Orion Energy Systems Inc (OESX) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Orion energy fourth-quarter fiscal 2015 and year-end conference call. (Operator Instructions). As a reminder, today's program is being recorded.

I would now like to introduce your host for today's program, Adam Prior of The Equity Group. Please go ahead.

The Company issued the announcement of Orion's fiscal 2015 fourth-quarter and year-end results this afternoon. The Company has made available an accompanying slide presentation on its website at www.oesx.com in the investor relations section. While the format of today's call will not refer to any slides in particular, we encourage investors to use the document during today's presentation as an accompaniment.

I will now read the Safe Harbor statement. Remarks that follow including answers to questions include statements that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are generally identified as such because the context of such statements will include words such as believe, anticipate, expect or words of similar import. Similarly statements that describe future plans, objectives or goals are also forward-looking statements.

These forward-looking statements are subject to risks that could cause actual results to be materially different. Those risks include among others matters that we have described in our press release issued this afternoon and in our filings with the Securities and Exchange Commission. Except as described in these filings we disclaim any obligation to update these forward-looking statements which may not be updated until the Company's next quarterly conference call if at all.

With us from Orion is John Scribante, Orion's Chief Executive Officer, and Scott Jensen, Chief Financial Officer. With that I will turn the call over to John. Please go ahead.

Good afternoon and thank you for joining us today. We reported our fourth-quarter and year-end financial results this afternoon highlighted with total revenue inside the range of our guidance at $19.4 million along with continued improvement in our gross margins and a strengthened balance sheet. In fact, we achieved a year-over-year increase of over 50% in every measure of the Company's financial performance related to margin and revenue. And with the momentum we have in our pipeline and new products, there is a strong platform to deliver on expectations going forward into fiscal 2016.

As most of you know, Orion, its competitors and other in our industries have discussed in detail the massive transformation to the next generation of lighting driven by solid-state LED technology and the LED lighting adoption growth. In our fourth-quarter, LED product sales grew to a record level of over 60% of our total product revenue peaking at 66% in March.

To put that into perspective, Q4 last year was less than 13%. We estimate that LED product revenue will continue to grow in the coming quarters reaching 80% of total product in fiscal 2016 fourth quarter. So while the first half of the year started off very sluggish as customers evaluated technology choices, we made up for that shortfall in the back half and actually grew lighting sales 40% year-over-year after being down 26% in the first half ending up at 6% for the year.

I would like to recognize our sales teams, resellers, product development and project people for making this achievement a reality. If you think about it, Orion had to have on standby two very distinctly different business models, one for florescent and one for LED running simultaneously just to be prepared for the ultimate customer decision that could go either way. While our financial performance last year was not one that we were proud of, strategic initiatives taken were necessary to position us for a strong fiscal 2016. In the words of the notable economist Joseph Schumpeter, incessantly destroying the old and incessantly creating the new, we successfully launched a brand-new business out of the remains of the old, a feat that many others in our industry have failed to achieve.

Orion currently has a broad line of LED products available for sale. Our designed modularity to these products create vast combinations for commercial, industrial and retail applications as well as future proofing. We introduced several new products last fall and intend to bring new LED products to the market that are superior to other retrofit solutions available in terms of low-cost installation or superior performance leading to a lower total cost of ownership.

Over the past few months and in our offering roadshow, many investors inquired as to the reason a customer chooses Orion over our competitors. To that end, our markets are predominantly building retrofit installations. Our business isn't predicated on the new construction market. The transition to LED is very much a land grab and we have tailored our sales process over the years to meet this retrofit market head on when others see the market as a one size fits all model. This is not new to Orion. We were a pioneer in the first wave of industrial energy efficient retrofits over the past two decades. So our deep experience in this area will provide an additional edge over those lighting companies that are new to the space regardless of their products.

The installed base of opportunity is massive for our products, somewhere around $200 billion in the US alone. Virtually any building that has existing lighting fixtures is a potential customer, any car dealership, any school, any hospital, any factory, any warehouse.

