Orion Energy Systems Inc (OESX) 2019 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Orion Energy's Fiscal 2019 First Quarter Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded. I would now like to turn the call over to Bill Jones. Sir, you may begin.

Good morning, and thank you for joining Orion Energy Systems' first quarter call. Participating today are Orion CEO, Mike Altschaefl; and CFO, Bill Hull.

Mike will open today's call to discuss Orion's Q1 '19 performance and the company's business objectives and financial goals for the full fiscal 2019 year. Bill Hull will then review some financial highlights, after which 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 Tuesday, August 7, 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 that 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, Bill.

Good morning, and thank you for joining our call today. We believe our first quarter performance marks the beginning of a revenue and profitability inflection point, which we are striving to accomplish in fiscal 2019. We entered the new fiscal year with a strong pipeline of opportunities and we were able to match our full-year revenue growth goal of 10% in the first quarter. We also delivered substantially improved bottom line results that reflected our cost-cutting efforts last year. For these reasons, we remain confident in our ability to achieve our revenue goal for fiscal 2019.

With respect to our Q1 2019 revenue performance, I'm pleased to report that our agent-driven distribution sales grew significantly and were ahead of our internal expectations. This provides confirmation that our strategy and efforts to develop this channel are taking hold. We also continue to fine-tune our agent base, replacing underperforming relationships with those we believe are better positioned to succeed. And through this process, we have learned a number of factors that must be addressed before an agency relationship can become productive.

We now recognize that our prior expectations for the time and effort required to develop meaningful agent productivity had not considered all relevant factors. This channel has required continuous training and sales and marketing support, as well as listening to the needs of our agents in developing products to meet the demands of their customers. Now we are seeing these efforts bear fruit as many of our agency relationships have started to become productive.

For those newer to the Orion story, the reason behind the development of our agent-driven distribution strategy was to substantially increase our reach into LED lighting opportunities across North America. Our previous national account focused sales effort enabled Orion to reach approximately 13% of the total commercial and industrial LED retrofit lighting market opportunities. With the addition of our agent network comprised of roughly 50 agencies, we now estimate we are reaching roughly 77% of total commercial and industrial LED retrofit lighting opportunities.

We are similarly encouraged by the traction we are seeing from our efforts to re-engage with energy service companies or ESCOs and resellers. ESCOs are increasingly gaining market share in the electrical distribution market due to their financing options and flexible contract terms. Our goal is to re-engage with ESCOs and electrical contractors to optimize sales from this channel, while we anticipate strengthening in upcoming quarters.

Sales from national accounts were somewhat less than anticipated in Q1 2019, as a few larger projects slipped into the balance of the year as a result of shifts in customer decision making and scheduling. This short-term shift does not reflect the progress we have made the past several months in developing potentially significant opportunities with major automotive, retail, healthcare and public sector customers.

In particular, we have been successful in advancing initial pilots for 2 new large customers as a prelude to broader-scale deployments, which we expect over the next several quarters.

We consistently find that customers select Orion due to our high product quality, innovation and customization, combined with our responsiveness and commitment to meeting the needs of our customers. We often find that national accounts are very thorough in their assessment of potential lighting system vendors as they require turnkey project management and solutions that are closely aligned with their energy efficiency, cost reduction and corporate sustainability goals. We are both proud and excited to see Orion's high-quality custom engineered products and strong service offerings gaining traction with major customer accounts.

Turning to product development, our strategy is to build products that extend our competitive position while also meeting our customers' current and future needs. To this end, we have invested resources in building our base of lighting control options that enable lighting systems to respond to occupancy, daylight levels and predetermined scheduling, while also providing data intelligence enabling customers to monitor and analyze energy savings.

We estimate that roughly 5% of our lighting system sales in the past 12 months included some form of integrated control functionality. With the performance that can be achieved with control systems as well as the ability to leverage our digital ceiling network to support other Internet of Things solutions, we expect this channel expansion to continue growing in coming years.

We also launched our HARRIS Patriot branded LED lighting product line targeted to the value-oriented segment of the market. The HARRIS Patriot line is a lightweight, sleek and lower-cost design ideal for new construction and for price-sensitive procurements. The line's modular design makes them easily upgradable should the customer decide to deploy advanced controls, more efficient light engines or other enhancements down the road, the upgrade potential that HARRIS line differs from competing lines providing Orion with solid market differentiation as well as potential future revenue opportunities.

