Orion Energy Systems Inc (OESX) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Orion Energy's Fiscal 2018 Fourth Quarter Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded. I would now like to turn the call over to David Collins. Sir, you may begin.

Good morning, everyone, and thank you for joining Orion Energy Systems Fourth Quarter Conference Call. Participating today are Orion's CEO, Mike Altschaefl; and CFO, Bill Hull. Mike will open today's call to discuss Orion's fiscal 2018 progress, financial performance and its business strategy and goals for fiscal 2019. Bill Hull will provide some financial highlights, and then we will open the call to questions.

An archived replay of this call will be available later today in the Investor Relations section of Orion's corporate website. This call is taking place on Monday, June 4, 2018. 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 generally will include words such as believe, anticipate, expect or words of similar import. Likewise, 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 anticipated. Such risks include, among others, matters the company has described in its press release issued this morning and in its filings with the Securities and Exchange Commission. Except as described in these filings, the company disclaims any obligation to update forward-looking statements.

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

Thanks, David. Good morning, and thank you for joining our call today. Our fourth quarter and full year fiscal 2018 revenue and margin performance progressed somewhat more slowly than we had anticipated, but not without a number of areas of progress that shape our more favorable outlook for fiscal 2019 and beyond. I will focus my remarks on our accomplishments in fiscal 2018 and help you understand the thinking behind our fiscal 2019 outlook. I'll let Bill provide a little more perspective on our financial results in his remarks as well as in the Q&A session.

What we did accomplish in fiscal 2018 were several key initiatives aimed at driving future sales growth and enhancing our profitability and cash flow through margin enhancement moves and substantial cost cutting across the organization that reduced annual overhead by approximately $6 million or 20% compared to fiscal 2017 levels. Though these efforts were not fully evident in our fiscal 2018 performance, we believe we have entered fiscal 2019 with much stronger sales momentum and an expanded pipeline of opportunities across 3 areas: our national accounts business, our developing agent-driven distribution model where we are starting to see exciting signs of real traction and our renewed efforts aimed at Energy Service Companies, or ESCOs, as well as resellers.

ESCOs and resellers had once been an important part of our go-to-market strategy, but received somewhat diminished focus and support as we worked to build out our agent base. Our 3-pronged sales strategy refinement has taken time to mature, involving some learning and adjustments as well as enhancing our sales and marketing support and management on our side.

Orion was successful in expanding its base of significant national account opportunities during fiscal 2018. This work has developed several projects that we expect will significantly benefit our fiscal 2019 results, starting primarily in the second or third quarter. We have developed some exciting product potential in the retail industry, and we continue to anticipate a solid contribution from our automotive segment. We believe that these national account customers choose to do business with Orion, primarily due to our proven ability to deliver on product quality, custom engineering and design, nimble decision making, quick production turnaround and nationwide project management capabilities, all wrapped in our commitment to exemplary customer service.

Our successful expansion into the agent-driven distribution channel has started to hit its stride with the maturing of our agent base through our sales, marketing and training collaboration and new product development to address the needs of a more diverse base of customers. For those new to Orion, we believe this initiative has expanded our North American reach from approximately 13% of the total commercial LED market to approximately 77% of the market.

Developing our agent base is a reiterative process involving training, supporting, incentives, understanding their needs in order to make them successful and productive. It also requires us to access their performance and to replace those who are not good fits or not up to the task. It has taken time and persistence on both sides to help our agents get up to speed working with Orion and to experience firsthand the quality of our products, capabilities, flexibility and underlying commitment to customer satisfaction. We've learned there are no shortcuts to providing that. We can deliver on what we promise and to supporting our partners to become effective in selling our strengths into their customer base.

In fiscal 2018, we developed and successfully launched our new value-priced Harris Patriot-branded LED lighting product line. The Harris Patriot line is a lightweight, sleek and lower-cost design ideal for new construction and more price-sensitive procurements. The modular design of these products makes them easily upgradable should the customer later decide to deploy advanced controls, more efficient light engines or other enhancements. This plug-and-play upgrade potential of the Harris line differs from much of the competition, while also providing Orion with potential future revenue opportunities. I am pleased to report that after all of our collective efforts, our agent base contribution to Q4 fiscal '18 revenues fell in line with our expectations, and we expect to build on its strength going forward.

Part of the solution for all of our customers has been to listen to what the market is seeking and then to develop products that directly address those needs. As a result, many of our recently launched products have been adapted to include a wide range of control integration options through modular plug-and-play designs that enable customization of fixtures for basic controls to advanced IoT capabilities. Enabling these fixtures' integration features has seen such -- has seen us launch exciting control integration options for Lutron Vive, Philips EasySense and Magnum Energy Solutions further broadening the control options for our customers.

