Q3 2022 Flux Power Holdings Inc Earnings Call

[music].

Greetings and welcome to the flux firewall Holdings' fiscal third quarter 2022 financial results Conference call.

At this time all participants are in a listen only mode.

A question and answer session will follow the formal presentation.

As a reminder, this conference is being recorded.

I would now like to hand, the call over to Justin Forbes director of business development at flux power Dustin.

Thank you and good afternoon, welcome to Flex powers financial results call Today's conference call is being recorded.

Your host today, Ron that Chief Executive Officer, and Chuck <unk>, Chief Financial Officer.

<unk> results of operations for our fiscal year 2022 third quarter ended March 31 of 2022.

A press release detailing these results crossed the wires. This afternoon at four <unk> P M Eastern time.

It's available in the Investor Relations section of our company's website at flex power Dot com.

Before we begin the formal presentation.

I'd 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 judgment 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 obligating ourselves to revise or publicly release the results of any revision to these forward looking statements in light of new information or future events.

Throughout today's discussion we will attempt to present some important factors relating to our business that may affect our predictions.

I'll also review our most recent Form 10-K and Form 10-Q for more complete discussion of these factors and other risks, particularly under the heading risk factors.

At this time I will now turn the call over to Flex power Chief Executive Officer, Ron that thanks.

Thank you Justin.

And good afternoon, everyone I'm pleased to welcome you to todays third quarter 2022 financial results Conference call.

Our third quarter reflected our trend of strong revenue growth from customer demand for our lithium ion battery pack.

And the addition of new customers and along with product improvements.

Revenue increased 89% to $13 2 million compared to Q3 of 2021 says skull.

Revenue.

Kevin.

Zero million, marking our 15th consecutive quarter of year over year revenue growth.

In the third quarter, we received 25 million in new customer purchase orders.

From an existing fortune 500 customers and new customers.

To highlight a few of our successes.

We have received an order for a class one <unk>.

Theory battery pack from our new wastewater treatment customer.

Yeah.

And multiple orders for GSD battery packs from an existing large domestic airline customer.

And finally in order for our C series battery packs from being global which recently reported a record pipeline.

For the third quarter, our customer order backlog increased to a record $38 $6 million as of March 31 2022.

Reflecting the growing demand for our products from new and existing customers.

And our continued expansion into new verticals.

Beyond our current backlog I just mentioned we received a non binding multiyear letter of intent in the third quarter from one of our large fortune 100 customers.

I indicated wanting to preserve build slots as part of their ongoing fleet conversion.

Tim.

In March.

We introduced three new models.

New products at the mode at 2022 material handling trade show.

First of all 36 lithium ion battery pack, that's at 36 volt option for three wheel very popular and growing three wheel electric forklifts.

Secondly, as C 48, lithium ion battery pack for automated guided vehicles and autonomous mobile robot used in warehouses.

And thirdly, and finally, the F 'twenty board lithium ion battery pack.

It provides twice the capacity or 210 amp hours for walkie pallet Jack's very high volume.

Forklift truck.

In January we also strengthened our corporate governance with the appointment.

<unk> Bo Linn.

Global technology and industry veteran.

Two our board of directors as an independent director.

As a member of the audit Committee and compensation Committee and as chair of the nominating and governance Committee.

As we put our third quarter results in perspective, the March 31, ending quarter reflected the ongoing impact of the global supply chain disruption.

Increased shipping delays at key parts throughout the quarter triggered delays in production.

Ned increasing purchase orders from growing customer demand.

This resulted in continued creep purchasing at inventory given the production delays.

Related to the delays, we experienced increases, especially in the prices of steel.

Various electronic components.

And shipping.

All of which increased fast there.

To us than we've been able to recover in pricing from chip units in the quarter.

Aggressive efforts had been taken to mitigate supply chain issues, including finding more competitive carriers to reduce shipping costs.

And utilizing lower cost steel suppliers that meet our specifications.

We have introduced new product design in response to customer request.

Some of the improvements included higher capacities for extra long a demanding shifts.

Easier servicing lower cost of ownership and other features.

Sure.

Variety of existing performance challenges and customer operations rich.

Rich scan of a broad spectrum.

We continue to introduce new product designs for margin enhancement part commonality and improved serviceability.

And we continued during the quarter to progress more potential new customers, especially those that have large multi shift fleet that seed productivity.