At the high end, we continue to see very strong demand for our ISON LED High Bay lighting systems, our premium interior fixture, delivering industry-leading energy efficiency with their 214 lumens per watt performance. Our ISON solution delivers substantial long-term energy savings versus other fixtures, savings that substantially exceed the fixture's higher initial cost.

Delivering total long-term cost of ownership advantages is Orion's strength as the quality, efficiency and performance of our fixtures make them a far more attractive long-term investment than the bulk of our competition. When we are able to deliver those messages to customers, they are able to understand the long-term benefit of investing upfront for substantial energy and maintenance savings down the road. Orion has a strong track record of winning the business of customers who focus on long-term cost benefits from energy efficiency and reduced costs for installation and maintenance.

Before I turn the call over to Bill, I would like to touch on the subject of tariffs. With respect to commodity metals, specifically steel and aluminum, we have experienced modest negative margin impacts related to steel and aluminum, the primary components of our fixture bodies. As for the electrical components that we're using for our lighting fixtures, we do procure components internationally and domestically with some suppliers being located in countries subject to current tariff actions.

Due to the many levels of supply chain within the finished goods offered by both Orion as well as competitors, there may be positive or negative impacts depending on the item impacted by the policies. While we believe it is too early to speculate on the impact of tariffs and policy proposals on our business, we feel confident in our component sourcing position. We have established multiple sourcing options and continue to work with our supply chain partners to take action on various policy scenarios.

Finally, turning to our goals for fiscal 2019, based on our Q1 performance and outlook for the balance of the year we have maintained our full year fiscal 2019 revenue goal of achieving approximately 10% growth over fiscal 2018. With respect to our prior goals of achieving breakeven EBITDA and a gross margin of 30% in the second quarter, we are modifying the expected timing for achieving these goals as a result of current and anticipated business conditions.

While we continue to pursue the goals of breakeven EBITDA and a 30% gross margin or better, and believe these are achievable, we now think these are more likely to occur later this fiscal year. We have revised the timing of these goals due to the modest impact of tariffs I just mentioned as well as increases we are experiencing in certain other costs such as freight.

In addition, with respect to some major national account opportunities, we anticipate some pricing compression being required to secure these projects. However, the scale of these opportunities should more than make up for any margin impact, particularly in contributing gross profit dollars. Collectively, we believe these factors will likely push out the achievement of our breakeven EBITDA and gross margin goals.

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.

With that overview, I will turn the call over to Bill to provide some detail on our Q1 financials. Bill?

Thanks, Mike.

Before I get to the first quarter results, I'd like to touch on a couple of points.

First is our compliance with NASDAQ listing standards. In June, NASDAQ notified us that we had regained compliance with their $1 minimum closing bid requirement, thereby bringing that matter to a successful close. I also wanted to remind investors that during fiscal 2018, Orion enacted a wide range of cost-cutting efforts that eliminated approximately $6 million in annual overhead expense, representing an approximate 20% reduction in overhead expense compared to fiscal 2017 levels. The full benefit of these efforts will be reflected in our fiscal 2019 results.

Now turning to our fiscal Q1 '19 performance, we were able to grow revenue 10.1% to $13.8 million compared to $12.6 million in Q1 2018, principally reflecting sales growth from our agent-driven distribution model. Gross margin improved 340 basis points to 25% in Q1 '19 compared to 21.6% in Q1 '18 due to both ongoing efforts to enhance manufacturing efficiency as well as the margin benefit of greater fixed cost absorption on higher revenues in Q1 '19.

Total operating expenses decreased $3.1 million to $6.1 million in Q1 '19 compared to $9.2 million in Q1 '18, reflecting the benefit of Orion's cost reduction initiatives implemented in fiscal 2018 as well the absence of $1.9 million in severance costs incurred in Q1 '18. I would like to point out that we were slightly positive from an operating cash flow perspective in Q1 '19, reflecting working capital reductions that offset our net loss.

At the close of Q1 2019, Orion had net working capital of $9.8 million, including $7.8 million of cash and cash equivalents, and we had $2.3 million of borrowings under our revolving credit facility, down from $3.9 million at fiscal year-end. We believe that our cash position combined with credit available under our revolving credit facility, provides sufficient resources to fund our business going forward. As Mike mentioned, we continue to expect growth for the full fiscal 2019 year, where we will also maintain cost controls to drive better bottom line results.

