Energy Focus Inc (EFOI) 2014 Q1 法說會逐字稿

Good day and welcome to the Energy Focus first-quarter 2014 financial results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Frank Lamanna, Chief Financial Officer of Energy Focus. Please go ahead, Sir.

Thank you, Blake, and good afternoon. Welcome to the Energy Focus first-quarter 2014 earnings conference call. Today, James Tu, our Executive Chairman, Eric Hilliard, our President and Chief Operating Officer, and myself will report on our results for the first quarter of fiscal year 2014. The news release with our earnings results have been posted to our website under the investor section.

As a reminder, today's discussion will include forward-looking statements, including predictions, expectations, estimates, or other information that might be considered forward-looking. These forward-looking statements are subject to numerous risks and uncertainties. We encourage you to review our most recent filings with the Securities and Exchange Commission, including our 10-K and 10-Qs for a complete discussion of these factors and other risks that may affect our future results or the market price of our stock.

We are not obligating ourselves to revise our results or publicly release any revisions to these forward-looking statements in light of new information or future events.

Now I would like to turn the call over to James Tu.

Thanks, Frank. Good afternoon, everyone, and thank you again for your participation in our first-quarter 2014 earnings call. Our first-quarter 2014 financial results mark a three-year continuation of our turnaround efforts during the second half of 2013 and an exciting production of positive momentum under the new Energy Focus.

Before we start discussing about our progress, I would like to take the time to express my gratitude to all our shareholders who were patient and supportive to our necessary reorganizational efforts during the past nine months. I would also like to give two thumbs up to all our employees who took the multiple challenges and oftentimes unprecedented pressures to co-create a new powerful culture of accountability, trust, extraordinariness, [fun], openness and integrity. We have now in part on a long and exciting journey towards building an impactful LED lighting enterprise.

During the quarter, as we stated in the press release, our sales, excluding government R&D service revenues, grew 32% organically from a year ago. As we indicated in our press release, our government product sales grew 511% over the same period of last year. Even so, we believe that we are still in the first half of the first inning of our penetration into the military ships market.

We have not yet started generating significant commercial LED tube sales during the first quarter as we reorganized our ESCO product sales team and launched our two products into the commercial and industrial markets in January this year. However, we are now building up our pipeline for commercial tube sales aggressively and we very much look forward to increasing revenue contributions from commercial tube sales from the second quarter on.

Equally important, as we continue to enhance our production and [close inefficiency] and impose stronger operational and financial discipline throughout the organization, we were able to improve our growth margins further during the quarter which came in 9.1 percentage points over the same period in 2013 and 5.7 percentage points over the fourth quarter of 2013. Notably, the solutions business improved its gross margin by another 8.8 percentage points sequentially from the fourth quarter of 2013.

We have improved solutions margins by 17.8 percentage points over the past six months. And our solutions business is generating operating earnings on its own for the second consecutive quarter. We believe that we are well on our way to reach and exceed the 30% margin target we laid out in the last earnings call for 2014.

On operating margins, we reduced operating relative to $1.1 million from $1.2 million same quarter last year. Had we not invested additional $300,000 to jumpstart our commercial business, we would have improved our margins further. That said, with clear continuing sales growth and margin improvement, we do believe that we are on track to narrow the losses further and become professional positive within 2014.

Now I would like to turn the call to our CFO, Frank Lamanna, for more specifics on the financials after which I will update with you in further detail our progress in various business units.

Thank you, James. Good afternoon, everyone.

Before I discuss the financial results for the first quarter of 2014, I would like to inform everyone that the financial results that I am going to refer to as continuing operations will exclude those of our pool products business which was sold in November 2013. We have eliminated all net sales and expenses associated with pool business on a historical basis and classified those activities as discontinued operations.

For the first quarter of 2014, Energy Focus had net sales of $4.9 million, an increase of $461,000 or 10.3% compared to the prior year's first-quarter net sales from continuing operations of $4.5 million. Our product segment sales grew 3.1% quarter over quarter. In the first quarter of 2014, government product sales increased 511% compared to the same quarter last year as our sales to the U.S. Navy and maritime fleet gained momentum.

Offsetting this growth was a 97% decrease in R&D services revenue due to our changing focus to only those projects that may result in material LED lighting product opportunities. The solutions segment sales increased 21% from $1.8 million in 2013 to $0.1 million in the same period 2014.

