Orion Energy Systems Inc (OESX) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, (Operator Instructions) And as a reminder, this conference call is being recorded. I would now like to introduce Mr. Keith Radeke, Director of Finance. Sir, you may begin.

Good afternoon, everyone, and thank you for joining Orion Energy Systems' Fiscal 2017 Conference Call. Participating in today's call are Mike Altschaefl, Orion's newly appointed CEO; and Bill Hull, Orion's CFO. Following the review of Orion's safe harbor statement, Mike will open today's call and review Orion's renewed focus on driving growth and implementing cost reductions to accelerate its path to profitability. Bill will then briefly review Orion's Q4 and full year financial results, and then we will open the call to investor questions. An archived replay of this call will be available later this evening in the Investor Relations section of Orion's corporate website. This call is taking place on Thursday, June 8, 2017.

Remarks that follow, including answers to questions, include statements that the company believes to be forward-looking 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 than those anticipated. Those risks include, among others, matters that the company has described in its press release issued this afternoon and in its filings with the Securities and Exchange Commission. Except as described in these filings, the company disclaims any obligation to update these forward-looking statements.

With that, I'll now turn the call over to Mike.

Thanks, Keith. Good afternoon, and thank you for joining us today. As you may know, 2 weeks ago today, I was appointed CEO of Orion by the company's Board of Directors. At that time, we also postponed the reporting of our Q4 results so that we had more time to work on developing our action plan and to make today's press release and call more informative. I have served on Orion's Board of Directors since 2009. And in August of last year, I was appointed Board Chair. I appreciate the board placing their confidence in me to assume the executive leadership of the company. I'm also excited to join the rest of the executive team.

As newly appointed CEO of Orion, my charge is to build upon the strong business foundation and technology leadership we have established as a designer and producer of energy-efficient lighting and retrofit solutions for commercial and industrial buildings in the LED lighting market. Equally important is to accelerate Orion's path to profitability. While we have made changes in our executive team, I want to make it very clear that Orion's sales and product growth strategies are not changing. We remain focused on the LED lighting market with a go-to-market strategy built around energy efficiency, best-in-class service and a nationwide network of agent-based distribution partnerships.

Orion competes against large players in the LED lighting market by developing cutting-edge products that deliver industry-leading performance and energy efficiency. Our products also incorporate smart design and features that reduce total cost of installation or ownership as well as deliver specialized capabilities to meet unique needs in certain sectors.

We continue to believe that Orion is pursuing the right strategy to leverage our proven track record and broad base of customer relationships, including nearly 40% of all Fortune 500 companies to ramp our sales activity, converting lighting systems to energy-efficient LED technology over the next decade and beyond.

Our renewed focus on execution, including a reduction in our cost structure, will accelerate Orion's path to profitability. We have identified a range of cost reduction initiatives that we have already begun implementing. Our cost reduction efforts will right size Orion's cost structure and bring our overhead more in line with our current revenue level and accelerate our path to breakeven EBITDA as defined in our press release, which we now believe is achievable by the fourth quarter of fiscal 2018 before nonrecurring items.

We decided that our cost reduction efforts needed to be top to bottom. As part of our cost reduction plan, Orion's executive team and outside directors have reduced their total compensation by approximately 35% compared to fiscal 2017 levels. We believe that in starting our cost initiatives at the top, we have sent a very clear message to all of our stakeholders regarding our commitment to managing costs and driving the business to profitability.

In total, we expect to reduce operating expense levels by $3.5 million to $4 million on an annualized basis or approximately 12% to 13% versus fiscal 2017. We expect to have majority of our cost reduction activities completed by the end of June and the balance by the end of September 2017. As part of these initiatives, we expect to record nonrecurring charges totaling $1.5 million to $2 million relating to our cost-cutting initiatives, principally in Q1 and Q2 of fiscal 2018.

Now I would like to take a few minutes to talk about our growth strategy. Continued execution of our agent strategy, which includes active efforts in supporting agents in getting up to speed on our products and providing industry-leading levels of service and responsiveness from initial quote through product shipment and after-sales support, should position Orion to achieve our revenue growth goal of 10% to 15% in fiscal 2018.

