Orion Energy Systems, Inc. (NASDAQ:OESX) Q2 2024 Earnings Call Transcript

Orion Energy Systems, Inc. (NASDAQ:OESX) Q2 2024 Earnings Call Transcript November 7, 2023

Orion Energy Systems, Inc. beats earnings expectations. Reported EPS is $-0.14, expectations were $-0.15.

Operator: [Technical Difficulty] Fiscal 2024 Second Quarter Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions]. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Bill Jones, Investor Relations. Please go ahead.

Bill Jones: Thank you, and good morning, everyone. Thank you for joining today’s call. Mike Jenkins, Orion’s CEO, will begin with an overview of Orion’s business strategy and outlook, followed by Per Brodin, Orion’s CFO, who will discuss second quarter and year-to-date results, the company’s financial position and its financial guidance. We will then open the call to investor questions. Today’s conference call is being recorded, and a replay will be posted on the Investor Relations section of Orion’s website, orionlighting.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. Forward-looking statements generally include words such as anticipate, believe, expect, project or similar words, also, any statements that describe future objectives and goals, plans or outlook are also forward-looking.

Such forward-looking statements are subject to various risks that could cause actual results to differ materially than currently expected. These risks include, among others, matters that the company has described in its press release issued this morning as well in its filings with the Securities and Exchange Commission. Except as described therein, the company disclaims any obligation to update forward-looking statements, which are made as of today’s date. Reconciliations of certain non-GAAP financial metrics to GAAP measures are also provided in today’s press release. I will now hand the call to Mike Jenkins.

Mike Jenkins: Thanks, Bill. Good morning, everyone, and thank you for joining our call today. As anticipated in our last call, Orion’s business progressed in the second quarter with both sequential and year-over-year revenue growth of 17% and reflecting the revenue momentum we anticipated building as we progress through fiscal ’24. September was our strongest month of the year and within our top 3 months since the start of fiscal ’23 for both our Lighting business and our overall total. Per will discuss our Q2 performance and financial guidance a bit later in the call. Now I’d like to start by providing an overview of our strategy and performance across the business segments. Within our Lighting business, the $9.6 million Department of Defense European LED retrofit project began in earnest in Q2 with revenues of approximately $1.2 million, and we expect to complete the bulk of this project in the fiscal year.

This project experienced some unexpected start-up issues working its way through the EU regulatory bodies, but is now in full swing, and we expect to catch up in the second semester of fiscal ’24. We anticipate several other larger retrofit projects to contribute to the balance of this fiscal year, including a project for a global technology customer as well as continued growth from a long-term global warehouse logistics sector customer. We also expect meaningful revenue to come from an outdoor lighting project for Orion’s largest customer. We feel good about our growing pipeline of lighting business. We also anticipate solid full year growth in LED lighting revenue from our ESCO and electrical contractor distribution channels. In fact, the technology customer retrofit project I just mentioned, was sourced through a relatively new ESCO partner.

By their nature, ESCOs are focused on delivering energy savings and environmental benefits to their customers. LED lighting retrofits are right in the sweet spot of their value proposition as they provide significant quantifiable long-term energy savings and generally a full return on investment within 2 to 5 years. Our ESCO business was up 43% in quarter 2 and 38% for the first 6 months, which includes our expanded relationship with our large warehousing logistics customer, but excludes the DOD project, which was sourced through an international ESCO. We are continuing to build our base of productive agent and distribution channel relationships, focusing on partners who recognize the value of our high product quality leadership and energy-efficient performance and our commitment to the highest levels of customer service.

To extend our penetration in our distribution channels, we recently launched a new line of more value-oriented products that incorporate the industry-leading design, quality and energy efficiency for which Orion is known within the trade. These new products include TritonPro LED retrofit high bay and other interior fixtures as well as an expanded line of Harris branded exterior LED lighting products. They were developed in response to requests for more competitively priced LED contractor-grade fixtures that incorporate Orion’s strong design and product quality. Feedback has been very positive, and we’ve recorded over $1 million in revenue from these new products in quarter 2, their first quarter of availability. Our quoting activity has been strong, and we look to accelerate sales of these products in the second half of fiscal ’24.

Importantly, these products also provide a solid margin contribution. Also on the product front, we recently debuted several new products that are compliant with the Build America Buy America or BAA Act, and we expect that they will be well received by those customers who prefer U.S. manufactured products. BABA is a certification, which requires 55% or greater of material content and products to come from U.S. sources. The BABA standard was created as part of the federal IRA bill and that stipulates state, municipal and schools to use BABA compliant products when possible in order to receive federal funds. Orion is uniquely positioned to provide this product due to our U.S.-based manufacturing facility and capabilities. As you may know, over the past 24 months, we have diversified our business into 2 new complementary areas, which include electrical maintenance services as well as providing turnkey electric vehicle or EV charging station solutions.