First-quarter 2014 gross margin was 28.9% of net sales as compared to last year's first-quarter gross margin of 19.8%. A 9.1% -- excuse me a 9.1 percentage point improvement. In the first quarter of 2014, product segment gross margin improved by 6.7 percentage points to 29.3% of sales in the first quarter of 2014.

Our improvements in gross margins in the products segment have been spurred by our continuing efforts to effectively manage and refine our supply chain. We have identified cost savings opportunities by trading more efficient product designs and at the same time lowering costs through our supply chain. The growth of our sales pipelines has enabled us to enhance our buying power and to go -- and to negotiate more favorable material pricing in terms with our suppliers.

The solutions segment gross margin improved by 12.8 percentage points to 28.5% of sales as we continued to improve operational execution of the solutions business. We have refocused the solutions business by concentrating our project design efforts on only LED lighting designs in retrofits while specifying Energy Focus's array of LED lighting and products. Except for a few legacy projects which are scheduled to be completed in the second quarter, our margins on awarded projects are increasing to establish target levels.

Operating expenses were 25 -- or, excuse me, operating expenses were $2.5 million in the first quarter of 2014 as compared to $2.1 million in the same quarter of 2013. The increase in operating expenses was primarily due to selling, general and administrative expenses associated with building our commercial LED tube business.

For the first-quarter 2014, net loss from continuing operations was $4.1 million as compared to a $1.5 million net loss in the first quarter of 2013. Included in the first-quarter net loss were one-time expenses of $2.7 million, $2.6 million of which were non-cash charges and are related to the conversion of unsecured convertible notes. Excluding these one-time charges, the net loss from continuing operations was $1.4 million.

Cash and cash equivalents at March 31, 2014, were $2 million compared to $2.9 million at December 31, 2013, a decrease of $900,000. During the first quarter, we utilized funds, purchased materials to meet growing demand for our military and commercial LED tubes and to pay down our aged outstanding accounts payable, which significantly improved our credit status with third-party credit services and suppliers.

Cash used in operations for the quarter ended March 31, 2014, was $2.1 million compared to $2 million for the prior year.

Now I will turn the call back to James.

Thanks, Frank. Now I would like to provide you with an update on the progress we have made during the first quarter of 2014 as a company overall and in our various business units.

As many of you are well in Energy Focus today consist of many tube business segments. LED lighting solutions and LED lighting products. Our solutions business provides both LED lighting retrofits [audit] and design services as well as turnkey LED lighting retrofit solutions mainly to the Energy Service companies, or ESCOs, which provide energy efficient retrofit solutions with performance guarantees for their clients, mostly federal or state-funded agencies are able to pertain (inaudible) for these energy upgrades.

Our product segment markets are primarily composed of military and maritime, ESCO, and commercial industrial. During the quarter, I am happy to report that we continued to make progress in all of our target markets.

First, we continue to improve our solutions margins and contributed operating income to the business for the second quarter in a row. Digitally improved internal control procedures were put in place and our cost control measures. We believe that we have fundamentally elevated our margin to a sustainable level.

During the quarter, our solutions team designed and proposed an industry-leading amount of all LED projects of $9 million. But in context, schools, universities, hospitals, and parking garages, we believe that our proven LED lighting retrofit design capability will help us expedite LED adoption in the markets we address. And in regards to enter into more product selling opportunities, many facility managers today are still not clear about LED lighting's extreme appeal. And the incumbent lighting companies are still not actively converting their customers and distributors to LED lighting products.

Therefore, our long-term goals for our solutions business is to maintain positive financial contribution to the Company and fill all LED lighting retrofit design and consulting services to help shape Energy Focus into a leading, trusted brand in the lighting industry as well as generate large product sales opportunities.

Our military and maritime business excluding government R&D contracts grew not only 510% from the first quarter of last year, but also 40% sequentially over fourth quarter of 2013. Again, we have stated that we have been experiencing triple-digit growth in the sales pipeline of this business since the beginning of the year. And we believe that we are just in the beginning of steep and sustainable long-term growth.

Our sales footprint continued to expand during the quarter and we believe that the awareness of our LED products is approaching an inflection point as we are now getting unprecedented interest from shipyards across the country. Our long-term goal is not only to grow rapidly, but also to dramatically expedite LED induction by the U.S. Navy, military (inaudible) and Coast Guard which together represent more than $1 billion opportunity for us over the next few years.