I would like to point out that for the first 9 months of fiscal 2017, prior to the fiscal 2017 fourth quarter sales slowdown in our industry, Orion had achieved total revenue growth of 12%, which was within our targeted range. Combining our growth goals with our reduced cost structure and efforts to keeping -- to keep driving gross margin improvements, we believe Orion is also well positioned to reach our goal of breakeven EBITDA by the fourth quarter of fiscal 2018.

Because of our size and the variety of factors that impact our industry and business, I do want to clarify that targets are goals, not financial guidance, but they are realistic given what we know today. We will update you on our progress versus these goals as the year progresses.

Let me now spend a few moments on our progress in migrating our sales to an agency-driven distribution model. The transition of identifying the best possible agents and then developing and managing them for our mutual success has taken longer than originally expected. Our initial agency was launched in August of 2015, and we have hired nearly 20 agents by April 2016, the beginning of our fiscal 2017. Over the balance of fiscal 2017, we assessed and fine-tuned the performance of our sales agents while also continuing to expand our knowledge of the unique characteristics of this channel, particularly looking for the retrofit market and what factors make for the most successful and productive agent relationships. Ultimately, we recognize the need to make some significant changes to our agent base. And starting in November of 2017 through the end of our fiscal 2017, we had replaced nearly 75% of our original agent base while more than doubling its total size to over 40 firms. We have also moved to focus our sales personnel in smaller territories so they can spend more time working with our agents to devote more time to Orion's product lines and better support their long-term success.

Today, we are partnered with some of the largest sales agencies in America, firms with between $20 million and $200 million in annual lighting business. Orion now reaches approximately 95% of the United States and Canada as well as parts of the Caribbean and Latin America, putting us in a solid position to drive long-term sales growth.

Building agent relationships doesn't happen overnight. It requires the investment of time and resources to train and gain presence with each person within each firm, and this includes multiple touches across our organization. We are fielding a diverse team from engineers to sales support, customer service and even finance personnel to provide unprecedented access to our organization. We have also built web pages, direct links and other collaterals tailored for our agents. Our interactions are ongoing. Our new agents have been impressed with the breadth and extent of our engagement, with many of them indicating that this is rarely present from their other lighting relationships.

Our enterprise account team serves major accounts that are carved out from our agency channel, yet they actively support the development of new business opportunities that are referred to into the agency channel through a partnership model. We intend to continue making the necessary investments in sales, marketing, sales support personnel as well as providing other resources for our growing agent channel.

Unfortunately, the timing extent of our agency reset likely amplified the impact of the industry slowdown in our fiscal fourth quarter of 2017. Yet even amidst the building and realignment of our agent base, Orion achieved strong growth in our agency channel with approximately 43% of our product sales coming from sales agents in fiscal 2017 first full year of our strategy compared to just 4% the year prior. We are on schedule to have a base of over 50 sales agents fully in place and optimized by Q2 of fiscal 2018.

In summary, while our fiscal 2017 performance fell below expectations, our full year operating results reflect the benefits of repositioning the business. Our LED business is strong. We have superior products, top customer service and our sales and distribution reach has been substantially expanded and is gaining traction. We still need to execute on our core mission each day, but we believe Orion is now closer to realizing, not only improved revenue growth, but also improved bottom line results, accelerated by a renewed focus on cost management.

I look forward to continue to meet our investors over the coming months. We appreciate your support and interest in Orion.

And with that, I will turn the call over to Bill to provide more color on our fiscal 2017 results.

Thanks, Mike. As we preannounced last month, our fourth quarter and full year results for fiscal year 2017 were lower than expected, mainly due to an unforeseen industry-wide slowdown in lighting retrofit activity and our agency reset during the quarter. Nonetheless, we grew our full year top line by 4% to $70.2 million, expanded our gross margin by 110 basis points, reduced our net loss close to 40% and increased our backlog by $1.7 million.

Orion delivered its full year revenue growth despite a decline in average selling prices and further contraction of our legacy fluorescent lighting business, sales of which decreased $6.1 million or 33% from fiscal year 2016. Our fiscal 2017 revenue growth was principally driven by LED revenues, which grew 16% over fiscal 2016 to $53.1 million. This represents over 80% of total lighting product sales, a record for Orion.

Product revenue from our agency channel rose to 47% in fiscal Q4 2017 versus 8% in the same period a year ago, and that should expand on a sequential basis as we continue to build this channel.