<unk> and cost benefits coming from lithium.

Inventory increased to $20 9 million at March 31.

'twenty two.

Primarily to mitigate the impact of supply chain disruptions.

And to support timely deliveries to customers at the same time.

However, we are advancing our supply chain and production initiatives to reduce inventory in fact.

Our inventory turns during the quarter.

Increased favorably from two <unk> to two five.

And Thats.

Cogs cost of goods sold divided by total inventory.

While the supply chain issues are still challenging our strategic supply chain and profitability improvement initiatives.

Getting to show positive results.

Improved production processes, including implementing lean manufacturing and resulted in our continuing to result in increasing efficiency, which in turn has seen inventories improve as I just mentioned.

We anticipate inventory levels will decline as we continue aggressively shipping backlog.

Our strategic initiatives.

Continued gaining traction.

We recently implemented a $5 million credit facility on just on March 11th.

122 that included a $4 million $4 million of signed committed credit availability.

We believe this credit facility along with our working capital line with Silicon Valley Bank that totaled $6 million of which two 5 million is available.

These will both provide availability for unforeseen needs as this supply chain disruption.

<unk> to continue.

Yeah.

Finally.

We're seeing a modest I'll say modest improvement and supply chain issues from an internal standpoint due to our intense focus on manufacturing processes procurement cost efficiencies achieved so far.

As we continue advancing towards our goal of reaching.

Cash flow breakeven and profitability.

We have taken actions to restore our gross margin improvement path.

As highlighted on slide six.

Our gross margin improved sequentially.

Sequentially to $14 six in the third quarter.

From $13 six in the prior quarter second quarter fiscal 2022.

This reflects initial progress in restoring our gross margin trajectory as shown on this slide but the history.

Our improvement initiatives include getting traction from our price increases.

Utilization of alternate vendors and lower cost suppliers.

New product designs to lower cost.

Reducing part count and complexity.

And improving serviceability of packs all of which are part of our plan to accelerate our gross margin improvement.

While supply chain disruptions continues to be a drag on our operational capabilities.

In the third quarter, we were successful in keeping inventory levels at least relatively flat relatively flat increasing to $20 9 million at March 31.

2022.

We felt it was necessary to secure this inventory given the current supply chain and consistency.

To achieve our future financial goals, while meeting our growing customer delivery requirements.

Looking beyond the remaining 2022 fiscal year and building on our success in the material handling industry. We're also focused on broadening our reach and to warehouse robotics and related verticals.

But our operating strategy.

We are positioned well to continue to.

To support these sectors as the adoption of lithium energy storage continues to accelerate.

On the technology front.

We continue to see customer interest in our proprietary sky BMS telematics product.

Designed for remote fleet management and monitoring.

It delivers battery pack data to optimize performance and customer fleet tracking.

I'm happy to report that our customer repeat feedback remain very.

Positive.

With that I will now turn it over to Chuck <unk>.

<unk> financial Officer to review the financial results for the quarter ended March 31.

Yes, Thank you Ron.

If we turn to review our financial results in the quarter ending March 31.

Revenue grew 89% to $13 $2 million in the fiscal third quarter of 2022.

This was compared to $7 million in the same year ago quarter.

And the company grew by 71% from $7 $7 million in the fiscal second quarter of 2022.

Increased revenue was primarily driven by our sales of.

A higher mix of the large packs, we sell that have higher selling prices combined.

Combined with the higher volume of units sold.

Both existing and new customers.

In the third quarter of 2022 alone.

We booked $25 million in new customer orders as mentioned, while there can be some seasonality with orders strong customer demand continues.

Although gross profit was higher in the fiscal third quarter at $1 9 million.

Compared to the same quarter, a year ago at $1 7 million.

Gross profit margin decreased to 14, 6% in the fiscal third quarter of 2022.

As compared to a gross profit margin of $24 one in.

In the same year ago quarter.

Gross profit was impacted by higher costs for steel.

Electronic parts.

The common off the shelf parts.

All happened during this quarter those were partially offset by higher revenues for the quarter.

Selling and administrative expenses increased to $3 9 million.

Fiscal third quarter of 2022 from $3 1 million.

In the same fiscal period of 2021.

This reflects increases in outbound shipping.

A higher insurance premiums.