In addition, we continue to practice kaizen or continuous improvement in our manufacturing operation for military products. We are also making more progress in designing products to lower component costs while maintaining functionality and reliability. And we believe we are on our way to sequentially higher gross margins in our government business.

Our strategy in the ESCO markets is to leverage upon our proven product reliability endorsed by the Navy as well as our deep understanding of networks in the ESCO channels. We are currently focusing on our sales and marketing efforts in the federal government agencies, which we believe have potential sales of several billion dollars over the next few years. Our goal, as in the military channel, is to become not just a leader but also to be the spender for LED tubes to be used in ESCO projects.

We are now pursuing over $20 million of opportunities through our various government entities such as U.S. Army and Navy bases, VA hospitals and federal government buildings. And we expect to see sales materialize from second quarter on and opportunities to grow substantially over the course of 2014 and beyond.

Our commercial industrial business sales, primarily our LED Tube's products to -- that address the retrofits flow for [lithium bulbs], high-intensity discharge lens, and [prodding] luminares. We believe that our CMI business has an addressable market of more than $60 billion in the US alone over the next five to 10 years. Based on the number of fixtures installed and conservative long-term estimates on [length crisis], our strategy in a nutshell is for us to meet our clients' needs by providing the highest performance products at the lowest cost.

As I mentioned earlier, we have just launched this business in January 2014, targeting mainly large national retailers, hospital systems, universities, parking garages and property management companies, particularly in high power rate, high energy rebate regions. Since then we have identified and are now pursuing $14 million of opportunities. We have already started our Ohio regional office and we plan to open three more regional offices this year in Boston, New York, and Washington, DC areas.

Although the sales leadtimes are usually between six to 12 months, we believe that we will start seeing modest revenue in our second quarter with sequential quarter-over-quarter growth for the foreseeable future.

In conclusion, we believe that we are building positive momentum in all the LED lighting markets we serve. And we look forward to updating with you with more exciting progress as the year unfolds.

With that, I will turn the call back to the operator to open up for questions.

(Operator Instructions). [David Herdman].

I am excited about the progress, but I do have some questions about the booking on the Navy sales that were announced. I don't know how that goes, I mean or if it is -- obviously you announced a lot of sales in the quarter, but the sales figure doesn't show that. Can you put some information in there?

David, when you say the sales figures, I am sure we announced in the press release before that we are seeing a lot of orders and the orders will take a few months to be filled. So you will start seeing that obviously in the coming months and quarters.

Just so I understand it, when you announced them -- the sales aren't booked in that quarter that you are announcing the sales, they are booked as it is delivered, or -- ?

Well, what -- in there, obviously if you look at the press release today, the earnings release, that is the real sales. We sold $1.5 million in the quarter. But if you look at the press release we have announced in the past, though, it is because that we are seeing tremendous momentum and growth in the order pattern. And we were making announcement that those are material developments in the Company that we had to make an announcement.

So you will start seeing those orders turn into sales in the next month, quarter or two.

Very good. I do have one other question on the pipeline. It sounded like you had $20 million in Navy sales pipeline and another $14 million in commercial sales pipeline. Is that -- ?

Those are the opportunities that we are pursuing now. So, we believe that a portion of that, hopefully a good portion of that, will come in in the next few quarters. That is where we are. And we are still increasing the pipelines, by the way. So, they will turn into sales, some of them at least, over the next few quarters.

Okay, very good. Thank you very much.

Billy Hardy.

Greeting from Dallas. Back in April -- in fact, April 7, you announced that you were partnering with a fixture manufacturer who had gotten approval from the Navy to supply fixtures for new ship construction. And in turn you would provide the tube fixtures for that, that new construction.

Has that been extended to commercial building construction wherein you would partner with either that firm or some other firm that was doing similar fixture work so that you could piggyback on the fixture to get your tubes into new construction?

I will have Eric talk a little bit about that fixture partnership and then I will answer your question about commercial fixtures. Eric?

Okay, thank you.

Thanks, James. So, to speak specifically to the U.S. Navy fixture and new construction market that we have partnered with, we want to open that market up as we announced in the press release, which is a sizable market to us. But to do that obviously you have to provide the entire fixture. So the complete focus on that is to do just that. Be able to go to the shipyards who are producing brand-new vessels for the United States Navy and provide the entire fixture of LED solution.

And that is just specific to that and that manufacturer's focus is that so it was not in any way to utilize that front to move in to the commercial marketplace.