In the fourth quarter, we converted our legacy fluorescent business and our exterior LED offerings to a stock-to-order basis, thereby reducing our risk. As part of this change, the quarter includes $2.2 million of noncash inventory charges to cost of product sales. These moves reflect our full focus on LED product lines as the driver of revenue growth going forward.

Turning to gross margin, Orion achieved a 110 basis point expansion in gross margin to 24.7% in fiscal year of 2017 when compared to fiscal year 2016. This gross margin reflects the inventory adjustments discussed earlier and in today's press release. Absent these charges, Orion's gross margin would have been closer to our goal of 30%.

Orion's backlog rose 30% to $7.3 million at fiscal year-end 2017 versus $5.6 million at the end of fiscal 2016. As we previously noted, Orion's commitment to the rapid turnaround of orders to shipments, our order backlog tends to vary quarter-to-quarter driven principally by a larger order activity.

Also during the fourth quarter and full fiscal year 2017, we invested in new product development by modestly increasing our R&D spending in order to maintain our technology leadership.

From a balance sheet standpoint, net working capital was $25.5 million at the end of fiscal 2017, and this includes $17.3 million in cash. At March 31, Orion had $6.8 million in long-term borrowings.

Operator, let's open the call for question-and-answer session. Thank you.

(Operator Instructions) Our first question comes from the line of Amit Dayal with Rodman & Renshaw.

Our next question comes from the line of Craig Irwin with Roth Capital Partners.

And I guess, congratulations on the new role, and we look forward to strong leadership really turning the ship around here, so excited to see new ideas. First thing I wanted to ask about is the cost savings initiative, right, $3.5 million to $4 million. Your investors would like the participation of the executive management and the board there, saving $1.5 million of that. But can you walk us through the other -- the balance of $2 million to $2.5 million, where that's going to come from? Traditionally, in lighting companies, this means lighter employment. How do you see this playing out?

Sure, Craig. I'll make a couple of opening comments and then Bill will add some color to it. One, I just need you to -- ask you to appreciate, we are still working on these plans, and certain things have been implemented and certain things have not. So there are parts of it that we can share, parts, we cannot. But it does go throughout the entire organization and involves programs and systems that we feel can be scaled back or changed and others that will impact personnel also. So I'll allow Bill to kind of give you a little bit more color, but there's only so much we are able to comment on today.

Yes. Craig, so obviously, you saw that the executive management and the board taking a substantial cut there, and so that's where we're starting. And that's something that kind of gives almost immediately. Then you have things like professional services that we're taking a look at. We have other programs in place that -- some of those we have commitments to, so they might not start right away. So it's going to take some time to pull back on some of those commitments and programs and events, those kind of things we have. And that's kind of the -- some of the major items. And we'll get into more detail as the year goes on, I think.

What we're being particularly careful to do is to make sure our spending in sales and marketing is staying where it needs to be and -- because we do anticipate and want to continue to grow revenues as we've indicated. And so we're being careful where we are applying our look at this and doing it wisely to make sure we're not impacting our sales and marketing team.

Great. Understood. So then the cost that you called out to implement this strategy, $1.5 million to $2 million, hitting primarily in the first fiscal quarter of '18, will this be mostly cash expenses? Are there likely noncash components to these charges? And does that include charges for changes to the executive management team? Or is that something that was already reflected on the P&L?

Craig, this is Bill. So those are cash charges, and they'll be reflected in our first and second quarters. Does that answer your -- and it includes all the things you just mentioned.

And it does include severance for changes to the executive team?

Yes. This is what we think the total amount would be for everything, the nonrecurring charges, correct.

Okay. Excellent. Then moving on to the repositioning towards a more traditional distribution strategy, right, putting in an agency channel and sort of restructuring the way you face the market. I like it because in the long run I think it really will give you opportunities to drive down costs and maybe diversify the revenue mix, introducing new products, et cetera. But in the short term, it caused a little bit of turbulence. Do you feel like there was maybe any lost revenue in the quarter that was specifically related towards -- related to this transition? And would you care to guess how much higher frictional costs were during the quarter related to this transition than what you would have seen if you were pursuing the same channel approach that you were a year ago?