And higher personnel expenses.

Research and development expense increased to $1 $7 million in the fiscal third quarter of 2002.

Paired to $1 5 million.

Fiscal third quarter of 2021.

Those increases were primarily due to expenses related to new product development.

<unk> certifications.

And new and $38 three testing.

So the cash usage as we discussed previously.

That supported our actions to protect our customer orders.

Given this global product shortage and delivery delays.

We are actively working to reduce inventory balances as we move through.

Pandemic caused disruption.

We ended the third quarter were $3 8 million in cash.

And.

As Ron mentioned previously we have our $6 million working capital line of credit with Silicon Valley Bank.

Of which $2 5 million is still available on that line.

And as mentioned, we recently closed on a $5 million credit facility of which we currently have $4 million.

Our committed signed that availability.

These are resources that help us to manage our working capital.

This added credit facility, along with progress on our initiatives.

Has led to the removal of a going concern clause, we had in our SEC filings.

Now I'd like to now pass it back to Ron to offer some closing remarks.

Thanks Chuck.

In summary.

We are well positioned to create long term value for our shareholders.

Our strategic initiatives have been deployed positioning us to work towards mitigating ongoing global supply chain disruption.

And executing on our record $38 6 million customer order backlog.

And finally generating cash receipts to accelerate our trajectory.

Cash flow breakeven and profitability.

Looking ahead, we continue to focus on increasing our energy storage solutions to new and existing customers, who are anxious to the benefits of lithium ion technology.

And also to focus on expansion into emerging sectors, such as warehouse robotics and high voltage applications.

Okay.

We continue to see strong interest from both investment funds.

Summers and vendors for <unk>.

Products that are aligned with ESG values, it is environmental social and governance.

<unk> power is at the forefront of sustainable products with technology that avoids tons of carbon dioxide emissions due to higher efficiency and reduced energy consumption towards.

For the same work requirements as done by other sources.

Of energy.

I look forward to providing our shareholders with further updates in the near term as we continue to leverage our leadership position in lithium ion technology solutions.

As our growing list of new and diverse the various large customers.

As shown on our slide on our web and our Powerpoint and on our website.

And we also hope to see some of you at the upcoming HC Wainwright Global Investor Conference in two weeks.

And the LD Micro conference in June .

And also our Investor analyst facility tours that we're planning for the period.

Coming July through December .

Held at our headquarter facility in Vista, California.

I. Thank you all for attending and now I would like to hand, the call over to the operator.

Again, our question and answer session.

Greater.

Thank you at.

At this time, we'll be conducting a question and answer session.

If you would like to ask a question. Please press star one on your telephone keypad.

Information tone will indicate your line is in the question queue.

You May press Star two if you would like to remove your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star.

One moment, please while the floor for questions.

Our first question is from line of Amit Dayal H C. Wainwright. Please go ahead.

Thank you good afternoon, everyone and thank you for taking my questions.

Ron with respect to margin improvements I know you highlighted you've taken steps to.

Move in that direction.

How much improvement I know you saw a 100 basis point improvement sequentially. This quarter on the gross margin front, how much improvement should we anticipate you know over the next few quarters to come through for you guys.

Yeah, Hi.

Thanks for the question, we're extremely focused on that and we've got a lot of aggressive actions as Ed mentioned I think this past quarter was just trying to dig out of the December quarter, where we really felt the full impact of the increased prices delays against preordering.

It just hit at full throttle.

While we still have supply chain shortages and delays.

During the quarter, we are starting to gradually work out of that so you know.

It went up a point of course, we would like more but.

We're confident here and tracking.

All that we're doing that that rate of increase is just going to continue significantly as we go month to month and quarter to quarter as we go forward from here.

You know, we don't give out guidance on that but when you look at the when we tally we share our tally will be glad to talk to you offline. If you wanted a little more color but.

We have very significant increases from.

Steel is one of the things that hit the hardest.

It has gone up.

Several hundred percent and so during this time, while we're being hit.

We develop sources, we're now starting for some parts getting sources from China with very significant decreases in from Mexico as well there are some very good sources in Mexico that are our head of operations is very familiar with with lower cost and also low more timely delivery as well the logistics are <unk>.

Factors too.

And we're designing a whole new platform that had a very very significant cost when you start eliminating about half your part.

You really get some significant cuts directions.

