Orion Energy Systems, Inc. (NASDAQ:OESX) Q1 2024 Earnings Call Transcript

Orion Energy Systems, Inc. (NASDAQ:OESX) Q1 2024 Earnings Call Transcript August 9, 2023

Orion Energy Systems, Inc. misses on earnings expectations. Reported EPS is $-0.18 EPS, expectations were $-0.11.

Operator: Good morning everyone and welcome to the Orion Energy Systems Fiscal 2024 First Quarter Conference Call. At this time, all participants are in a listen-only mode. After some prepared remarks, we will conduct a question-and-answer session. I would now like to turn the conference over to Bill Jones, Investor Relations to begin.

Bill Jones: Thank you and good morning all. Mike Jenkins, Orion’s CEO will begin today’s conference call with a review of Orion’s current business, strategy, and outlook. Per Brodin, Orion’s CFO will then discuss the company’s first quarter results, financial position, and guidance among other matters, and then we will take investor questions. Today’s conference is being recorded and a replay will be posted to the Investor Relations section of Orion’s website at orianlighting.com. Remarks that follow and answers to questions include statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally include words such as anticipate, believe, expect, project, or similar words.

Additionally, any statements that describe future objectives and goals, plans, or outlook are also forward-looking. These forward-looking statements are subject to various risks that could cause actual results to differ materially than currently expected. These risks include among other factors matters that the company has described in its press release issued this morning as well as in its filings with the SEC. Except as described therein the company disclaims any obligation to update forward-looking statements that are made as of today’s date. Reconciliations of certain non-GAAP financial metrics to GAAP measures are also included in today’s press release. Now, let me turn the call over to Mike Jenkins.

Mike Jenkins: Thank you, Bill. Good morning and thank you all for joining us this morning. While Q1 was a more modest quarter as previously suggested, we remain very confident in our pipeline of opportunities for the balance of the fiscal year, which we believe position us well to deliver meaningful growth over fiscal 2023. Our confident outlook is supported by the expanded array of complementary products and services that we have put into place over the past two years to better meet our customers’ evolving needs. Per will discuss our Q1 performance and guidance in more detail later in the call, while first I will provide a brief overview of how we have repositioned our business to meet our customer demands. As you may know building on our proven expertise in design and implementation of large national LED lighting retrofit projects, we expanded into lighting and electrical maintenance services and then last year, we entered the market for electrical vehicle charging solutions.

Importantly, both of these initiatives were in response to customer inquiries regarding our ability to service needs in these areas. Orion Maintenance Services was launched in fiscal 2021 to support our largest client with reactive maintenance services for their lighting and light electrical needs. Given the scale and geographic scope of our clients’ requirements, we quickly recognized the need to expand our service footprint and capabilities and we proceeded to acquire Stay-Lite Lighting in Q1 of fiscal 2023. Last week we announced the signing of a three-year agreement with our largest customer to provide preventative lighting maintenance to approximately 2,000 stores nationwide. This program started in February and has scaled over the last several months.

Given the increasing complexity of lighting systems and controls, Internet of Things solutions, and other electrical systems, we view maintenance as a growth opportunity in an ideal way to expand the value we can provide to our customers over the long term. We continue to build out the scope of this business to ensure we have the resources, talent and appropriate systems in place to deliver reliable high-quality and timely service to national customers’, customers who may have hundreds or even thousands of locations across the country. Our maintenance solutions business also provides other benefits to Orion, which include a growing base of recurring revenue as well as a regular ongoing presence in customer locations. This positions us well to both understand and deliver products and services to meet ever-evolving needs.