Turning to the cost side of the business. As we've previously commented on in detail, Orion enters fiscal 2019 having eliminated approximately $6 million in annual operating costs during fiscal 2018. The full benefit of these cost reductions will be reflected during fiscal 2019 and should play an important role in enabling Orion to deliver improved operating results and achieve our EBITDA breakeven goal.

Based on the expected benefits of our efforts focused on driving revenue and profitability improvements, we are providing an initial fiscal 2019 revenue goal of approximately 10% growth over fiscal 2018. We believe this is both a realistic and appropriate goal based on our current view of the business. We are also reiterating our prior goal of achieving a 30% gross margin and breakeven EBITDA by the second quarter of 2019. We caution that our quarterly performance can and will likely vary materially on a sequential and year-over-year basis due to economic and industry forces outside of our control as well as the size, timing and terms of customer contracts.

Further, our gross margin and EBITDA are very much impacted by our revenue levels and related overhead absorption.

Finally, I would like to comment on our NASDAQ listing status. We previously requested and were granted an initial 180-day period in which to regain compliance with NASDAQ's $1 minimum closing bid requirement. We have requested, and we were granted a second 180-day extension period through November 26, 2018, during which time we believe the execution of our business plan could enable Orion to regain compliance. In order to demonstrate to NASDAQ and our shareholders that we are fully committed to regaining compliance with the $1 minimum closing bid requirement during our second compliance period, we will ask our shareholders to approve an authorization for a range of possible reverse stock split ratios at our Annual Shareholder Meeting in September. I want to be clear that we are doing all of that -- all that we can to advance the business and deliver financial results that would support our regaining NASDAQ compliance in an organic manner between now and November.

Our seeking shareholder approval in September for a reverse stock split is only to secure the authorization to utilize this tool and to demonstrate to NASDAQ and our shareholders that we are taking appropriate steps to ensure Orion regains compliance. Only in the event that we are unable to regain compliance without it would we affect a reverse stock split.

Finally, I would like to mention that we will be presenting tomorrow at the LD Micro Invitational in Los Angeles. We look forward to seeing some of you at LD Micro.

With that overview, I will turn the call over to Bill to provide more detail on financials.

Thanks, Mike. Beginning with revenue, Q4 2018 came in at $15.1 million, slightly below $15.3 million in Q4 of 2017 and below our implied goal. Q4 2018 LED product revenue was $12.3 million compared to $12.5 million in Q4 of '17 and $14.5 million in Q3 of '18. In all 3 periods, LED lighting represented 90% of total lighting product revenue. Fluorescent sales were flat in Q4 '18 versus the prior year period at approximately $1.3 million. While our focus is on LED lighting, we continue to provide certain fluorescent products based on customer requests, particularly given the substantial size of legacy fluorescent lighting installations and our interest in eventually helping those customers navigate to more efficient LED solutions.

Gross margin was 21.4% in Q4 2018 compared to 6% in Q4 '17, reflecting the impact of $2.2 million of inventory-related charges in cost of sales in the prior year. However, Q4 '18 gross margin decreased sequentially from 29.6% in Q3 '18, primarily due to the impact of lower overhead absorption related to lower revenue.

Looking at the full year fiscal 2018, total operating expenses decreased $2.2 million to $27.7 million in fiscal '18 compared to $29.9 million in fiscal '17, reflecting initial benefits of the company's cost-reduction initiatives offset by $2.1 million in cost reduction-related severance expense and a $0.4 million increase in asset impairment charges.

At the close of fiscal '18, Orion had net working capital of $13 million, including $9.4 million of cash and cash equivalents. And we had $3.9 million in long-term borrowings under our revolving credit facility, compared to $6.6 million at the end of fiscal '17 and $3.6 million at the close of Q3 '18. We continue to believe that our cash position combined with unused credit available under our revolving facility should provide us with sufficient financial resources for the foreseeable future.

And with that, let's open the call to your questions. Operator?

(Operator Instructions) Our first question comes from Eric Stine with Craig-Hallum.

So I was wondering if we could start with the national account. You mentioned the significant opportunities that you see in front of you. I mean, maybe, I mean, as much as you're able to give some details, are those new or existing customers? Maybe the magnitude, if that's possible, but also curious, I mean, have you factored that into the guidance, the 10% growth year-over-year? Or should we view that as upside to that guidance or that outlook?

