $6.1 million. The increase in sales was due primarily to $3.2 million higher sales from our SRC solutions business. This was partially offset by a $1.1 million decrease in our government products R&D services mainly due to lower revenues from the US Navy contract.

Gross margins were 20% of net sales versus last year's fourth-quarter gross margins of 20.6% of net sales, a slight decrease from the prior year. However, gross margin dollars increased $540,000 as a result of higher sales. Operating expenses for the fourth quarter of 2012 were $3.6 million compared to the prior year's $1.6 million, a $2.1 million increase. Approximately $1 million of the increase were non-cash items. $672,000 due to the write-off of impaired goodwill and $309,000 due to a lower favorable adjustment on a contingent liability.

Additionally, there was approximately a $900,000 impact as a result of last year's favorable credit to operating expenses relating to the US Navy contract. When adjusting for these items, operating expenses increased approximately $200,000.

The fourth-quarter loss before taxes was $2 million compared to a loss before taxes of $625,000 in the prior year's fourth quarter. This reflects an increase in gross margins of $539,000 on higher sales, which was offset by $2.1 million in higher operating expenses, $1 million of which were non-cash.

For the year ending December 31, 2012, net sales were $29.8 million compared to $25.8 million for last year, a $4.1 million increase, or 16%. The increase in sales is primarily the result of $3 million of higher sales, or a 26% increase from our Pool and Commercial products, primarily driven by higher sales for our LED commercial and pool products.

Sales from our SRC solutions business also increased $1 million, or 11% of sales improved over the second half of 2012 as our pipeline strengthened. Gross margins increased $1.1 million on $4.1 million of higher sales. Gross margins as a percentage of net sales for 2012 were 20.9% compared with the prior year's 20.1%, 8/10 of a percentage point improvement. The improvement in gross margins as a percentage of net sales was the result of improved margins from our Products segment as a result of cost-reduction efforts.

Operating expenses for 2012 were $11.3 million compared to the prior year's $10.4 million, an increase of $888,000. The increase in costs is due primarily to the writeoff of the impaired goodwill of $672,000 and a reduction in benefit of a contingent liability of $309,000. Excluding these non-cash adjustments, operating expenses were essentially flat in 2012 compared to the prior year at $10.7 million. However, this does include an $883,000 increase in R&D expenses, primarily due to lower-cost recovery benefits in 2012 versus 2011 as a result of 2011's billing to the Navy, the qualification of products under the $23 million contract. Offsetting the increase in R&D expenses was approximately a $900,000 decrease in G&A and sales and marketing expenses.

I am also pleased to report that our Products segment of the business was profitable in 2012 reporting $548,000 of earnings from operations. This represents a $1.3 million improvement from the prior year's loss and represents the first profit in this segment since 2008 when we first began reporting segments.

The loss before taxes for 2012 was $5.7 million compared to $6.1 million for 2011, which includes approximately $1 million of non-cash operating expense from 2011. Excluding the adjustments for goodwill and contingent liability, the loss before taxes in 2012 would have improved $1.3 million on $4.1 million of higher sales as compared to last year.

Additionally, financing-related expenses decreased $172,000 from the prior year. Cash at December 31, 2012 was $1.2 million versus $380,000 at September 30, an $801,000 increase. Cash used in operations for 2012 was approximately $7 million. $3.3 million of that was due to cash losses and $3.7 million of that was due to changes in assets and liabilities that affected operating cash flow.

Inventory turns at December 31, 2012 were 11.1 turns, approximately 3 turns better than the prior year. DSO was approximately 60 days, an 11 day increase from September quarter as the result of the early buy program for our pool products.

On December 13, 2012, we received $1.5 million for a three-year unsecured subordinated debt note, which has a 5% interest rate and matures on December 31, 2015. The notes are convertible into common stock at $0.23 a share.

On March 6, 2013, we also announced that we embarked on a program to raise up to $3.8 million in convertible debt, of which $1.7 million has been received as of March 6, 2012. These notes are also unsecured with a 5% interest rate; however, they mature on December 31, 2016. The notes are convertible into common stock at $0.23 a share. The proceeds from financing will be used for operations during 2013. Now I will turn the call back to Kevin for questions.

(Operator Instructions). [Ted Brown], Private Investor.

Hi, Ted here. How are you doing?

Hi, Ted.

What's that?

I said we are doing well. Thank you, sir. Glad to hear from you.

All right. Listen, a couple of things and I would like you to think about them and tell us what you think. First of all, a while back at the last conference call, I think, I mentioned the fact that Nexus was up really in serious trouble and there must be some products of Nexus that you might be able to negotiate with.

Now, in the meantime, they have found themselves a whole lot of additional capital and they announced the day before yesterday that they had -- they are all ready to come forth with a wonderful plug-in replacement that is very similar to what you think that you have or that you are working on. And I wonder if they have some really severe kind of competition for us now. Yes, go ahead.

