Flux Power Holdings, Inc. (NASDAQ:FLUX) Q2 2024 Earnings Call Transcript

Flux Power Holdings, Inc. (NASDAQ:FLUX) Q2 2024 Earnings Call Transcript February 8, 2024

Flux Power Holdings, Inc. beats earnings expectations. Reported EPS is $-0.05, expectations were $-0.09. FLUX isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to the Flux Power Holdings Second Quarter Fiscal Year 2024 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to hand the call over to Maria Rico, Marketing Manager. Maria?

Maria Rico: Thank you, operator. Your host today, Ron Dutt, Chief Executive Officer and Chuck Scheiwe, Chief Financial Officer, will present results of operations for the fiscal second quarter ended December 31, 2023. A press release detailing these results crossed the wires this afternoon at 4:01 p.m. Eastern Time and is available in the Investor Relations section of our company’s website fluxpower.com. Before we begin the formal presentation, I would like to remind everyone that statements made on the call and webcast may include predictions, estimates or other information that might be considered forward-looking. While these forward-looking statements represent our current judgments on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially.

You are cautioned not to place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this presentation. Please keep in mind that we are not obligated or we are not obligating ourselves to revise or publicly release the results of any revisions to these forward-looking statements in light of new information of future events. Throughout today’s discussion, we will attempt to present some important factors relating to our business that may affect our predictions. You should also review our most recent Form 10-K for a more complete discussion of these factors and other risks, particularly under the heading Risk Factors. At this time, I will turn the call over to Flux Power’s Chief Executive Officer, Ron Dutt.

Ron Dutt: Thank you, Maria and good afternoon everyone. I am pleased to welcome you to today’s fiscal second quarter 2024 financial results conference call. Firstly, please note that on Slide 3, if you are following the deck, for those of you new to our story, there is a short reminder of what we do. We are powering your transition to sustainable lithium-ion battery technology. We are powering material handling, airport ground support, solar energy storage, port authority equipment and other applications with new and clean technology. Our products and services are focused on the growing demand for large nationwide fleets that are pursuing a better return on investment and a positive environmental impact compared to lead acid batteries.

We are the leading supplier to large material handling fleets who require the best, both now and with future deliveries in product, technology, service and ease of doing business. Our reputation and brand are critical as we target top-tier customer and OEM names, which I’ll point out shortly. We must have a strong reputation and solid track record to reliably satisfy these large fleets that have hundreds of facilities and need their batteries for new equipment and existing equipment delivered on time without difficulty. Fortune 100 companies demand suppliers that are transparent, experienced and trustworthy as they transition their fleets to new and clean technologies, which puts us in a very strong position in the clean energy market. And we have the trend of on average, adding two large new customers per quarter and at the same time without losing any of our installed base of customers.

Our business priority this past year focused on progress to cash flow breakeven while continuing to capture market share for the increasing demand for lithium batteries. We continue to be highly encouraged by our momentum toward cash flow breakeven and profitability given the underlying demand of our products. We have made progress on a number of our growth initiatives that have near-term and long-term impacts. Our new series of heavy-duty models will be added to most of our product segments and along with that, a new top 5 forklift OEM private label program, both of which will address the strong market demand beginning in early 2024 calendar year. And our automated assembly of cell modules is tracking well. We plan to launch the first, the industry’s first integrated telematics fleet-wide program for the Fortune 100 customer later in 2024 this year that combines the telemetry data of both the forklift and the battery.

We believe that our leadership in telematics will serve as a continuing platform to introduce new features for operating performance and asset management that are highly desired by our customers. Also, we are exploring with partners opportunities for fast charging technology and international sales opportunities. The second fiscal quarter 2024 also saw ongoing momentum to both the top and bottom lines as we continue to move steadily towards profitability. While reaching record quarter revenue of $18.3 million during the quarter, we do continue to see lumpiness due to the timing of deliveries of customer new forklift orders and higher interest rate impacts. We improved gross profit up 38% in the second quarter to $5.7 million and gross margin expansion of 700 basis points to 31% compared to the year ago period and also up from our fiscal first quarter of $4.3 million and 29% respectively.