Another trend that exhibits our competitive advantage is demonstrated in the increased orders of LED upgrades from previous Orion customers. Virtually all of Orion's 4 million florescent fixtures installed in over 11,000 facilities can be upgraded to LED with less labor and less material costs compared to removing the entire fixture and replacing it with competitors. This value proposition is refreshing to our customers as Orion's modular platforms provide a built-in LED upgrade path from our prior florescent installs.

Our pipeline has increased throughout the past six months and now we are seeing larger size deals through our distributors, ESCOs and enterprise accounts. We are seeing more federal business in the pipeline with VA hospitals and post offices and others. And some recent notable wins in the private sector was a contract for 47 locations of an international chain of big-box discount stores that will ship this quarter. And the award of another school district in the Midwest where over 3000 of our flagship LDR fixtures had over 20% gross margins. Our average project size is growing in the double digits, our margins are improving and our LED sales are better aligned with our production strategy and renewed financial position.

We are increasing gross margins as we had promised. In the slide deck that accompanies our discussion, we have included our margins on top of our LED sales trends. This shows that there has been a steady improvement with our material costs stabilizing and achieving a scale on LED that is allowing us to better achieve leverage in managing our costs and yet there remains considerable margin improvement ahead of us.

In our last call we noted that there was one product line which margins were dragging, our LED door retrofit or LDR. As we progress with the design and supply chain improvements for this line, higher gross margins are readily achievable. And with increased volumes, we will further increase gross margins by leveraging our fixed overhead across all our products. We believe that this is a positive trend and we are prepared to begin delivering the increased margins that our shareholders are expecting.

So with that, I will leave it to Scott for a few minutes and then I will come back.

Thank you, John. I will briefly discuss financials but I encourage each listener to review our press release issued this afternoon.

Orion's total revenue was $19.4 million for the fiscal 2015 fourth quarter compared to $12.6 million in the prior year period. During the quarter, lighting revenues increased 58.7% year-over-year. Additionally we closed out the year achieving our goal of exceeding 100 actively engaged key resellers. We have been encouraged by a solid backlog and pipeline of new product orders specifically growth in our LED product sales. Our order backlog as of March 31, 2015 was $7.1 million consisting of $6.9 million of lighting orders and $200,000 of solar orders. This compared to our December 31, 2014, backlog of $7.4 million which consisted of $7.1 million of lighting orders and $300,000 of solar orders.

The lighting backlog was bolstered by a $3.2 million single order received during the fiscal fourth quarter and by increasing LED orders for LDR and LED high bay products. We expect that $3.2 million of our backlog will be converted into revenue during the first quarter of fiscal 2016. The remaining portion of our backlog is expected to convert to revenue by the end of the calendar 2015 year.

Product revenue from Orion's LED product increased to $10.4 million or 60.1% of total lighting products during our fiscal 2015 fourth quarter compared to $1.3 million in the prior-year period. Total gross margin was 15.4% for the fiscal 2015 fourth quarter compared to 10.2% for the prior-year period largely as a result of the accelerated pace of LED lighting product revenue, the related impact of fixed expenses within our manufacturing facility and recent initiatives to reduce material input costs with our supply chain.

During the back half of fiscal 2015, we reduced certain costs across our top volume LED components by approximately 20% on a historical spend of approximately $10 million. Many of these reductions occurred during the fourth quarter and we will begin to benefit from these reduced costs during fiscal 2016.

We reported net loss for the fiscal 2015 fourth quarter of $4.7 million or $0.19 per share. In the prior year period, we reported a net loss of $8.8 million or $0.41 per share.

Now I would like to spend a few seconds on the financial highlights for fiscal 2015.

Orion's total revenue was $72.2 million for fiscal 2015 compared to $88.6 million in the prior year. Lighting revenue increased $3.8 million from our prior year due to our ongoing transition to an LED driven sales platform. Our initiatives to expand our US markets resellers, launch new LED products and sell into new markets are delivering improved lighting sales results. As a reminder, the Company did experience an expected decline in revenues of $20.2 million for the year due to the previously mentioned exit of our non-core solar business. Again, this is a sector that Orion no longer pursues.

Product revenue from Orion's LED product increased to $30.8 million during fiscal 2015 compared to $4.8 million in the prior year. Fiscal 2015 LED lighting products sales increased 542% over the prior year. Our total adjusted gross margin excluding the impact of wireless controls impairment costs and our third-quarter warranty charge was 16.1% for the fiscal 2015 year compared to 25.9% in fiscal 2014.