No, I understand that, but is there any plan to mirror that in the commercial market?

So, Billy, to your question about the commercial and industrial markets, remember, we are focusing on the retrofit opportunities. Yes, we do get requests to replace the fixtures from time to time and we do partner with a few fixture companies. When we -- they are pretty much our vendor anyway. We are buying products from different fixture companies when the needs come up.

But our main market is going to be in the retrofit market where we refit the tubes. However we place [HIB] lens or tugging garage luminares with our tubes. Those are the biggest opportunities. We are talking about billions in -- adjusting the florescent side is more than $2 billion in [soft tubes] in the US alone. So that is the [Edison] market. Yes there are going to be fixture demands from time to time and we do have a fixture company that we work with and we do expect in the future that some of these picture companies will be marketing our products as well. So I hope that answered your question.

Well, in a way, but just one point. Is it -- is the fixture company the company that decides what lighting tube to use or is that independent of their decision?

Well, number one, we get demand from our customers, our eco-clients, about fixtures sometimes other than single retrofits. So we buy fixtures and package them into the whole deal and sell to them. That is one way we work with the fixture company.

The fixture companies also have their own fixtures that they would choose their own lens. And we hope to be the lens that they choose in the future. We would like to be the vendor of the industry, obviously.

So, we look forward to working with the fixture companies to put our lamps in their fixtures. That is another aspect of the business when it comes to fixtures.

I think you probably know that a lot of other LED lighting companies, especially larger lighting companies, try to push the whole panels and fixture replacement solutions. We focus on replacing the tubes because it is a lot more economical and it is a lot easier, and you wouldn't have to rebuild the fixtures the next time you upgrade your lighting. So there are a lot of benefits of directly retrofitting the fixtures with our tubes. That is the solution we are pushing.

Right. Well, I am just trying to mirror what you are doing in the new Navy warship construction area where you are partnering up with a fixture so that you can get your tubes into that new warship which had been approved by the (multiple speakers).

Sure, sure. I think that is definitely a very good question, but realize that the Navy market is a very specialized market where there are not many fixtures companies that have qualified fixtures in the channel. In the commercial markets, you have literally hundreds of fixtures companies everywhere.

Our goal is to be able to work with the larger fixture companies and, hopefully, at some point we will be able to penetrate that market as well. That is why we call the OEM market is one of our verticals.

Well, good luck (multiple speakers).

It is a very different venture. That is why in the Navy market you need a partner with a qualified fixture company to get into the new shipping building market.

Yes. I know in your announcement there was a summary of all the ship activity that was going to take place in, I guess it was about a 20-year summary, but in focusing on the near term, there's quite a few ships that the Navy is hoping to build and develop in the near future. So, good luck.

Thank you.

(Operator Instructions). Al Snyder, Oppenheimer and Company.

Good afternoon. I am very pleased with what I've heard. I have a quick question. About three or four days ago, President Obama announced a commitment, executive orders, I think he is talking about various forms of energy efficiency programs.

The $2 billion efficiency (multiple speakers)

$2 billion, right. $2 billion and essentially pointing out that the $2 billion is an extension of existing programs and they are really paid for by upfront costs. And no net cost to the taxpayer.

Yes. (multiple speakers)

That was part of the actual federal release. That is pretty exciting stuff. So, I guess the question, James, is where do you stand with respect to that type of business? Are you a factor? Are you trying to be a factor in that area? So how are you doing with that? That is the question.

Yes, absolutely. That is a great point. Yes. It's -- as we -- as I just went over in the earnings call, we have a dedicated focus on federal ESCO opportunities which absolutely capture, try to capture that additional opportunity in the next few years. We have go to multiply our current self pipeline in the next few quarters by focusing on -- partnering with the leading ESCO that will be able to get these opportunities, these energy efficiency retrofit opportunities.

So, definitely, I would think that it will be one of the fastest-growing business for us in the next few quarters.

That's terrific.

Yes, we have a dedicated team that Eric Hilliard is now overseeing to expedite our growth in that whole particular vertical. And, again, as I mentioned, we want to be not only a leading player in that market in that particular vertical, we would like to be the center because we are, today, providing what we believe highest performance at lowest cost products.

As you know, buildings, all these buildings have florescent lights. That is exactly what we are intending to replace.