101 on manufacturing.

Those things just don't all of a sudden popped in in like one month or one quarter, but the effect of those <unk>.

<unk> unabated in the months and quarters ahead of the several quarters ahead, where it should really really began will begin to report the kind of numbers I think we're all.

We're happy with so it's starting now it has started is gaining momentum.

And.

We're excited we're excited about it despite all the headwinds of the supply chain lesson, we're raising those margins anyway pricing effect.

A lot of that backlog was negotiated before we got the onslaught of that.

Price increases that we sent out last fall in April so that will start coming in.

New orders.

This is particularly the second half, but really it's already started but it is going to gain.

Gain net momentum that I'm really trying to.

Mentioned.

Understood. Thank you for that drug and then you had a really strong sequential increase in revenues.

How should we think about the new backlog grew as well. So I mean is this sort of the new quarterly levels, we are potentially.

Delivery.

Or will we see a.

The sequential drop in revenues.

In terms of just the cadence over the next few quarters, how should we think about revenues going to fee based.

Yes, no you looked at $38 million in shipping that monetizing it if you will.

The LOI that I'm referencing.

And.

We're capacity constrained right now so we're increasing our capacity we've got a second shift that we're starting to build up.

To provide the same kind of.

Throughput as our first shift on particularly on the big packs. Our increase in revenue is primarily coming from these larger packs, which were thrilled for as Chuck had mentioned.

They have higher prices higher margins and.

Very glad.

Great glad for those so.

Thank.

To your point.

Revenue.

We see this momentum continuing we don't see any indication of our momentum abating. Both in terms of course, the orders, we're receiving $20 million during the quarter now those orders received will be shipped not during that quarter of course, but shipped over over several quarters up to.

Several quarters.

Just on that based on the timing of those but we see it continuing.

And.

We have relationships.

In place.

Where we see <unk> ability to leverage those relations to get other other companies you know we.

We are channels to market are through the national account sales reps at at the forklift Oems that Toyota is a world crowns Raymond and so forth.

Also some of their very large dealers.

As well they already have the accounts. We're after so as we as we perform on the large accounts that leads to other large accounts, it's a great.

Leverage point with lots of synergy, we see that dynamic just continuing actually to accelerate.

So it all bodes well can't really.

We still have a little bit of Lumpiness the things once we get beyond the backlog, but that certainly is.

As been abating dramatically.

Versus the last few years.

Is there any revenue concentration.

With any specific question.

With specific customers.

Yes, good question.

I'm starting to see if there's any revenue concentration.

Are you guys right now.

Yes. It is.

Good news and bad news.

And it really.

We have.

Three or four customers that provide the majority of our of our revenue.

And as they continue to convert their very very large fleets. These are fortune 50 fortune 100 companies.

It bodes well for just continuing orders each quarter.

Not as far as you can think about.

As well.

<unk>.

We are tracking.

Our VP of sales is giving us updates on <unk>.

Quite an impressive list of other customers that we're working through.

Stages of the sales cycle with them.

And I'm really looking forward to that because.

Aye.

I think the customer concentration.

Reduced customer conference concentration.

We will give it.

Assurance in our financial forecasting and planning.

I'll say that of all of these large customers. We've had we haven't lost any this is a relationship business. So we're very very focused very intent on ensuring that we build and strengthen the relationships with these companies.

Because they have just ongoing ongoing ongoing.

Needs for our packs.

And they are very good.

Typically very collateral in there in their sectors as well.

Yes.

Thank you so much.

That's all I have.

We appreciate your time thank you.

Hey, Thanks, Thanks, Amit for the question.

Okay.

Thank you. Our next question is from Chip Moore with E. F. Gordon. Please go ahead.

Hi, good evening, thanks for taking the question.

So.

First on the <unk>.

Order momentum great to see.

Was curious on the new multiyear LOI.

Is there any interesting.

Hate to see a large customer looking to lock up slots.

I assume.

Those units get priced if they commit but maybe you can expand on the mechanics, there and any sense of how big that opportunity could be.

Yes, no Jeff Thanks for the question yes.

I think it's really the first LOI of this sort that that we've seen no really reflect this is starting to happen in the industry because.

Supply chain when they commit forklifts.

<unk> has the batteries.

The large these large companies want lithium they don't want to ask.