In October of ’22, we also entered the rapidly growing market for commercial and industrial EV charging solutions with the acquisition of Voltrek. As I mentioned, a growing number of customers had asked about our capabilities in this area. After researching the market, we quickly realized that our best path to enter the space was by partnering or acquiring a company with capabilities, experience and customer service commitment essential for success. We were fortunate to find Voltrek, a pioneer in commercial EV charging solutions with deep expertise, strong industry relationships and an excellent track record. Most importantly, Voltrek had a business model and philosophy that was very similar to our turnkey LED retrofit solutions business. In our Lighting business, turnkey solutions involve initial site surveys and custom product designs, engineered for the customers’ unique needs.

From there, we progressed through the on-site installation and system commissioning, all with one central point of contact and accountability that provides the customers with a very streamlined and easy project solution. Our EV charging solution business model is very similar to this, as it requires upfront site visits, followed by custom design and planning to meet each customer’s needs. In both cases, Orion is positioned to provide ongoing maintenance and support. Historically, Voltrek business was focused in the Northeast nearest headquarters in Massachusetts. We are investing in a variety of initiatives to support Voltrek ability to scale its business for national reach. We are investing in personnel infrastructure and other resources to enable them to source and execute projects across the country and to more closely integrate their offerings and financial reporting within Orion.

Photo by Omar Tursić on Unsplash

While the process of building Voltrek team and infrastructure has imposed short-term constraints on their activities during the first quarter, we are very excited by the progress they are making in building out their team and capabilities. EV charging revenue dipped sequentially in quarter 1 ’24 as the unit managed through the integration and personnel recruiting processes. Segment contributed $1.2 million of revenue in Q1 ’24 versus no revenue for Orion in Q1 of ’23 and 3.4% in Q4 of ’23. One note that in Q4 of ’23, there was a large school bus project which we’ve previously mentioned that significantly improved this quarter’s results. We anticipate substantial growth at Voltrek in coming quarters and years, as the business builds upon its expanded base of customers and projects across the US.

Driving demand for EV charging infrastructure, our forecasted EVs will represent roughly half of the new vehicle fleet by 2030, the current administration also recently announced new mileage standards that are likely to drive continued growth in EV adoption. Importantly, we believe these new business areas are well aligned with our core mission of helping customers achieve their financial and sustainability goals. At Orion, we leverage the benefit of cutting edge technologies and custom design, engineering, implementation and high-quality service to develop and manage long-term customer relationships. But basically we help customers and partners navigate, implement and maintain increasingly complex and interconnected electrical systems. Additionally outside of components we manufacture most of our products in the US at our Manitowoc, Wisconsin facility.

Our manufacturing capabilities provide flexibility, customization and industry-leading delivery time frames with Made in America Solutions. In our maintenance services business, revenue declined slightly to $3.8 million in Q1 of 2024 from 4.1% in Q1 of 2023 due to decreased activity with a larger customer including some special projects. The business also saw a profit decrease in the period, reflecting a combination of legacy pricing embedded in the Stay-Lite organizational contracts, as well as higher subcontractor costs. We are now rolling out updated pricing for both new and existing customers to better reflect our cost — our current cost structure. In the case of some legacy arrangements, we have secured significant price increases to position the business for appropriate profitability.

While essential, we recognize that this effort will likely result in some loss of business that could provide a modest headwind for the segment. There are plenty of growth opportunities in maintenance and we’re investing to ensure we can deliver and maintain high levels of customer satisfaction. After many months of work, we recently finalized a three-year preventative maintenance agreement with our largest customer, a well-regarded national retailer. This agreement formalizes and builds upon services we initiated in February and scaled through July. Under this agreement, Orion will provide LED lighting and light electrical preventive maintenance services to approximately 2,000 retail stores on a nationwide basis in addition to the existing reactive maintenance business in place.

Lighting revenues were $12.6 million in quarter one 2024 versus $13.9 million in Q1 2023, again reflecting variability and timing of larger turnkey projects. Several projects are now ramping in Q2 including installations on a $9.6 million LED retrofit project in Europe for the Department of Defense, which we expect to conclude this fiscal year. This project, which started later than we originally expected was sourced in conjunction with a large international ESCO. In addition, we have recently commenced on an outdoor lighting retrofit project for our largest customer and anticipate roughly $5 million or more in revenue expansion from an existing customer in the warehouse logistics sector through an ESCO partner. Both of these new pieces of business have potential for additional revenue beyond fiscal 2024.