We continue to aggressively focus on cost containment initiatives related to material product costs and the implementation of lean manufacturing methodologies to reduce production costs in our manufacturing facility. We are now targeting gross margins for fiscal 2016 to be greater than 20% with expectations that we can achieve much higher, the variance being dependent on the LDR mix and margin improvements within that line. Our margin challenges have now been contained to one product line and selected sourced items and upon correction of our LDR input costs and increasing production volumes, we have a plan to be operating at levels consistent with our historical gross margin ranges.

Our fiscal 2015 operating margins were impacted by increasing research and development expenses related to our launch of new LED products and ongoing initiatives related to further new product development, testing and certification. We expect this trend in our R&D expenses to continue during fiscal 2016. As a reminder in February, we took initiatives to reduce annual operating expenses by over $4 million strengthening our position to return to profitability in the future.

As we continue to pursue potential accretive acquisitions, there will likely be some diligence expenses incurred this year as potential opportunities present themselves. We reported a net loss for the fiscal 2015 year of $32.1 million or $1.43 per share. In the prior year, we reported a net loss of $6.2 million or $0.30 per share. The impact of our wireless controls impairment charge during our second quarter contributed a loss of $0.55 per share to our fiscal 2015 results.

Quickly moving through the balance sheet, Orion remains in a solid financial position to carry out all of our initiatives. At March 31, 2015, the Company has working capital of $36.7 million compared to $33.1 million at March 31, 2014. We finished the year with $20 million in cash, receivables growth on our increasing lighting revenues and improving inventory turns in spite of the transition to new LED products and our supply chain challenges. Our balance sheet is strong.

We continue to pay down total debt over the course of fiscal 2015 with total debt decreasing $1.5 million to $5.1 million as of March 31, 2015 compared to $6.6 million as of March 31, 2014.

With that let me turn the call back to John. John?

Thank you, Scott. To wrap up, let's just discuss our strategy for the coming months in terms of sales, margins and guidance.

We have elected to not provide annual sales figure for guidance in fiscal 2016 instead focusing on a bottom-up approach of our business and providing some specific details to our investors to enable them to model our financials.

In previous years we provided a quarterly number. This was practical at times when we were developing large multi-year solar projects which allowed greater visibility throughout the year. However as the lighting retrofit market transitioned into a disruptive and fluid environment, it is difficult to accurately depict the interim timing of when projects would be initiated and completed from our customers.

Last year we provided annual guidance number which we revised throughout the year. This too became problematic as the market dynamic shifted rapidly. We considered doing this again this year or providing a minimum sales number, each has its benefits and distractions namely setting a precedent where investors would concentrate on a sales figure that may in the long run not be in line with growing a consistently profitable enterprise.

Orion's stated goal is to achieve profitability later this fiscal year. This is dependent on sales continuing to accelerate but also execution on margin expansion and the operating initiatives that we implemented in our fourth quarter last year. We expect that the operating and input cost initiatives we made will yield an annual reduction of approximately $10 million beginning in fiscal 2016. And our current expense structure provides a breakeven point at $95 million in sales with a gross margin of 26% and operating margin of breakeven.

This serves as our starting point and understand that our expense structure is improving. We anticipate capital expenditures in the coming year to be moderate and every opportunity Orion pursues will be a driver towards accelerating our return to profitable operations.

We are very confident that we will achieve a strong year-over-year sales growth from the $72.2 million we achieved in fiscal 2015. We have a robust pipeline and orders in the pipeline are getting much larger.

I discussed last quarter the creation of our innovation hub located in Chicago, Illinois where we will develop each coming generation of our technology. This is a long-term endeavor aimed at building one of our industry's best development centers at the forefront of design and efficiency. While I will not discuss the specific makeup, we have formed our innovation team and we will be in full operation early this summer.

We have an aggressive sales and marketing campaign designed to drive sales for new customers, new markets and new verticals. We are achieving all of this while still budgeting lower SG&A costs as a percent of total revenue for the year. To our customers, we always aim to keep our customer promise. That goes for our investor community as well. We are focused as a management team on delivering quantifiable results that you can measure and evaluate as we improve your value as shareholders.