With ongoing initiatives focused on strategic supply chain and profitability improvement, lower costs and higher volume purchasing, we are targeting gross margin improvement to continue towards 35% in the short-term. We are highly focused on achieving cash flow breakeven during this fiscal year 2024. We made good progress during the second fiscal quarter, delivering positive adjusted EBITDA of $300,000, an improvement of $1.2 million from an adjusted EBITDA loss of $900,000 in the second fiscal quarter of 2023 and sequential improvement from a loss of $1.2 million in the first fiscal quarter of 2024. Key drivers of the improvement include gross margin expansion and steady operating leverage from modest growth in operating expenses over the year.

Our cost and pricing initiatives contributed to gross margin improvements that I just mentioned to 31% in Q2 ‘24. Also, our inventory balances have been stable, reflecting better management of supply chain sourcing and higher inventory turns from improved operational processes and lean manufacturing implementation. Taken together, we are executing operational efficiencies on our strategy for cash flow breakeven beginning in this fiscal year 2024 and increasing profitability beyond as we continue to drive expansion of our product lineup, operational efficiencies and service network. In the longer term, our strategy revolves around building scale to sell our products to large fleets, building on our momentum in revenue, gross margin and operating leverage.

Currently, we are growing organically within our capital resources, but have begun to explore and develop strategies, including those already mentioned, to build partnerships that can leverage our revenue growth, our technology and our profitability and achieve our goal of building scale to meet the needs of our top tier customers. Our efforts on increasing revenue and margin improvement, specifically for adjusted EBITDA are shown on Slide 7, reflecting the upward trend over the past 2 fiscal years and our momentum towards sustained breakeven. The increase in Q2 fiscal ‘24 is directly attributed to the improved gross margin – gross profit, sorry, from gross margin expansion and revenue growth. We believe our trajectory to profitability is built on a strong foundation of lean implementation and ISO 9001 processes.

Additional enablers include expansion of high demand models and continued operational and volume-related supply chain cost reductions. Our current and potential pipeline of customers continues to expand with 4 new customers this past quarter and 8 new customers in the calendar year 2023. Our full product line caters to large fleets who seek an ongoing long-term relationship partner to meet current and future needs, not just a one-time transactional purchase engagement. These customers represent well-known household names, having large fleets who require high-performing suppliers. While the forklift growth rate has historically been single-digit, the adoption of lithium-ion batteries is growing at a much higher rate, driven by the compelling value proposition of lithium compared to lead acid, especially for the larger multi-shift operations.

The material handling sector is not unaffected by economic downturns, but it is critical to transport goods and provide services throughout the business cycle. Our strategy has included adjacent verticals such as airport ground support equipment. And we continue to assess other possible adjacencies to leverage our core competencies and capabilities. The trajectories of our revenue and gross margin on Slide 9 speak for themselves. We have taken actions to restore our gross margin trajectory that was interrupted by the pandemic and our highest priority now of achieving sustained profitability this fiscal year. Our ongoing improvement initiatives include a number of actions that are now impacting gross margin and will continue to do so. First, price increases to offset commodity [Technical Difficulty] increased pack volumes, more competitive shipping costs, lower cost, more reliable and secondary suppliers of key components, expanded manufacturing capacity and production process.

And finally, transition of product lines to a new modular platform, which has more efficient design for assembly and service. All these initiatives are part of our plan to accelerate gross margins as our target is to reach a gross margin at 40%. Slide 10 highlights our backlog and inventory level trends, which are reflecting a more predictable pattern in recent periods, reflecting the growth of the business. As of February 1, our backlog was $30 million [Technical Difficulty] new customers during the quarter, including a winery that is the largest wine producer in the world. Our run-rate of backlog does vary at any point in time that has a pattern of running from $20 million to $38 million depending on the time of the orders received. Beyond our backlog of open orders, we’re working on a pipeline of high probability orders well over $100 million, which does stretch beyond our current fiscal year ending June 30.

We monitor the multibillion-dollar addressable material handling market for economic trends, new entrants and customer demand trends, and we believe this market to provide a very positive growth environment for a strong, stable undercurrent especially given the recognized double-digit growth of lithium-ion solutions in the sector. Our strategic initiatives also include improving sourcing actions to mitigate part shortages, supply chain efficiencies and increasing inventory turns. With that, I will now turn it over to Chuck Scheiwe, our Chief Financial Officer, to review the financial results for the quarter ended December 31, 2023. Chuck?