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

(Operator Instructions) And our first question comes from Craig Irwin from ROTH Capital.

So the first thing I wanted to ask about is the revenue trajectory. It's nice to see things up year-over-year and in the teens. I know this environment is a little bit unpredictable. But for the September quarter that we're in right now, would you expect double-digit revenue growth again year-over-year in the core revenue?

Craig, I think at this point, it's probably a little bit early for us to predict that on a quarterly basis, and normally we have not done that. We continue to feel very confident of having the full year be at least a 10% growth. How that fleshes out between Q2, 3 and 4 is still a little bit undetermined as things develop. And so while we're pleased with the 10% in Q1 and feel confident about a full year 10%, the mix between quarters 2, 3 and 4 we're just not commenting on quite yet.

Understood. I can't fault you for that. Definitely can't fault you for that.

Financial results this quarter, general and administrative, was up sequentially, $1.8 million in the fourth fiscal quarter to $3.1 million this quarter. Can you maybe bridge that increase for us and help us understand if there are any sort of lumpy onetime items that might not repeat in the first quarter? Or was the fourth quarter number maybe a little bit lower than where trend is going to be for the next few quarters?

So Craig, so you're comparing sequential quarters?

Yes. Sequentially for G&A.

Yes. Yes. So typically, our first quarter, our expenses are a little bit higher, and it's mainly due to some expenses around events that we might have, so light fair and some other type things that we have going on, so it's not unusual to see that. But again, as I said before, we expect the trend to continue to show the improvements we made last year across the whole year.

You're down a lot versus $5.3 million last year. $5.3 million to $3.1 million is a lot of progress. But as we look at the rest of the year, should we start trending down from this $3.1 million given light fair and some of the other expenses you incurred in the first quarter?

Yes. I think the way to think about it is go with the guidance I provided. We took $6 million out of 2017 across the board. And you're specifically talking about G&A, so generally speaking, yes. But directionally, it will go down.

Okay. Okay. Excellent. Excellent.

And then I understand on the gross margin side, a lot of the companies out there are saying that the big boys, all the top 5 OEMs in the lighting market, now have a mandate where they're not supposed to lose any job and people are submitting for pricing waivers and getting answers back in less than an hour so that they can keep customers. So it sounds like the market is getting a lot more aggressive about keeping things, but I would have thought that Orion would be in a favorable position versus many of the others with international manufacturing footprints, your faster turnaround from your domestic facility and the lack of tariffs directly impacting your products.

Can you maybe talk about whether or not the location of your facility in Wisconsin is a bonus, is a positive for approaching the market as we head through the next couple quarters? Do you see the steel price issues and some of these other things impacting you in a different way than what we would expect for some of the other larger lighting competitors?

Sure. Great question, Craig. A few comments related to that.

We continue to believe that having the U.S. based manufacturing has been a competitive advantage for us. And when we link that together with the ability to do customization of fixtures for specific needs for customers and do that on a very timely basis, then be able to source both locally as well as internationally to then produce here and deliver product normally within 10 days or less to the customer, has been an advantage. Then linking that with our ability to do turnkey management in certain situations really brings the complete package, particularly to the large national accounts.

I don't feel that we've seen the national account competition with the larger competition in the industry getting that much more intense the last quarter or so; I think it's been sort of consistent for us. We feel that we can hold our own. My comments earlier regarding some possible margin compression was really more related to getting early on projects with some large possible accounts to go in and then be able to do test situations and pieces of business to get a larger piece of business down the road.

And then, finally, on some of the tariff situations, as we've said it's kind of mixed. The latest round that came up a few weeks back in the case that, perhaps, completed fixtures out of China could have a 25% tariff on them. One would expect that could possibly have a positive impact for us being primarily a U.S.-based manufacturer for most of our product. So we're -- we feel, so far, the impacts from tariffs for us have been modest and see, hopefully, more upside to it down the path than downside right now.

Great. Then my last question: I was talking to another large buyer of lighting fixtures, the management team this morning, and they're telling me that they have projects they need to implement in the September quarter, that are facing modest delays because of the availability of fixtures from some of your competitors. Apparently, there's disruptions on the component availability and because of the confusion around tariffs. Are you seeing your lead times change at all? Are you seeing your lead times for components change at all? And do you think that the overall environment of uncertainty will benefit Orion given that made in the USA really does have a lot more certainty around delivery times?