Thank you for your support and patience during our transition, our best years are right ahead of us. So with that I will take your questions.

(Operator Instructions). Steve Dyer, Craig-Hallum.

Thanks, good afternoon, guys. A couple of quick ones for me. What are you seeing if anything that has changed on the competitive front and sort of how does that play in? I think you guys alluded to kicking the tires perhaps in some M&A this year. How do we think about what is going on in the industry?

It is good to talk to you, Steve. Thanks for calling in. From a competitive point of view, it appears that there are there is still a lot of change and navigation going on with some of our larger competitors. The small competitors we saw right after the turn of the calendar year, a lot of M&A activity in terms of deals that were unavailable and we also saw a lot of companies at that time that were either failing to make the transition to LED or had serious financial problems that they were trying to exit or find a new home for.

On the M&A side, it is still a struggle to find profitable accretive companies that meet our criteria of having not only the financial EBITDA contribution to the business but also a strong sales or channel presence as well as some level of intellectual property. That was the trifecta with our Harris acquisition and while there are some companies out there that meet that criteria, then you are fighting the valuation that you see.

So we are active, we are constantly looking, constantly entertaining opportunities but it is difficult for us to find that.

But I also think just from a pure competitive perspective that it is settling down a bit in terms of some of the craziness, the noise, the dis-information that is being presented to customers and I attribute that in some regards to small companies just not being able to make it and getting out of the business and also a more educated customer and their ability to sort through what is real and what isn't. And so companies like Orion who have the established presence in the marketplace, that have the credibility in working inside of a lot of buildings, complex buildings, retrofit is -- you are inside the existing conditions, you are inside operating businesses, the fork trucks are still moving through the building, the operations still have to continue and the credibility and the reputation that Orion has and ability to deploy projects across North America in a way they can trust gives us a competitive advantage.

It is still hard to find people that are pure retrofit competitors. A lot of people may say they are but they just really don't have the experience to pull it off. A product is a product in a large regard but it is the way you ship it, the way you transport it, the way you package it, the way you hang it and install it. All of those things are advantages that Orion has that others don't focus on.

Okay, great. In terms of the resellers that you have, I know the last year, year and a half has been sort of spent finding new ones, getting additional geographic coverage, getting them up to speed and productive. Where would you say you are in that process? In other words, are you everywhere you want to be geographically? Do you feel like you are kind of hitting closer to peak productivity with most of them at this point?

To the latter question, no. To the former question, yes. We are in pretty good shape on the geographic coverage. Our strategy if you will recall in our last call, we ramped up our reseller account pretty heavy and ended at 101. This quarter we ended at 102 that fall within our strict criteria of being active not just all of our resellers but the ones that are active that meet certain thresholds. So we really only added one in the quarter but last quarter you may recall on our call I stated that our strategy is not to add any more but to penetrate more deeply within those partners that have chosen to do business with Orion in a heavy way to help them build their business, help them extract more out of their pipeline, win more business, more share within their business and really broaden that relationship in a way that is beneficial for both parties. And we are gaining on that front. There is more to go. We think that some of those active resellers will still turn a little bit, will still have a little turnover in there as we are adding some more sophisticated resale partners some that are doing $50 million, $100 million, $150 million in lighting.

So it really now becomes a strategic endeavor around how to create more value and more profits for those resellers so that they continue to choose to do business with Orion.

Okay and then just I guess more general question the overall transition to LED, I mean are we at the inflection point yet? It still seems like it is a little bit fits and starts depending on the customer and those types of things? I mean does it feel like that or do we feel like we kind of have buy in, the price is now right for the payback and we are off to the races in the next 12 to 18 months?

I think the answer is so in general yes, as a company and peaking at 66%, LED coming off of 13 last year this quarter, clearly if you walk through at our manufacturing facility today it is hard to find a fluorescent product coming off the line anymore. They do run a line or two but the vast majority of everything we are doing, what the customer wants to hear is still LED.