Yes. A few answers to your question, Eric. First of all, we are seeing some nice activity both with our existing national accounts, putting new projects in place, allocating more capital going forward and those would primarily be some of the ones we've talked about in the past, which are some of our larger automotive customer segment initiatives, and so that's from existing customers. We have previously talked about some of those magnitudes, and we continue to feel positive about what might be happening there. In addition, we have some significant opportunities that are developing well for us and -- with some new customers for us. And part of what -- from a magnitude standpoint, we're really not at the stage yet of being able to disclose magnitude. Part of what happens in these situations, as while they might be large, the individual orders that come in might come in over time. And we typically do not record something in the backlog unless we have purchase orders or other significant documentation of sales. So we're excited in that we are seeing it both with existing national accounts as well as new national accounts. We think we are seeing more capital being allocated to energy projects and to lighting projects, and we -- and what I will tell you is that we have found in some of the new opportunities, we are seeing our ability to carry out nationwide project management capabilities as being one of the factors along with our product that is getting us to the table as big situations where we're typically winning those against some of our larger competition.

Got it. And just -- and maybe you said this and I missed it, but I mean, should we view that as or -- so it's there, you're hopeful, but it is not part of that outlook, at least at this point for fiscal '19? Is that how we should look at it?

I'd have to say, Eric, it's hard to be real definitive on that because frankly, some of this is developing. So while some of our existing national accounts look -- I guess, I'll comment on our automotive side where we have fairly good visibility, even though it's not contractually obligated, is part of our forecast, and then some of the opportunities are -- could have some upside potential for us, but you also have things that you think are -- is going to happen that don't happen. But we are -- so some of both.

Okay. Got it. Maybe just turning to the agent channel. I mean, clearly, you're feeling better about that. Is there a way -- I mean, do you track the percentage of that channel that's been in place that now you're more than a year and it's more mature? And then, I mean, you're feeling better, but when do you -- I mean, how far away do you feel until you feel like that channel is up and running where it should be?

Sure. On previous quarters, we had provided some percentage breakdown between our national account business and our agent business, and we had been in that mid- to upper-40% range. What we've decided to do going forward is that as we have refined our approach to the market in these 3 paths of national accounts, agent-driven distribution and ESCOs/resellers, we don't find that percentage breakout being that significant of an indicator for us as we're managing the business. We look at the agencies, we look at the revenues that we're generating from them, the profitability we're getting from them and the investment we're making in those to kind of make our decisions. We are fairly built out across North America with our agents base being in the -- again, we're in the -- nearing 50 agents on a nationwide basis. And as I mentioned in my opening comments, the expectations we've had in Q4 of '18 were met with that agent base. So we think we're getting to the point where it's maturing. They're understanding how to work with us. We're understanding how to work with them. And we expect them to continue to hit our expectations throughout fiscal '19 from an agent side of the business. So we think we're through that path, and now it's refinement and support and growing with them.

And our next question comes from Craig Irwin with Roth Capital Partners.

So Harris in the past had some really interesting customer relationships. You've done well maintaining several of those, but I'm guessing that they participate actively, or the people involved originally in capturing those customers, participate actively in the new pipeline development. Can you maybe discuss any elephants that you're hunting? I mean, that was an area of particular success for Harris in the past. Can you give us maybe an idea on how many elephants are out there in the grass? And are you optimistic that maybe 1 or 2 of these could be landed in this next fiscal year? And are any of those in your guidance?

Yes. Thanks, Craig. So as a bit of background, Harris lighting is a company that Orion purchased in 2013, and Harris had a significant history to it, in particular did some large national rollouts of both high bay product and commercial linear and troffer product for a number of companies. And we continue to have a number of the people from Harris involved with our business. In fact, our COO, Scott Green, came to us through that acquisition. Craig, we are seeing that. Certainly, that group of sales executives from the Harris team are a significant portion of our national accounts team that continues to look for new opportunities, not simply taking care of the existing or past opportunities. And we are seeing some significant opportunities developing in that area, as I've mentioned earlier. Elephants is kind of a relevant term, but they are projects that tend to be larger in nature, and a little bit in answering my -- the previous question, I'd say we forecasted some of our 10% growth, the likelihood of landing certain new business that's unidentified, but also there is going to be upside potential if we are fortunate to land an elephant or 2 going forward. So it's part of our optimism right now that while we're seeing the -- all 3 paths to the market feeling pretty good to us right now. The opportunity for us on the national account basis just near term, we feel is significant, and that's where we're making sure we have our resources allocated in going after.

Great...