We think that, overall, our ability to deliver product based on U.S. manufacturing is going to be a positive for us against our competition over the next few quarters. We have, to date, not had to delay any projects because of supply chain issues or availability of components, for some of the reasons you've mentioned earlier.

There are certain electronic components that demand seems to be up worldwide in the industry and not only ours, but in other industries that use things, in semiconductors and other electronic components. But we've been able to manage our supply chain, do our forecasting and have not had any impacts so far, but we continue to manage our supply chain closely to make sure we're prepared to deliver product for our customers.

So yes, overall, I think it's going to be an advantage for us with our supply chain and U.S.-based manufacturing. Often, when we -- over the last 2 years, we get asked how can you compete being a U.S.-based manufacturer? We believe in today's environment, with some of the customer expectations and the supply chain issues and perhaps the tariff issues, it will continue to be a competitive advantage for us over the next few years.

And our next question comes from Eric Stine from Craig-Hallum.

Just a couple questions for me. I mean, it sounds like you definitely -- the agent channel coming along very well, and I know some of that simply -- it's maturing, but also steps you're taking. I mean can you -- when you think about that channel, I mean, any way to quantify or just talk about where you might be the primary source rather than a second or third? And then as you think about that, I mean, what's kind of the optimal mix where you would want to be the primary source for that agent?

We have various agencies across North America that have other lighting products as part of their line card, which is normal in our industry, Eric. And in many cases, they are going to have competing products with ours. And our task is to support them, educate them on our product, provide competitive pricing and competitive commission arrangements and really help them in the sales channel delivering product.

We see where we can be competitive is particularly where they are in retrofit situations because we're a company that really understands retrofit opportunities, can help them through that. So we really don't -- we do know that we probably do better in certain situations where their other line cards might have certain of our competitors than others, but we really don't have any set mix that we try to target in terms of where we're at with those agencies.

Overall, we have found that the time we spend with them training, sales support, sales leads and then performance on delivering product has been helpful. And to somewhat comment on an earlier question today, we particularly find where we're, frankly, able to deliver high-quality product on a timely basis has been very key in that channel because we have heard and seen supply issues from some of our competitors going through the agency channel.

Got it. That's helpful. And then maybe just on the national accounts, and I can certainly appreciate that there's timing uncertainty with some of these things, but the 2 -- you mentioned 2 large ones. I assume those are the automotive customers. In the past, I think you've talked about $14 million or so that you may be anticipating in fiscal '19 and maybe that has changed, but just curious any sizing of those 2 customers? And then, also, any details of what you are seeing in -- the other end markets being retail and healthcare?

Sure. A few comments.

First of all, as mentioned previously, one of the main reasons we grew a little bit slower than maybe we thought we might grow in Q1 and maybe in Q2 is our national accounts were just a little bit slower than what we had anticipated. We didn't lose anything of significance, it just is an environment where it seems to take a while to get things approved at the customer level and getting capital approved. And even though we all hear that there is substantial amount of cash available by companies, you still have to work through the capital approval process, which takes us some time. So we are actually very optimistic about the rest of the year with respect to our national accounts.

For our primary automotive customers where we had previously commented a few quarters ago that we expected at least $14 million of revenue in fiscal 2019, we continue to believe that we will have at least that much in revenue from those 2 customers. And then beyond that, we have developed some very significant potential opportunities in the retail industry as well as in the public sector and in the healthcare area. And those are just some variety of situations that we are working on right now, that they tend to be large and they take a while to come together. But when they come together, they can have a very positive impact for us both in terms of volume, from a manufacturing standpoint and just absorption of costs for us. So that's why we had mentioned that we see automotive, retail, healthcare and the public sector being very positive for us for national accounts for the remainder of the year, particularly in the second half of fiscal 2019.

And our next question comes from Amit Dayal from H.C. Wainwright.

All my questions have been asked, but just going back to certain -- the margin topic. Can you quantify like what sort of impact you might be seeing, maybe on the downside, if you're expecting margins would drop here? Is it just a few basis points? Is it bigger than that? Any way to sort of quantify? That would be helpful.

All right. Amit, at this point, we don't have specific numbers around potential impacts of margin from either the tariff issues or some of the competitive natures.