Yes. Let me make some comments on that. I think -- I'm not sure I would use the word turbulence in terms of the agent situation. As I stated in my remarks, we did have a bit of a false start in the approach that we took with agents when we started on this and during fiscal 2016 of the nature of agents that we decided to go after. After we learned more about going to market in that channel, we migrated to the current agent criteria and backgrounds that we want to fulfill for our agent model. So it's more of ramping up those agents than it is in turbulence. We ramped up some of them during '16 and '17, but then we made the change and cut back on agents and then grew it back to over 40 agents. And we typically find that it takes 3 to usually 6 months for our new agent to really get up to speed with us. We're attempting to accelerate that through training and support for them. But as those agents come up to speed during fiscal 2018, we certainly expect an uplift from that happening. So we're not terminus -- turbulence as much as getting up to speed. We also, as we've transitioned from direct relationships, we have support of those agents greatly by moving many of those direct relationships through the agencies to provide them with that business and get their support and partnership as we migrate to this strategy.

And our next question comes from the line of Steve Dyer with Craig-Hallum.

It's Ryan Sigdahl on for Steve. I'd like to start with product gross margins. By my math, if we exclude the inventory write-offs and the reserves and the nonrecurring stuff, I get to an adjusted gross margin of about 23%, which is a little bit lower than what you guys have printed the last couple of quarters here. Any additional color there would be helpful. And then maybe how we should think about inventory balance and how it looks going forward.

Sure. For fiscal 2017, one thing you need to take into account is with the sales volume dropping off in Q4, it had an impact with respect to our gross margin because of the absorption levels in the manufacturing facility. So the full year margin comes out perhaps what you are describing, but the margin was higher during quarters 2 and 3 of fiscal 2017 when the volume was higher. So I think you've got to dissect a little bit the quarters 2 and 3 from quarter 4 2017 when you look at that product gross margin analysis.

Okay, makes sense. And then being a little over 2 months here into fiscal Q1, maybe talk about how orders are shaping up. And should we assume normal seasonality in fiscal Q1, down from Q4? Or was Q4, enough headwinds in there that seasonality is kind of out of the window there from a comparative perspective?

I think it's probably reasonable to continue to look at the fact that our Q1 seasonality will be there. And we expect our revenue for fiscal 2018 to be somewhat back-end loaded to the second half of 2018.

All right. One more for me. Mike, I know you've only been in the CEO role here for a few weeks. But from what you've seen, do you think double-digit growth over the next couple of years is reasonable? Or still getting in the weeds here and too early to see on that?

No. Because I've been around the company since 2009, I absolutely think double-digit growth is very achievable for this company with the products that we have, the products we have in development, the development of our agency-based distribution model and the members that we have here at Orion and our facilities. I am confident that we can achieve double-digit growth.

(Operator Instructions) Our next question comes from the line of Joseph Osha with JMP Securities.

This is McCrea on for Joe. I have an industry question for you. There have been comments across the industry about LED pricing erosion, and you've mentioned the demand shift in Q4 during your commentary. Is price stabilizing at all? Or is this erosion still continuing?

There's kind of a mixture going on. I would say, there certainly appears to be less price erosion from an ASP standpoint, average selling price, of units than there had been. But at the same time, we are experiencing that the marketplace is very competitive. And so it's not so much driven by a reduction in some of the materials to build a product, but there is strong competitiveness in the marketplace to capture market share. So that's what we're seeing currently. And I think that's part of what we saw in quarter 4 of fiscal 2017, and we're seeing that in quarter 1 of fiscal 2018.

Great. Is there any product segment that's experiencing more of an impact than others? I'm thinking between the ISON, Apollo and Harris?

No, it's across the board.

Yes.

Okay. Great. And then one final question. The lighting controls portion of the business, what kind of attach rates are you guys seeing across the different end markets? And do you think that customers are more interested in bringing controls in for the new construction rather than the retrofit market?

We're continuing to see that building in the marketplace of attached controls, I think it's going to continue to grow in the future. We're looking at how we use the technology we have. What we believe is we've got the platform in the ceiling with our fixtures, and it's going to continue to grow. We're not seeing a great difference between those segments right now but it also still is developing. Recently at LIGHTFAIR, a lot of discussion about IIoT and what's going to happen in the grid on the ceilings. And a lot of it is still just being figured out by the marketplace of how to make it all work.