Ted, we read the same press releases that you did and basically what we saw was a press release that they were just introducing a new tube that would put out roughly 1700 lumens at 15 watts, which is 112 lumens per watt. Good for them, but we have been selling one that can achieve 118 lumens per watt since our fourth quarter. So I don't know how to respond further than that.

The other thing that I would mention to you is that the market is just so huge at this particular point in time that I don't believe that they will compromise any of Energy Focus's sales. In terms of their technology that they introduced, basically, it was a multiple LED tube lamp similar to the one that we have been selling, but the real, the higher levels of differentiation and excitement really begin when we bring commercial IntelliTube to the markets in the latter half of our second quarter. So I guess that is my only thoughts on that.

Okay, well that is good, Joe. Look, you have been very slow in developing this. What is it, the four-foot tube.

Yes, sir.

And it was promised in the last quarter of the last year and you didn't mention when it is coming. ad some people think that that is very important.

And I totally agree and it is very important. It is the gamechanger and in our last earnings call, what we did say was that we expected to introduce it either in the last half of 2012 or by the middle of 2013. And we are absolutely committed to doing just that. And I would have liked to have introduced it a little bit, a little sooner, but the reality is that we were highly dependent upon the LED chip manufacturers themselves and we now have LED chips that are high brightness white LEDs that achieve the amount of light output that we need and at the efficiency level that we need as well. So we are moving full steam ahead.

Incidentally, Peter Field and I went to see [GPA] Technologies in New Hampshire here, along with another friend of yours, [Joe Gilette] and we got quite a good feeling about what they could do. I wonder if they are one of your -- one of the fellows that have your equipment? Do you know that?

I am not familiar with GPA Technologies. I am actually just trying to Google them as we literally speak right now and look at their products.

All right, well, we can fix you up.

Okay, would welcome that.

Okay, but, yes, check with them. Now another thing that -- I guess I will get out of here after I ask about this -- you've had terrible investor relations. Now I know Brian Tanous has been on and off with you, but there are a few of us, like us who go to your annual meetings and drive all the way to Cleveland and all that kind of stuff, and when we call, we get kind of concerned because we have lost a lot of money on paper. And we just got nervous about this and we never get a call back. So we would like to have better investor relations from the few of us who are still living. Okay?

Understood.

What do you think about that?

I understand what my customer is telling me.

Okay, well, I will sign off.

It sounds like an area for improvement. Ted, you have my commitment that we will take action upon.

Okay, thanks a lot and I will leave you for now. Thanks.

Thank you, Ted.

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

Good afternoon (inaudible) and thanks for taking my call.

Definitely, Peter. Our pleasure. Thank you for calling.

Well, my pleasure. First of all, congratulations on the improvements you have made and the accomplishments you have done. Could you give me a little more color on the projected growth in sales for this next year and when we are going to reach that magical EBITDA breakeven point?

Ted, as I mentioned in my preamble -- or excuse me -- Peter -- we do expect to see double-digit growth in sales in 2013 and we do expect to provide you, let's call it, more insight into guidance during our next call. The reality is right now is that with what is going on with this government sequester, we just got to at least get a few days under our belt before we can really comment any further on that. But with or without the sequester, we feel very good about double-digit growth.

Well, I assumed that would be the case and shall I also assume that is why in your press release you show an expectation of $5.5 million to $6 million in sales for the first quarter of 2013, which would seem to be quite conservative and in fact is equal to what the Q1 was in the prior two years, but that is probably just due to lack of being able to see what is coming on the other end of getting the sequester back up and running and so on and so forth?

Peter, that is a very fair conclusion.

Okay. Well, hopefully when we get together for your annual meeting, we will have perfect clarity and we will all know what the future brings.

I am looking forward to it. Thank you, Peter. Appreciate your call.

Thank you, gentlemen.

(Operator Instructions). That will conclude our question-and-answer session. I would not like to turn the call over back to Joe Kaveski for any additional or closing remarks.

Well, thank you, operator and I would like to thank everyone again for participating in our call today, especially those of our employees and our investors and Internet participants.

In conclusion, I think that, as I mentioned and for the reasons I mentioned, that there is going to be significant adoption to LED within the lighting industry, especially within the public sector within the next 12 to 24 months. At Energy Focus, there is no doubt that we are well-positioned to capitalize on this transformation.

In summary, we already serve those most viable markets for the LED transformation. We already sell the best-performing LED products today and we are about to launch the gamechanging technology that we call IntelliTube for the commercial markets that in the end is what it is all about, kind of creates superior value for our customers and our shareholders. So with that, I would like to thank you again and we look forward to visiting with you on our first-quarter 2013 earnings call. Goodnight, everyone.

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