Besides what I’ve mentioned, we also anticipate a full year growth in our ESCO and electrical contractor channels where we continue to build a base of productive relationships with partners who appreciate our quality, value, reliability and high levels of customer service. Our ESCO business closed quarter one up over 30% excluding the Department of Defense project and we expect strong growth to continue throughout fiscal 2024. End customers in the ESCO channel are particularly focused on energy savings and environmental goals to help them combat higher energy prices and CO2 production. Generally speaking, LED lighting retrofits provide obvious and quantifiable environmental benefits and high returns on investment ranging from 30% to 50% ROI with two to five -year payback periods.

This compares to solar panel installations that typically involve 10 to 20-year paybacks. To support growth in the ESCO and electrical contractor channels, we recently launched a new line of value-oriented high bay lighting products that we call TritonPro and an expanded line of exterior LED fixtures. These new product lines were developed in response to customer and partner requests for a broader array of more competitively priced products, so we are quite optimistic about their sales potential. Reflecting these various factors, we expect our second quarter revenue to be higher than Q1 and we anticipate the second half of fiscal 2024 to be meaningfully stronger than the first half. Finally, I want to point out that since our last call Orion published our second annual sustainability report to review our mission progress and goals.

I encourage everyone to take a look at their report, which is available on the homepage of our website orionlighting.com and provide us any feedback you have. Sustainability and conservation initiatives are proving to be very important to many of our large corporate customers and we expect these initiatives to play an important role in our long-term growth. While we still have work to do to build out and integrate our new lines of business, we are very proud of the progress our teams have made to-date and excited about the expanding set of opportunities ahead. With that, I will hand the call to Per Brodin to discuss our financials and fiscal year outlook in more detail.

Per Brodin: Thank you, Mike. Our Q1 2024 revenue was $17.6 million versus $17.9 million in Q1 2023, primarily reflecting the variability and timing of certain LED lighting projects, which was mostly offset by revenue from the addition of our EV business. Our gross margin was 18% in Q1 2024 compared to 19.8% in Q1 2023, with both periods experiencing under-absorption of fixed costs on lower revenues and the current year margin pressures experienced in the maintenance business that Mike discussed earlier. Gross margin on products increased to 26.4% in Q1 2024 from 23% in Q1 2023 due to a favorable product mix and better absorption of fixed costs in our assembly operation. However, our realized gross margin on services declined to a negative 11.2% versus a positive 10.3% in Q1 2023.

The deterioration in services margin primarily relates to legacy multiyear maintenance services contracts from our acquisition of Stay-Lite Lighting combined with inflationary pressures on subcontractor costs. As Mike mentioned, we are actively addressing this situation implementing price increases on new contracts and significant existing contracts. Reflecting these steps in our maintenance business and a general expectation of growing sales volume, we expect our gross profit percentage rebound as we progressed through the year with some quarterly variation based on our business volume and revenue mix. Q1 2024 operating expenses were $9.6 million in line with Q4 2023 but up from $7.2 million in Q1 2023. The increase primarily reflects higher consolidated G&A expenses from the addition of Voltrek in Q3 2023 as well as the $1.1 million acquisition-related earn-out accrual in the period.

Orion recorded a Q1 2024 net loss of $6.6 million, or $0.21 per share versus a Q1 2023 net loss of $2.8 million, or $0.09 per share primarily due to flow-through on reduced gross profit the additional Voltrek infrastructure costs $1.1 million earn-out accrual. Our cash used in operations was $7.3 million in Q1 2024 due to the operational results and timing of payments for projects that were completed in Q4 fiscal 2023. This follows strong cash flow in Q4 2023 due to collections of related receivables mainly for those same projects. We expect positive free cash flow over the balance of this fiscal year and for the full fiscal year in 2024. At June 30, we had net working capital of $20.6 million, including inventory investments of $17.7 million accounts receivable of $14.6 million and cash of $8.2 million.