However, you also have to look at our business. We really have three markets. We have our commercial and retail markets, we have our parking or exterior and then our High Bay and while the High Bay is a heavier concentration of fluorescents, the office is predominantly LED so they are moving in different waves and different sequences. The parking area, the florescent sales have dropped dramatically and LED has entirely taken over while there is still a little bit of florescent that still going out. In the office and retail, it is all LED and then in the High Bay is still a bit of a mix and it is still a bit of a mix just because there are customers out there that might be in the warehouse area might be trapped in a two- or three-year lease and really don't want to invest anything more than they are willing to abandon. And with the predominant of the buildings not being owner occupied there, it is just a little bit of a lag.

But that will catch up here shortly. Our Apollo High Bay LED sales have eclipsed our LDR sales in the last quarter or two and so we are seeing a much faster growth in our High Bay LED but it is coming off a little bit lower baseline.

So this fiscal year we expect the High Bay space to really catch up. So inflection point, yes. Some products lead, some products lag we are clearly, I think I said in my comments that by this time next year in excess of 80% of our sales and that might be conservative.

Okay, thanks.

(Operator Instructions). George Casper, private investor.

First off, you are getting close to two months into your first quarter. Can you give us any color on how the backlog is looking relative to the end of the quarter and how it might look at the end of the quarter? Can you give us an expectation on that?

So to just reaffirm that we are not providing guidance and so I'm not going to talk in specifics, I will talk directionally, George. But we are encouraged by what we have seen in terms of the bookings pace year-over-year. Right now that is encouraging. We did have a strong backlog, over 300% higher on the lighting side versus our last year backlog as we entered fiscal 2015. So that is encouraging as well. We did see a push out on one larger order that will end up being converted later in the year and that happens and that is one of the challenges in terms of John mentioning earlier just the dynamics of customer decisions and installation starts and completions.

But we are encouraged and we continue to see that the steps we have taken over the last year strategically with our resellers and our new products are reaping rewards.

Now I know you talked briefly about moving ahead in Chicago on your innovation center or R&D center. In the area of product development, are you going to try to concentrate on the area that you are in or are there areas out there that bring to mind an opportunity that you haven't been in up until now? On the LED side that is of course.

So the three spaces that I previously mentioned, the parking area, the High Bay and the commercial suspended ceiling space, the office and retail side, that is 52% of the installed base that is currently out there and strategically we decided to stay in those spaces. So as we enter, as we spend money on research and development and invest on that front, it is going to be in those spaces.

Now with that in mind, you may wind up with an acquisition that has a strong presence in a marketplace that we may evaluate and then ultimately build -- at least some development around that. But right now we don't anticipate that.

Once you get out of those three spaces, there is not a lot of high volume product sets. You get into things like either replacement lamps and replacement bulbs which is very commoditized at the moment or you get into things like architectural lighting which you might sell two or three at one time and then you can't really build a high-volume efficient product line off of that. Others can but it is just not set up for a line.

Finally, I think the sales channel becomes problematic too because it would depart away from our retrofit base and move more into a new construction specification type market.

So I think we are very comfortable where we are, there are a few ancillary markets that I have got my eye on and some of our acquisition targets have some presence there that seem kind of interesting but for the most part I think right now we are sticking with what we have got.

In terms of your acquisition strategy, do you need to own -- when you go out looking for something if it is really intriguing, do you have to own 100% at the beginning or would you do some incubator kind of investments with the goal of reaching 100% along the way?

That is a hard question, it is somewhat hypothetical. I think my preference is still to own 100%. I really think that is the right strategy not to say that you might take a position to investigate but that is really not our strategy. Our strategy would be to own outright.

Okay. And then lastly, the number of personnel that you have in Manitowoc at this point in time relative to the start of your backing off in the fourth quarter in terms of this reduction in cost structure?

Our headcount in Manitowoc is in the 160 range. We've got employees down in our Jacksonville office that focus on our enterprise accounts. That is maybe down from 200, George.

I got you. Okay, all right. Thank you.

Craig Irwin, ROTH Capital Partners.