These new areas are well aligned with our core mission of helping customers achieve their business and sustainability goals while providing Orion with exciting cross-selling opportunities. Many of our customers had previously asked us about our ability to help them in these areas, which was a key factor in our decision-making to enter these spaces. We entered the commercial industrial EV charging solutions market in our third quarter of last year with the acquisition of Voltrek. We had a large bus project in quarter 4 of last year and then saw revenue dip sequentially in Q1 this year as we managed through Voltrek integration and the build-out of its sales and project management teams to support expanding revenues and a broader geographic reach.

Our EV segment rebounded strongly in quarter 2, delivering $3.4 million of revenue versus no contribution in the year prior. We anticipate continued growth at Voltrek in the coming periods as the business capitalizes on its long-term track record of success, growing market interest in EVs throughout the U.S. and our ability to cross-sell these solutions with our strong base of customers and progress. Projections are 50% on the new vehicle fleet will be EVs by 2030 and 80% by 2040. Businesses everywhere are now considering their electrification and EV charging strategy to support their employees, customers and their own fleet needs. Orion is well positioned to help our customers and partners through this exciting and rapidly evolving journey.

A technician inspecting newly installed lighting components in a state-of-the-art commercial building.

Our Maintenance Services business also delivered both sequential and year-over-year revenue growth. We acquired Sealite Lighting in quarter 1 of last year, and with the acquisition came a number of multiyear contracts, some of which are now no longer profitable given a range of cost increases, including higher subcontractor costs that have occurred over the past several years. To address these inflationary pressures, we have updated our pricing for new and existing customers to better reflect our current cost structure. We’ve been working to renegotiate contracts as they came up for renewal, and we are making progress. We have renegotiated 3 out of 4 of our most significant legacy contracts and believe this effort will return maintenance to solid profitability as these new price levels continue to impact our results in the second half of fiscal ’24.

We recognize our pricing effort could result in the loss of some business and could therefore provide a modest near term revenue headwind for the segment. Nonetheless, there are plenty of growth opportunities in this space, and we believe that we can restore profitability while delivering high standards of service and great value to our customers. We recently finalized a 3-year preventative maintenance agreement with our historically largest customer. Orion will provide LED lighting and light electrical preventative maintenance services to our customers approximately 2,000 retail stores nationwide. The agreement formalizes and builds upon services we initiated in February and scaled through July. Overall, I am pleased with the progress we are making, though we still have work to do in terms of integrating our lines of business and pursuing expanded revenue opportunities.

We are excited about our expanded array of solutions to offer customers and partners and are encouraged by their interest. We have already secured product sales and new projects through our cross-selling initiatives between all 3 of our segments. This remains an area of focus for the business that we believe we can deliver growth synergies as we move forward. In summary, we believe we are building a strong and diverse business for long-term success. We expect to see our total revenue accelerate across the business in the second half of fiscal ’24, and as such, have reiterated our $100 million revenue guidance for fiscal ’24. Now I’ll pass the call to Per Brodin to discuss our financials and fiscal year outlook in more detail.

Per Brodin: Thanks, Mike. Orion’s Q2 ’24 revenue improved 17% to $20.6 million from $17.6 million in Q2 ’23, primarily reflecting bolster activity in the current quarter and maintenance revenue growth, which was partially offset by lower lighting revenues. Revenue also grew 17% on a sequential basis compared to the first quarter of fiscal ’24. As discussed previously, we have several larger lighting projects, including the European DoD project and a large outdoor project, which we expect to ramp meaningfully in the second half of fiscal ’24. We recognized $1.2 million of revenue on the Department of Defense project in Q2 ’24, which leaves approximately $8 million of remaining revenue to complete this project. Our first half revenues rose 8% to $38.2 million from $35.5 million in the first half of fiscal ’23.

Our gross profit grew to $4.6 million from $4.4 million in Q2 ’23 in spite for the decline in gross profit percentage. Notably, our gross profit margin improved on a sequential basis, reflecting the improved terms on 3 significant maintenance contracts and better absorption of fixed costs across all businesses. As Mike discussed, our gross profit percentage is being impacted by inflationary challenges over the past several quarters on legacy contracts in our maintenance business. During the quarter, we renegoniated pricing at 3 of 4 of our most significant legacy contracts, and we are working to update other legacy contracts as well. Our maintenance business also began benefiting from a new 3-year agreement to provide preventative maintenance services for our largest customer.

In Q2, our efforts led to an improvement in service margin from negative 11.2% in Q1, although it’s still slightly negative, we expect further margin benefits in the back half of this fiscal year, driven by the rollout of our new pricing. Gross margin on products improved approximately 250 basis points to 30.1% in Q2 ’24 from 27.6% a year ago. This increase is attributable to new product sales and overall higher volumes benefiting fixed cost absorption. Reflecting the steps taken in our maintenance business and our expectation of growing sales volume in the business overall, we expect our blended gross margin to improve further in the second half of this fiscal year. Our Q2 operating expenses increased to $8.7 million from $7.4 million in Q2 ’23, mainly due to the addition of Voltrek operations included $1.1 million earn-out accrual and $200,000 of intangible amortization related to the acquisition.