Chuck Scheiwe: Thanks, Ron. Now, turning to review our financial results in the quarter ended December 31, 2023, s Ron mentioned, revenue for the fiscal second quarter of 2024 increased by 7% to $18.3 million compared to $17.2 million in the fiscal second quarter of 2023. This was due to a higher number of packs sold during the quarter, as well as price increases for certain packs sold. Gross profit for fiscal Q2 of 2024 increased to $5.7 million compared to a gross profit of $4.1 million in fiscal Q2 of 2023. Gross margin was 30.9% in fiscal Q2 of 2024 as compared to 23.9% in fiscal Q2 of 2023. So this was reflected higher gross profit and lower cost of sales as a result of the gross margin improvement initiatives we’ve talked about, and this will help us achieve our profitability.

Selling and administrative expenses were at $4.6 million in fiscal Q2 of 2024. This is up slightly from $4.3 million in the previous year quarter. This is primarily attributable to staff-related expenses, some higher professional service fees and stock-based comp. This was also partially offset by decreases in outbound shipping costs, recruiting costs and consulting fees. Research and development expenses increased slightly to $4.3 million in fiscal Q2 of 2024. This is compared to $1.2 million in fiscal Q2 of 2023. This is primarily due to additional engineering projects to support our new products. Adjusted EBITDA improved to a positive $300,000 in fiscal Q2 of 2024 from a loss of $900,000 in fiscal Q2 of 2023, and this is mostly driven by the improved gross margins.

Our continued initiatives, business growth, operating leverage all contribute to drive this trajectory. Net loss for fiscal Q2 of 2024 was $800,000 compared to a net loss of $1.7 million in fiscal Q2 of 2023. The improvement principally reflected increased gross profit, and that was offset by increased operating expenses and interest expense. Cash was $1.6 million at December 31, 2023, as compared to $2.4 million at June 30, 2023, and this is mostly based on just timing of utilizing our credit line and when we borrow. Net cash used in operating activities decreased by $2.1 million to $1 million in the 3 months ended December 31, 2023, which is compared to $3.1 million in the 3 months ended September 30, 2023. And available working capital includes our line of credit as of January 31, 2024.

That’s under our $16 million credit facility from Gibraltar Business Capital. That is the remaining available balance of $6 million. And we also have our $2 million available under the subordinated line of credit with Cleveland Capital. Our credit line with Gibraltar provides for expansion for up to $20 million. Now I’d like to pass it back to Ron to offer some closing remarks.

Ron Dutt: Thanks, Chuck. Looking at the positive momentum of our existing customer base and new customer acquisitions, we are confident that we are on a trajectory toward reaching sustained profitability during the current fiscal year. Our steady ongoing gross margin improvement reflects our goal to reach 40% gross margin, leveraging our operating and pricing – operational and pricing initiatives. As we establish consistent and increasing profitability this year, we look to implement revenue growth initiatives that we are currently exploring and developing. Our strategy continues to focus on the strong demand in the market for sustainable energy, especially in our industrial sector where we do not rely on government incentives, but only a compelling value proposition and ROI.

We believe the combination of existing customer orders and the acquisition of new customers who want the benefits of lithium-ion technology can drive continued revenue growth. We are seeing strong progress with our growth strategy, including the introduction of new heavy-duty models to be launched this year and a second private label program expected to launch with a major forklift OEM. We also have a – we are exploring a partnership with a fast charging proprietary technology firm, and we look to additional revenue potential from establishing the industry’s first telematics integration for an entire nationwide fleet with a Fortune 100 company. And our current production facility should support annual revenue up to $150 million, given our facility footprint, a second shift build-out and full implementation of lean manufacturing.

As I mentioned previously, we have an improved capital structure that includes increased working capital line of credit of $16 million with Gibraltar Business Capital to support planned growth with provisions to increase to $20 million and a new $2 million subordinated credit facility with Cleveland Capital that has an extended maturity to August 15, 2025. In summary, we are well-positioned to execute our growth strategy as we offer customers deep experience as first movers in the sector and validation by Fortune 100 customers who entrust migration of their fleets to lithium-ion solutions. I look forward to providing our shareholders with further updates in the near-term as we strengthen our leadership position in lithium-ion technology solutions with our growing list of new and diverse large customers.

I thank you all for attending. And now I would like to hand the call over to the operator to begin our question-and-answer session. Operator?

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Rob Brown with Lake Street Capital Markets. Please proceed with your question.

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Q&A Session

Rob Brown: Hi, good afternoon and congratulations on the strong quarter.

Ron Dutt: Yes, thanks, Rob.