And our next question comes from the line of George Mosher, a private investor.

Mike, do you see any effects since the election of less interest in saving energy than there was before?

George, thanks for calling in. What I've heard from our salespeople is not bad particularly from a saving energy standpoint. What we are perhaps seeing since the election is there continues to be some uncertainty in the economy. We're seeing a bit of a -- what we think could be a boost down the road from the fact that we do manufacture and assemble in the United States. And we think that's going to give us some additional opportunities going forward. Much of our competition comes from foreign markets, and we saw that somewhat again when we were at the large trade show in -- at LIGHTFAIR in Philadelphia a few weeks back. So -- and that part could be a positive. But we also -- on the government side, you see some delays and some uncertainty on what's going on. So it's been a bit of a mixed bag from a market standpoint reaction to the economy and the political situation. And hopefully, that will firm up as we go forward.

And our next question comes from the line of George Gaspar, a private investor.

First question is regarding R&D. How are you looking at your R&D capacity out of Chicago in the current year going forward here relative to what you have had in the past? Are there -- and can you talk anything forward about technology developments that you don't have in the market currently?

Sure, George. First of all, our investment in R&D is not changing significantly, as I talked earlier about our investment in sales and marketing, those are the areas where you have to be very careful and make sure we're continuing to make investments. Usually, we roll out product introductions in the early part of August, and we will be doing that again this fiscal year. We have a number of products that will come into market, some that are very, very exciting. And our ability to attract talent and have our product development team largely based out of Chicago continues to work for us. So the R&D front, we think, still has a strong pipeline with some really exciting products coming to market over the next couple of months.

Okay. All right. And second question would be on the production cost reduction side in terms of manufacturing personnel. Can you highlight any changed levels in terms of personnel associated with that or manufacturing approaches that you're going to try to execute as part of this cost reduction?

From a manufacturing process standpoint, for the last several years, we have been very close at looking at our manufacturing processes to become as efficient as we can but always continue to make improvements. We have shrunk the square footage that we need to assemble and produce the same amount of product. And we'll continue to do those things. On the first part of your question, we're not quite at the point where we are -- can talk about numbers of personnel that might be impacted by the action that we're taking. A little bit too early to be definitive about that, George.

Okay. And can you give us the thought process on this agency channel, that buildup that year accomplishing and the changeover. I assume that this agency channel is -- each one of these organizations is probably handling multiple companies that are associated in the LED business. Can you talk a little bit about those relationships with you versus others?

Sure. And that's somewhat of a change that we made, as I talked earlier about retooling on some of our agents from fiscal 2016 to fiscal 2017. At times in our initial strategy, we had been focused more heavily on agents that may not previously had a lighting -- a fixture line, perhaps an LED line. But what we actually found going to the channel that we're better off hooking up with agents that have multiple lines and then relying upon us being better to work with, having better products, having better customer service, having better information, better responsiveness and being more nimble. So in fact, what we have to do with those agencies in some situations is compete with other lines that they may be carrying. But so far, as I mentioned, in my comments, we're getting very favorable feedback from these new agents that our support, our service, our products are better than the other products that they are carrying. And we believe we can carry our weight with those agents carrying multiple lines.

Okay. And if I could ask one more, just on the financial side. In terms of the indication of your cash position being $17 million, I believe it was the comment was made.

That's correct.

On that, how do you see that you're able to handle the progress that you expect to bring forward here in the next couple quarters in cost reduction but also some expense reduction -- or expenses associated with that? Do you see yourselves as financially capable of this double-digit growth you're talking about on the level of cash that you have in the company currently?

Yes, George. We have looked at this and certainly forecasted and projected where our balance sheet might be with the growth that we're expecting, taking to account the costs related to this realignment as well as our growth. And we believe we will have more than adequate cash to manage away through that process with the -- our current financing structure.

Thank you. And I'm showing no further questions in the queue, so I'd like to return the call to Mr. Mike Altschaefl for any further remarks.

Thank you, operator. I simply would like to thank everybody for joining us in the call today. We appreciate your past support and look forward to keeping you informed and having you involved with us going forward. So thank you very much. Have a good evening.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.