And I'm sorry, Craig, I just wanted to add, I'm sorry to interrupt you. Some of these situations we find when you talk about an elephant in a national account can take years to develop. And so we have situations where we literally might be working on something for 2, 3, 4 years, staying in touch, working with them, and then things start to come together. And that's why we're feeling optimistic as we're seeing some of those things come together that we've been literally working on for years.

Great. That's good to hear. So I wanted to ask a little bit about your R&D budget. You've done a tremendous job trimming expenses throughout the organization, and I see how it tightened belts a little bit in R&D. But can you maybe discuss what the project vitality or product vitality is that you look for, the percentage of new products introduced each year, approximate number of SKUs from the R&D team over the course of the next year? Maybe can you also discuss the input that you'd get from your channel and other outside sources when you select those new products that you're going to be developing for introduction?

Sure. Our research and development costs between fiscal 2017 were right around $2 million and fiscal 2018 were right around $1.9 million. So a modest reduction, but some of that can just be projects that we're currently working on. We really have continued to make sure we have allocated to R&D what we think is necessary. How we look at R&D and new products? We have a team that works on new product development. We do get as much information, input as we can externally. Examples would be LIGHTFAIR for us is a significant trade show for our industry and, by having a booth and interacting with our customers and potential customers, we get ideas about products. Secondly, as we meet with our agent representatives and with the contractors they work with, they provide ideas for us. When we were at LIGHTFAIR, we had some product under development that we showed the people to say how does this fit in the marketplace. And so our strategy has been to stay focused, but realize that the industry continues to change, and there is a need for continued development of new product, different lumen packages, color tuning. And then, the last piece is certainly the control aspects. As I've commented in the past, our path to the control market has been to stay -- to be open from a technology standpoint. And therefore, we're able to work with multiple controls, firm's control packages to integrate those into our fixtures or to have them as add-on capabilities through controls. And we continue to think having that open environment is the way to go from a control standpoint. Our development is both on the higher end product. We continue to have the highest lumen per package in the industry at 214 lumens per watt. And we also, as we've talked a few times, developed a product along the Harris product line, more the entry level of cost competitive marketplace. So we look at both of those pieces. I don't have specific numbers for you of products on our roadmap, but we handle it and manage it as a product roadmap and meet periodically to make sure we're spending our resources appropriately to be competitive in the industry.

My last question is about the balance sheet. So over the last several quarters, you've really just done an amazing job, conserving cash, squeezing that balance sheet for cash. This quarter, you had 2 specific items on the cash flow. One was a use of about $900,000 in cash for prepaid or other, and then the other is $1 million use of cash for accrued items. Can you maybe discuss for us the short-term swings on the balance sheet? Whether or not these are likely to come back over the next couple quarters? How you feel about cash use throughout fiscal '19?

Yes. Craig, this is Bill. So we had a -- as we noted in our press release, we had a $1.4 million reversal at a loss contingency we had set up which was in accrued expenses. So although that wasn't cash, it's going to change the number, right? It went into income and reduced the accrued expense. So that's one thing. And I think the other thing is more related to deferred revenue and a few things like that, that just move around on the balance sheet. So I don't think on a go-forward basis, at least what we see right now we should see large shifts like that. Again, the $1.4 million was a onetime-type item.

Right. So it was a positive, it was eliminating a accrual we had for a possible legal matter that was no longer needed.

(Operator Instructions) Our next question comes from Amit Dayal with H.C. Wainwright.

So you talked about sort of reviving the ESCO/reseller channel. Can you talk about like what this comprises of? What are you doing in this -- on this front?

Sure. Historically, for our company, ESCOs, Energy Service Companies, and resellers had been a really significant part of our business from the company's formation back in the 1990s. In 2016, as we expanded the agent-driven distribution model and put a lot of emphasis on that, we somewhat pulled back of spending time and resources in that ESCO market. What we've found as we analyzed our revenues and our changes in our business over the last couple of years, we made a conscious effort some months ago to make sure we were regrouping in that area and going after all 3 of these paths to the marketplace. And so it's reinvigorating the ESCOs that we have been working with. It's going after larger ESCOs that operate throughout North America. And for us, it's just trying to cover the entire market. The way we try to term it a little bit is there is -- we believe customers are going to buy product in the way that they want to buy product, and we feel we have the ability to do that in any of the channels that they choose, whether it's best for them to buy it through the agency channels or to be a national account and buy in that manner or through ESCOs. And so we think it gives us 3 strong legs to the stool, if you will, and what we're feeling positive about right now is we think on all 3 of those, we have some good momentum going forward.

And just a follow-up to that, Mike. So how do we manage sort of the resources that we provide to these channels? Will it depend on performance? Or do you have sort of budgeted out specific resources that you will allocate to these different channels to go after the opportunities?