Rob Brown: I guess, first question here is on the order environment. There were very strong orders in the quarter. I know the business can be a bit lumpy, but what are you seeing in terms of customer activity? And how do you see the order environment over the next couple of quarters?

Ron Dutt: Yes, Rob, that’s really a good question. We spend a lot of time looking at that. Particularly our salespeople are working with our end-customers and the OEMs on that. The industry has largely recovered from the pandemic. But there is still some lumpiness out there in orders. We have not seen any backing off or reduction of orders from any of our customers, but we have seen some deferral out toward the end of the year and in some cases beyond as they just manage the timing of the replacing of their forklifts. And there must be some effect on high interest rates because we see that happening a lot in other sectors. And we haven’t lost any customers. So we see no back off in the managing of our installed base and adding new customers, but we are dealing with that lumpiness.

The lead times in normal stable times could be 2 months or so, and you can kind of see that reflected somewhat in our open sales orders, but there are a couple of lines with one of our largest OEM customers of forklift delays. So since a large percentage of our business, over 90% is for put on new forklifts, although the growing business on replacing lead acid batteries at the end of life is certainly beginning to grow, that can affect our timing. So we have an ongoing strategy as a growth company and talk about it all the time and the initiatives to accelerate growth. There currently is a strongness in our part to produce the concentration in our biggest customers and as a public company, so we can have a more predictable trajectory on our orders.

I’d just add though that like a lot of companies, I think a lot of customers are going after look at how deep and broad have you gone with some of these Fortune 50 and 100 customers because that really does provide the validation to others that are looking at this adoption and migration. So in your response to the orders, that’s going around the wagons pretty well. Does that help?

Rob Brown: Excellent. Yes. Thank you. That was a great overview and answered some of my other questions along the way. So that’s fantastic. And then on the margin trends, so good progress there. How much further to go is there in terms of some of these initiatives you put in place? Are there initiatives in place that really are set to show through in the numbers? I think you mentioned a 35% gross margin, that’s a near-term target, but a sense of how confident you are in achieving the margin improvement that you’ve worked on.

Ron Dutt: Yes. You hit another on another hot topic here, we work with on a constant basis. For the last well, 3 or 4 years when we had negative margins in large part because of low volumes. But we have established an infrastructure, a cadence, a war room mentality on margins of going after them in all of the high-potential areas, supply chain, sourcing, getting better pricing from higher volumes, on the design side, improving our designs for quality and reducing warranty. And then also from the pandemic, with the price increases we had to catch up on pricing because we had to honor long lead purchase orders with some of these customers. So the benefit of the aggravation of that supply chain was it forced us to really build a stronger, robust infrastructure to reduce costs, make all of our processes more efficient and also be taking a hard look at products we have and making sure the pricing is right.

I mean, after all, we and the dozen or so others that are in this sector are really buying new ground and learning more all the time about that. So I think those areas have initiatives that have momentum with them. So when we target cash flow breakeven, a big part of that is margin. It’s helped by growing volume, but the efforts on those are ongoing. Our goal is not just to break even. Our goal is to achieve the margin that a manufacturing company like us should achieve, which we talked about. And we have a lot of confidence that we have in place what I could loosely call the infrastructure to continue that momentum.

Rob Brown: Okay. Great. And then my last question is around kind of the working capital cash flows. Do you have some seasonality there? And do you expect the working capital kind of, I guess, use of cash flow to diminish?

Chuck Scheiwe: Yes. Well, a lot of the changes right now since you’re right on that edge of zero adjusted EBITDA going close to that level, a lot of the changes in capital is just – it’s working capital. It’s inventory purchases and customer payments. So for us, it can bounce around a lot when you have $1 million payments coming in, whether they come in this week or the next week, you’re going to see that bounce around a little bit. So I think our focus really on the cash side is holding inventory down and utilizing the balance sheet to keep us close to zero.

Rob Brown: Okay, great. Thanks, guys. I will turn it over.

Ron Dutt: Yes, thanks, Rob.

Operator: [Operator Instructions] Our next question comes from the line of Sameer Joshi with H.C. Wainwright. Please proceed with your question.

Sameer Joshi: Thanks. Ron, Chuck, congratulations on the positive adjusted EBITDA.

Ron Dutt: Yes. Thanks, Sameer.

Sameer Joshi: Yes. On the heavy-duty models that are expected to be launched later this year, have you received the UL listing for that? And part two of that question is, have you already sort of scoped prospective customers? And is there a pipeline behind that, those models?