Good evening, gentlemen, and thank you for taking my question. So I wanted to ask a little bit about the revenue progression for the first quarter. When we look at your book to bill fourth-quarter, you came in at 1 versus 0.8 [X] in the third quarter so a decent sequential trend there. Is this something we can read as supportive of on trend or maybe above trend growth into the first quarter? And by trend I mean historically on average since your IPO has been a 10% sequential dip in the first quarter given seasonality in the markets that you serve?

Yes, I think you can look at the historical seasonality, Craig, in Q1 and we are ahead of last year but then trend is consistent. We are encouraged. John mentioned the recent school district order that we got that is new business for us that the summer months you will see more activity just due to installation cycles and shutdowns within school buildings. But it is fairly consistent.

Okay, okay. Excellent. Then I wanted to ask about your gross margin improvement. We saw some very significant improvement in the service side of your business, but the product side seemed to maybe not be reflecting the potential improvement that you have really been focused on. You have been very specific about taking one important product line from negative 8% margins to positive 13% margins. Can you update us on the specific numerical progress in that product line and how far along you are in achieving the near-term goal of 13% gross margins and whether or not you see the 20% gross margin goal as achievable for that specific product line?

Good question. We certainly have spent a lot of time talking about the LDR and our challenges in the back half of the year. We mentioned going into Q4 that we had inventory that we were still working through, we were seeing components costs coming down. And so for the Q4, we were pleased with the progression that we made given the existing inventory. We ended within the quarter, the LDR gross margins were in the mid-single digits so progressing. We are expecting that as we get into our first quarter, we have churned through almost all of the inventory. We had one specific design style that we are selling through this quarter. We are expecting low single digits in terms of gross margins.

And then John mentioned again that school district order that we received that we will deliver on in this quarter. That is north of 20% gross margins. So we are progressing and our expectations are that the LDR is going to be lower margin in terms of mix compared to some of the other product categories, the high bay and exterior but we definitely have made progress to improve there.

Okay. The next question I wanted to ask was sometimes in the past you have shared with us the percentage of revenue generated through resellers in the quarter. You have done a lot of work to grow your reseller network 102 this quarter up from 30 last year. Can you maybe share with us more precise metrics on what this has done for revenue?

Sure. The resellers actually for both the fourth quarter and the fiscal year, it was 55% of our revenue through the channel. And I think to John's earlier comment about where we are in terms of I think maturity of those reseller adds, there is still a wide breadth of call it the size and maturity of some of those businesses. So we are encouraged by the pipeline that they are building. Additionally we have had some very sizable projects with our enterprise accounts in the automotive, in the retail and so the success that we have had that we have issued press releases on a quarter-by-quarter basis can really impact the mix between the channels.

Okay. Given that you have had the traction there and numerically we are up to 102 from 30, I guess your 1Q 2015 number was 53. I'm going to assume we continue to grow on top of the 102. Is it fair to say that you probably do have growth off the $9.5 million from resellers in the first quarter of 2015 that you shared with us back then?

Yes, we are seeing that within specific resellers and again it is a little bit dependent upon the maturity and the size of some of the resellers that we are bringing in with more established experienced salesforce versus somebody who maybe quite doesn't have the cross state lines and the presence, they tend to be more market specific within a narrower geography. Those take a little more time but we are encouraged.

We looked and qualified I think in the quarter, we actually had nine new resellers but we also looked at the activity over the course of fiscal 2015 and disqualified some if there had not been an active purchase order placed within the last two quarters. So on a net basis, it was a net change of one and that is going to happen. We are going to see some stick and some won't be as successful but as long as it is continuing to increase we are pleased.

Great. Last question if I may and maybe you could just clarify this, so I noticed in your last 10-Q that you pushed out the final $800,000 payment on the earn out for Harris lighting and I didn't see that reflected in this quarter. Is that something that will be paid during your second quarter or is that something that will now no longer be paid?

It actually was paid in February. It will show up as a change in our accrued expenses but we did satisfy that final payment in February.

Thank you. Thanks again for taking our questions.

Carter Driscoll, H.C. Wainwright.

A couple of questions. Maybe start with one, maybe play a little bit of devil's advocate but given what you talked about in terms of the trajectory of the transition commercial and retail obviously pretty much all LED, parking exterior -- going that direction -- high bay they want to kind of hold out. Is there any thought to kind of continuing this transition, maybe accelerating it by thinking about getting out of the florescent business and just going all LED, maybe resetting the whole revenue profile but maybe higher margin profile? Just talk high level what the pros and cons are from just looking at that type of strategy. And then I have a couple of follow-ups.