Total liquidity, which is cash plus borrowing availability on Orion’s credit facility was $16.8 million at quarter end including cash and $8.6 million of net revolver availability. We expect our cash and liquidity position to remain healthy and improve in coming quarters. As mentioned in Q2, we’ve started several larger projects, and we finalized the nationwide maintenance agreement with a national retailer all of which will contribute to our full year revenue growth outlook. Reflecting these and other factors, we have reiterated our expectation for revenue growth of 30% or more for fiscal 2024, which implies total revenue of approximately $100 million generally building as the year progresses. As such, we expect Q2 revenue to be stronger than Q1 and second half revenues to be meaningfully above those in the first half of the fiscal year.

With that, I’ll turn the call back to Shannon for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Eric Stine with Craig-Hallum. Your line is now open.

Aaron Spychalla: Yes. Hi. This is Aaron Spychalla for Eric. Thanks for taking the questions, Mike and Per.

Mike Jenkins: Hey, Aaron.

Per Brodin: Hey, good to see you, Aaraon.

Aaron Spychalla: Good morning. Maybe first on the maintenance services, congrats on the contract there. Can you just — anything else you can share on maybe size of that and opportunity with other customers just kind of the margin profile of kind of — what we should expect there with that type of business? And then just broadly on the services margins. I know you’re talking about improvement as we progress throughout the year given some of the initiatives you’ve done. Can you just maybe help with a finer point on that how that progresses through the year?

Mike Jenkins: Sure. First I’ll touch on the maintenance contract. So this was something that was underway as we referenced for many months actually at that part of the year. Clearly based on our level of performance with this customer, first on the reactive side of their business. We built the credibility and infrastructure to be able to take on the preventative piece of business, and we feel very fortunate to have secured that. Overall, that should be a low seven to mid-seven figures piece of business for us with very good reasonable profitability.

Per Brodin: And I’d add Aaron on that, profitability I would — if you think about some of our legacy overall margins we expect to perform — is to perform above that level. So that just gives you some indication of that. And then, I think as you think about the balance of the year, we do have some projects in the pipeline that we expect to hit as we move through the year. Those — in addition to the maintenance improvements will also help improve margin as we move forward.

Aaron Spychalla: Good. Thanks for that. And then, just maybe second on the EV charging business, you talk about the growing pipeline there. Can you maybe quantify at a high-level — where that stands today and kind of where that’s from? And then, just broadly, reception from customers as you look to expand that across the country?

Mike Jenkins: Sure. A couple of things on the EV front, the pipeline continues to grow. Our pipeline today is about double what it was when we acquired Voltrek. We have over $3 million of cross-selling in our pipeline today which was one of our key initiatives, to support that business. And we see both significant Level 2 as well as the DC fast chargers Level 3 opportunities. So we’re focused both on the Level 2, to support businesses with their employees, their customers as well as moving into some of their fleet operations with the DC fast chargers solutions, so, very encouraged with the pipeline that’s building on the EV front.

Aaron Spychalla: All right. Thanks for taking my questions.

Per Brodin: Aaron, I’ll just add. If you think back to the conversation we had at year-end on the EV business and Mike’s comment about the bus project that somewhat skewed the results in Q4. I’d say, our confidence level in what we can achieve in the EV business for the full fiscal year still remain strong and in line with the discussion we had back in June, thinking about their $6-plus million in the second half tempered a little bit for that bus project but being able to exceed that say on a run rate basis.

Aaron Spychalla: Yeah. That’s good. Thanks for the color, Per. I appreciate it all. I’ll hand it over.

Operator: Thank you. Our next question comes from the line of Alex Rygiel with B. Riley Securities. Your line is now open.