Yes. It's a great question. There are certain resources that are specifically allocated to one of those 3 channels. And there are certain resources, both product development and sales and marketing resources that are more general in nature and cover all of those. And frankly, that's part of the reason why we felt that discussing the percentage breakdown of revenue between agency and national accounts is becoming less meaningful because there is crossover between the different paths to the marketplace. From an agency standpoint, we have financial information from agencies as to what they have brought to the table, what they sell, where we have helped them with sales opportunities. Our commission structure with them is set up to reward those that bring us volume and profitability, and that seems to be working for us in providing good support for those agencies. The national account team is a somewhat separate sales team that focuses on national accounts, and then usually has linked with it our program project management resources and construction services resources because we are often doing turnkey projects for our national accounts. And then, the ESCOs and resellers kind of fit between those. They're different relationships where we are selling through the ESCOs or the resellers to the contractor, providing support for them from a technical standpoint, perhaps a product standpoint. So there is a lot of synergy between having all 3 paths to the marketplace, and we are able to work through some of the interactions with our customers to make sure they're getting product in the way that they want to buy the product.

Understood. And outside of the auto sector, where do you see more opportunities for you? Or where does the pipeline look promising?

Well, first, as we mentioned, we're so far for our Q4 of '18, we're on track with our agent-driven distribution channel, and we would expect that to continue going forward. On the national accounts, it's probably the area where you just see larger opportunities for big impacts because of the size of the opportunities that are in the marketplace. And there, we are -- we make sure we are in multiple industries. And so while we talk about automotive and retail as the 2 that are more significant right now, we continue to look at other areas in that area too of health care and other industries to be involved with. So from a -- to use a term used earlier on the call today, from an elephant standpoint, it's probably more from the national accounts in most situations, but we also have situations with agencies that get involved with very large situations. As an example, there are -- there is a school system that we're working with one of our agencies on that could be a very significant opportunity for a retrofitting of a very large school system in North America. So big projects can come really from all 3 of those avenues.

Our next question comes from George Gaspar, a private investor.

First question, I don't know if I remember seeing and reading or hearing about your -- what is the backlog that you have currently? And how does it compare?

George, our backlog is about $3.3 million at the end of the quarter -- at the end of the year.

$3.3 million?

Yes.

Okay. All right. And on the technology side, I assume now everything's moved out of Chicago, correct, both to Manitowoc and then down to Florida on the technology side?

That is correct. Our Chicago location is now closed.

It's now closed, okay. And then your borrowing capacity again, right now, please?

Well, that fluctuates, George. At the end of the year, it was about roughly $4 million.

What's your capacity to borrow?

Our line of credit is $15 million.

$15 million, okay.

Yes.

All right. And then your diversification in the product line, you were talking about color tuning. Are you progressing at all in color tuning? That seems to becoming a very interesting area of activity, particularly related to special hauls and things like that where they are used for different events. Are you doing anything in that area?

What we do is we work closely with our chip suppliers, and our largest chip suppliers are Nichia and Samsung for chips. And so we watch and learn from them as to what they are doing in some of these areas and find out how it might apply to our customer base. Certainly, areas like retail have some applications, and so we just think it's going to be a technology that will continue to develop with respect to LED, and our role is to partner with our suppliers to make sure we understand the trends and work with them to see what's being brought to market.

I see. Okay. Well, it looks like -- and then one on being in Manitowoc-headquartered Wisconsin, maybe you don't want to respond to this, but there is going to be quite a development down here in Southeastern Wisconsin by Foxconn. I mean, that sounds like a major project that you should be involved in. Is there any chance of you getting in that?

I certainly think there could be possibilities there. Our sales team has attended the informational sessions that are being held in Wisconsin, and we are working closely with our agency that is very significant in the State of Wisconsin, which would likely have a visibility into the new construction path. So there is going to be a lot of construction related to Foxconn over the next number of years, and so we are doing our best to put ourselves in play for those opportunities.

Great. Okay. Just -- and one final comment. While it looks like you've got things pretty well addressed in terms of taking cost structure out and now the critical thing is to really, obviously, and you know that to generate the revenue stream to bring this earnings number to the bottom line and get rolling forward. So I hope that all happens this year. Thank you.

I completely agree with you, George. Thank you for your comments and questions.

Thanks, George.

That concludes the Q&A period. I will turn the call over to Mike Altschaefl for closing remarks.

Thank you, operator, and thank all of you for joining us on today's call. We look forward to updating you on our business progress and outlook on our next call. Have a great day. Thanks.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.