We don't see it as being dramatic at this point in time and it probably has a bigger impact looking at a volume standpoint for us that we think would increase volume going through our facility and absorbing additional fixed costs as we get to the higher teens of revenue on a quarterly basis, but those things should more than offset some of the possible margin impacts from some cost creep that we've had in the supply chain and perhaps tariff situations. And in addition, we continue to feel very confident about longer term being in that 30% gross margin plus position. And so we look forward to having the increased revenue going forward and demonstrating what we can do there, so we really don't see it being dramatic.

Understood. In relation to your building the ESCO channel, has anything come into the pipeline from this yet or is it still in the early stages?

Amit, could you just repeat the question one more time, please?

In relation to the ESCO channel, has anything come into the pipeline from these relationships yet or are you still working through it?

Yes. I'm sorry. I missed the first part of your question. Yes, we certainly have had a positive impact from our ESCO relationships during fiscal 2019. We really started re-engaging more clearly with them 6 to 9 months ago and it continues to develop. Many of these are prior existing relationships that we are reinvigorating and supporting. So there has been a positive impact from those, so far this fiscal year and we expect that to grow as we head through quarters 2, 3 and 4.

Okay. Got it. Last quarter, you guys gave us a backlog number of around $3.3 million. I mean, this was the end of full year 2018. Do you have a number for backlog at the end of the first quarter of '19?

It's about $3.5 million, Amit.

Okay, so similar. Okay. Perfect. And then from a cash and balance sheet point of view, given the cost downs, etc., (inaudible) you guys -- it seems you are comfortable, but is there anything we should be sort of looking at or thinking about in terms of your working capital needs from where you are with your balance sheet?

We continue to feel confident about our balance sheet position, Amit. We believe we have the cash available as well as the financing capabilities with our banking relationship to execute on our current organic growth strategy. We always look very closely at working capital. And as we've discussed previously, the reason we've been able to manage our way through some prior financial results was with very strong working capital management.

We continue to have goals of further reducing working capital in the business to provide additional cash support for the business. So we're very confident about where we stand today financially in the balance sheet, we will always look for ways to improve it and feel we haven't needed to modify any of our strategies or programs or sales efforts with respect to our capital position.

And our next question comes from William Frost from Orion.

Could you spend a little time on your sales force? How large is it? How do you break it down per marketing segment, your direct sales, agency sales, ESCO sales? How sophisticated it is? What is your approach in these different segments?

Sure. Well, as a backdrop, we do approach the market in 3 different paths. So we approach it from the large national accounts, we approach it from the agent-driven distribution model that we've set up and then we approach it from the ESCO and electrical contractor relationships.

Generally, we have people specifically identified who are working in those separate channels. So we have regional sales managers in our agent-driven distribution model that oversee and work with the agencies in their geographic territory. We have individuals that focus most of their time working on national accounts and then we have some individuals that are primarily focused on the ESCO and electrical contractor market. And I kind of use the words mostly because given the size we are, we do get together with the entire sales team, we share information, at times going after opportunities there maybe some interaction between the groups to make sure we're covering the market as well as we can.

But we do divide up in those 3 segments as we go to market and then have oversight with both the executive sales management and myself. We're working with all the groups to work through their sales opportunities.

And how many people do you have now on your sales staff?

We really haven't shared that externally in the past of sales numbers. I would just again say we do have specific people that are orientated into each of those 3 different segments and cover them directly. So probably, at this point, we're planning to share just overall the org structure from the sales organization.

Okay. I understand that. The last question, you have mentioned in the past something about a reverse stock split. Can you talk about that a little bit?

Sure. We had brought that up in our last call in that it would be one of the possible solutions if we did not, in the normal course of business, get back in compliance with NASDAQ. Given that we have regained compliance with NASDAQ, we currently have no plans to implement a reverse stock split. As you probably know, because I believe you're a shareholder, we issued our proxy statement without any discussion about a reverse stock split. So it's currently not anything we are thinking about or planning for.

(Operator Instructions) And our next question comes from Jon Jung from Trailhead Asset Management.

Jon, we can't hear you.

Operator, I think we should move forward as we can't hear the individual.

Thank you. And that concludes the Q&A period. I will turn the call back over to Mike Altschaefl for any closing remarks.

Thank you very much, Shelby. And I'd like to thank all of you for joining us today. 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.