Operating costs declined sequentially from $9.6 million in Q1 ’24 due to lower compensation-related costs and a large credit write-off that occurred in Q1 ’24. We recorded a Q2 ’24 net loss of $4.4 million or $0.14 per share, including the Voltrek earn-out versus a net loss of $2.3 million or $0.07 per share in Q3. Cash used in operations a $4 million in Q2 ’24, reflecting operating results in a $1.5 million Voltrek earn out payment, partially offset by positive net working capital effects. We achieved positive free cash flow in September and expect positive free cash flow over the balance of this fiscal year. At September 30, we had current assets of $45.3 million, which included inventory of $20.2 million, accounts receivable of $16.1 million and cash of $4 million.

Working capital was $16.2 million at the close of Q2 ’24 total current liquidity, including cash plus $8.9 million of revolver availability, was [$12.9 million]. We expect our liquidity position to improve in the second half of the fiscal year based on the expected ramp in revenues. In addition, we are looking at additional ways to enhance our liquidity, primarily through a potential mortgage on our corporate headquarters. As mentioned, in Q2, we started several larger projects and finalized a nationwide maintenance agreement. In addition, our backlog sits at $21.1 million in September 30. All of these things and more contribute to our full year revenue outlook. Reflecting these and other factors, we have reiterated our expectations for revenue growth of 30% or more in fiscal ’24, complying total revenue of approximately $100 million.

The achievement of this goal implies a meaningful revenue improvement in the second half of the year. Based on this growth expectation, we also expect a solid improvement of our second half bottom line performance. With that, I’ll ask the operator to begin the Q&A session.

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Q&A Session

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

Eric Stine: So when thinking about the second half, you called out the DoD project, which has already started in the lighting project. So I guess I want to clarify if that started or when you expect that to start. But just curious, are there any other large projects that you would point to? And things that give you the confidence in that ramp, clearly, you’re reiterating it, so you’ve got that confidence and just trying to gauge that.

Mike Jenkins: Sure. There are a number of things. So obviously, the DoD project, as we spoke about, we talked about an exterior project for our largest customer, which is all basically happening in the second half of this year moving forward. And that’s a mid-7 figures kind of project and rollout. We do expect that our 2 customer, which we’ve disclosed, is a global logistics company and warehouse company. We expect that business to continue to scale as we move forward, which on a year-on-year basis will give us nice growth. And there are other — the global technology project which we spoke about, we do expect to recognize revenue on that moving into the second half of the year. So there are a number of nice projects, which we expect activation shortly, some of which are already in flight and should scale.

Eric Stine: So the DoD 1 is already in — that’s already underway in the others. I mean fair to say you’re waiting on, but there — you’ve gotten good visibility into those starting?

Mike Jenkins: That’s right. Yes and the DoD, we would have — we were anticipating a bit more revenue in Q2. I referenced in my comments that we did experience some start-up issues getting through EU regulatory bodies. So that — we view that miss basically to be caught up in the second half of the year.

Per Brodin: And just for the math, Eric, that we did say we recognized $1.2 million of that in the second quarter. The total project is in the $9.6 million neighborhood. There was a few hundred thousand recognized in Q4 of fiscal ’23. So there’s about $8 million left that we expect the majority of that, virtually all of that to be recognized in the second half.

Eric Stine: And then on the maintenance contracts, and I know you said you’ve renegotiated 3 of 4, but you’ve got some others out there. I’m curious if you can kind of quantify how many others might be out there that you would look to renegotiate and then curious if you have the mechanisms that you’ve got in place now whether there’s some variability to the contracts based on market conditions? Or are they just short enough in nature that it would just be kind of an ongoing renegotiation whenever they come up?

Mike Jenkins: Sure. Yes. As indicated on the last call, we were able to kind of off-cycle address pricing on a couple of these contracts. We have fully got renegotiated 3 out of our top 4, we have 1 major contract, which is still out there that we need to work on. . The way it works is basically we’ve renegotiated pricing and then all these accounts have their normal kind of RFP cycle. And so we will be working through that. And some of those are up as early as the beginning of our fiscal year — early in our fiscal year.

Per Brodin: And maybe, Eric, a little more context 4 large contracts really are the bulk of the piece of maintenance that is at State Light. So there are other miscellaneous contracts, but those 4 would represent the bulk of the revenue in that part of the segment.

Eric Stine: And so the last major 1 is that that’s where you’ve kind of — I mean, maybe to simplify, you presented them with the new pricing and now they go through a process and hopefully, in the RFP process you would win.

Mike Jenkins: Yes. I mean certainly, we’re going through with all of them, and that’s the 1 that’s remaining. So yes, I mean, in principle, those are having conversations right now. So…