Sure, and I will have Scott perhaps comment on some of the impact financially but it still provides a run rate of whatever it is, 35% of our sales and that is good margin, all the tooling is paid for, it is an easy line for us to run, the products don't change. I think the product we are running today was developed eight or 10 years ago so there is just not a lot of thought that needs to be put behind the ability to move that out and generate gross margin.

I think also not every customer is an LED customer, some whether it is the economics maybe it is the term, maybe it is just the philosophical issue around they are going to wait it out until the chips become a little more efficient and to not have that opportunity to not only make the sale but secure a relationship that would then flip to LED down the road. So to some extent it is a double sale every time we sell a florescent because at some point that is going to get changed out to LED again.

So we are creating our market by continuing to sell florescent. However, we are not actively selling florescent at this point. That is a product that is being bought if that makes sense. There is not a lot of effort and quite frankly some customers when they see you with a florescent brochure they just send you to the door. They just don't want to hear about it anymore.

It is strategic for us in a short period of time. It covers some overhead expense right now and at some point we will flip that switch. Maybe I had mentioned toward the end of this year it is going to get to a point of no return that we made just flip it at that time. But we will make that decision with Baxter at hand at that point.

Financially, the contribution, Scott?

So our overhead around the florescent line is mature. There is not a lot of maintenance required to support that line and John is absolutely right. I spoke with one of our resellers this morning in the Northeast and his customer base are predominantly tenants and short-term leases who really aren't interested in the longevity of LED and the maintenance benefits and they are looking at first cost and his order flow is predominantly florescent. So there is still a marketplace for the product and we will continue to support it as long as it is economically viable and we can manage good margins on it.

That is fair enough. That is a good answer. Maybe just elaborating on that, in terms of -- and I know it has been asked several times -- but in terms of your M&A strategy, can you remind us again what your kind of priorities are? Is it getting another vertical, is it penetrating deeper in the verticals you have now, is it bolstering the LED product portfolio and then any type of financial parameters I am sure accretion is an important one but anything you can add to that would be helpful.

Our strategy has been consistent over the last two years and that is we really are looking at three things. One is the accretive EBITDA, the ability to contribute to the business immediately without having to dig out of somebody else's problem. And normally when you start with that, the second two tend to follow and that is that they have a strong channel or sales team to bring on a product and not have more people on the street or a channel that is drawing that demand is tough to sustain.

So if you have got the strong EBITDA contribution you generally are going to have a strong channel and sales force.

Then the third is some level of intellectual property not to say that it has to be patents, but some unique product that can bolster the existing verticals that we have but again like with our Harris acquisition, we picked up a very strong federal vertical that we didn't have and that was a great addition. They had a little bit of intellectual property in this LDR product which then we were able to commercialize which hadn't been done or they hadn't commercialized it prior to our acquisition.

And then they certainly had a very a very strong sales force and strong earnings. That is really the model. Anything else we would see as being destructive to the business and we won't do it.

Okay and then just the last question maybe for Scott, of the cost-cutting initiatives that you are talking about, is there a portion of that that is kind of material, a material portion that is geared toward savings on the material side as you transition from florescent to LED and obviously scale is a big portion of that but anything material within that savings you quoted earlier?

There is and I think your question is on material costs. Of the 10 million, about 4 million of that was either negotiated pricing or on LED components that we could see either -- and really driven by our increasing volumes and the increased leverage that we now have with the supply base.

Is that $4 million tied to achieving that percent of sales you are hoping to do so over the next fiscal four quarters?

It is based upon our historical run rates so as we grow that will help deliver greater savings.

Okay, that is all I had. Thanks, guys. Appreciate it.

This does conclude the question-and-answer session of today's program. I would like to hand the program back to management for any further remarks.

Thank you very much. Thank you for joining us. We appreciate all of your support and look forward to reporting in a few months. So enjoy your holiday weekend and we will talk to you soon. Thank you.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. Good day.