One other question then I will get off the queue. Can you give, or are you permitted to give, any other projections as to where we might be at the end of the year? I mean, are you being conservative in what you are seeing? Are you being -- thinking beyond these numbers? How do you really -- how do you feel about where we are?

It sounds to me that you are at the takeoff point right now and if things fell into place that (multiple speakers) there would be some really (multiple speakers) some really wonderful numbers coming down. And I don't want you to be overenthusiastic, but I guess we would all like to know could we wake up one day and say, oh my God, the numbers doubled. They are far in excess of what James had suggested as a result of his hard work and effort, and it is all happening.

Thanks, Al, for your question. Obviously, as an investor myself, I would love to see strong [quarter and half] of this Company and that is why the whole team is working towards. And I think we have been conservative and we want to stay conservative in focusing the future. This is the first year of a turnaround that we tried to build up hopefully sequential growth going forward. And I obviously don't rule out the possibility that we could grow faster in some quarters than other quarters. But I would like to see a few quarters of positive momentum building and development before we feel comfortable forecasting the numbers.

No, I understand. I understand. (multiple speakers)

One promise I can give you is that at some point by year end we should have a pretty good sense about these contract flows. One thing I keep emphasizing over the past few calls is that the deals we work with are pretty sizable given where we are right now in terms of revenues. You are talking about national retailers, large hospital systems, that each of them could be millions of dollars. So it is far too early for us to predict a quarter.

And we don't want to underestimate the potential. We don't want to overshoot either. So --

No, I understand. I understand.

So, our policy is to stake out some of these and execute and in a few quarters when our sales level is at the point and our pipeline is at the point we feel confident of giving our quarterly financial projections, we will do so.

Well, absolutely. I appreciate that, James, and good luck, as usual.

Thank you.

[Ted Brown].

Listen, when the ships come back from four months of deployment to West Pak or the Med, are they happy with the system with your light fixtures?

Sure. I will have Eric answer that.

Yes, absolutely. I have been meeting with the United States Navy over quite a period now both in the Pentagon and in the fleet. And I do believe that the fleet is very pleased with the product they are receiving. All we ever get is really positive reviews and positive information.

And, yes, I could be very zealous about this. But I want to speak on behalf of the Navy, I was going to say every time I meet with them they seem very, very pleased.

Okay, good. Now my other question has to do with the fact that some of us who have been investors in the Company for three, four years believe that the Company had patent protection and had things that they could offer this great and expanding market that is unusual. And has, as I say, patent protection on some of this stuff.

Now, what percentage of the fixtures that we are putting out are patent protected in some way, proprietary kind of products, and how (multiple speakers)? I am going back now to the commercial stuff and how much of it is (multiple speakers) proprietary and how much of it just comes off of the -- right out of the hardware store?

Right. So, Ted, the thing is that, as you know, we have been developing LED lighting products for over 10 years now. We have a substantial amount of proprietary know-how (multiple speakers)

I would hope so.

To make sure that the products work, work very well. And I think that could be proven by the fact that, since 2007, our product on the Navy ships has never broken. The failure rate has been zero. I don't think any company in a leading industry could say that. At least I'm not aware of.

On the commercial products, which was launched about four years ago, our failure rate is below 0.2%. So, I am saying that the products have to be reliable. They are, after all, lights. They have to provide the lights reliably.

And coming from there, what's the --? What is the other factor -- what are the other factors that make this such as indecision is the price. And the service. (inaudible) activities, right. So we try to address those concerns. So those factors become how we win the business as to how we establish ourselves as the leader. So that is why I emphasized lowest cost, highest performance.

So, (multiple speakers) with our technologies is that we are able to leverage what we know and develop a very strong supplier network because a lot of the productions need to be outsourced in order for us to be economically competitive.

James --

But we make sure that we are designed -- our design. What? I'm sorry.

Right. Excuse me. Is Revolution selling the same stuff?

No. We actually look at every product. I mean, the primary ones that come from viable brands. We actually compare with all of them over time. We believe that we are absolutely providing the highest performance and the lowest cost products today. Again, (multiple speakers)

Okay, keep it up.

-- price points. And, so, they have their products. We do look at their products as well, but we are not selling the same product at all.

Okay, good. Thank you.

At this time, there are no further questions in the queue.

Okay, thank you, everyone, again, for your participation and we very much look forward to talking to you again in our second-quarter 2014 earnings call. Have a great day.

That concludes today's presentation. Thank you for your participation.