To go back and stick a lead acid battery and our new forklift thats going to.

The very large fleets that want the performance.

No.

D.

Okay.

It's very it's very likely that is going to continue.

So this LOI.

Is locking in that space, it's one of our largest customers and so it really reflects.

Not an unusual event, we were pretty confident that the level.

Of ordering that's happening what's going to happen because we know.

The size of their fleets, we know their commitment to us.

We believe the relationship is strong although we have to perform each quarter each month believe me.

There's no guarantees in any any orders in this sector in this business and material handling.

Like a lot of other other businesses I've been in as well. So you got to perform but it's not a huge surprise I will say just to give you an idea.

I don't really want to quote a number because it's not an order.

But.

It's far.

Covers two years and each year is in the low.

Eight figure dollar.

Level category.

And I think to add to these are at higher pricing as well this is not at all.

The pricing we had a year ago. This is at increased pricing that we put into factor yes.

So for.

A couple of product lines that.

Have a have a higher margin already said theres not as much risk.

I think look we're moving to and we're seeing by the way. This may go beyond your question, but related I've, just mentioned that we're starting to see signs of.

If you want a locked in price at this price if you want to share.

And any risk to that than then.

It's a lower price so the pricing.

This inflationary environment.

Is dependent on who's taking the risk on future prices, but on this particular, one we're pretty we're pretty confident.

With the pricing.

Got it that's super helpful color I appreciate that and great to see.

And I guess.

A follow on to that and you touched on.

The second line in <unk>.

The higher billing and pack capacity.

And I think the mix sustainable this quarter, but maybe back to the first question on just sort of near term.

Cadence.

Any thoughts on product mix the next few quarters.

Chili's that capacity should be ramping up.

Yeah Yeah.

<unk>.

Chuck said.

We're tracking it just a very.

Yes.

Definite trend toward higher mix of the bigger packs and for us.

Think of it simply is that those class III walkie pallet JAKKS has the lower price. Although there is a lot of them and in a.

A few years ago that was the only thing we sold and then we of course built out the whole product line.

But the class one and two vehicles.

Trucks that we have packed for we call. It our <unk> 36 pack for class II and X series four class one.

Those are the bread and butter the lion's share of these big fleets is where all the action is in terms of revenue and margin. So those two and then the third one.

Central.

Like the big three if you will and what we're talking about a bigger packs as these larger pack for the airline airport equipment.

Ground support equipment, the trucks that pull the baggage carts cargo trucks scissor lifts.

And pushback tractors.

Those are the larger packs as well and we're seeing quite.

Quite a bit of revenue come in from there with with R. R.

Yeah.

The largest customer that we're now we're now starting to see other airlines.

So net orders following following their example, so.

Those are the ones who are pushing we also have another.

<unk>.

Hack that high kilowatt, we call. It the next 80 and it's for US a lot of these larger and larger FERC lifts that theyre seeing.

Now that now that lithium is really become economically attractive just in terms of cost savings. They could take some of these larger forklifts that are.

Even outdoor forklifts and migrate from diesel or propane to lithium and gain the advantage of the better environmental impact because.

Really honestly all of our customers. There is somebody there that that has a environmental.

Yes, one thing I would add is we're working towards margins is to keep in mind with this backlog now we're.

We're not waiting for the supply chain to correct itself in some miraculous way, we're taking this backlog and it gives us the ability to do that.

Much larger purchase orders do blanket purchase orders do less.

Much larger commitments with vendors that really drives the price down, especially on the sales side. So.

That's a big advantage to having that alpha that we can order stuff for six months out.

It takes time to get into the chain, but it's definitely helpful.

Yes, yes, absolutely.

Nice.

And then maybe if I could sneak one last one in.

Just you've made a lot of.

Highlighted sort of the focus on broadening beach I think several times and.

Whether it's warehouse robotics, you talked about the momentum in the ground support equipment channel.

So maybe just more expansion there and then if you could touch on it I think you did.

One of your customers acquired.

No.

Storage play just any thoughts on that it sounds like maybe they were still facing purchase orders. So just curious there.

Yeah.

You're really just talking about the adjacent verticals here I think.

We have we've been negotiating with.

But with our customer.

Division of a household name on robotics for their warehouses is a big big provider.

The robotics.

And we expect to kick in in the first part of next year. So it's just a natural extension here.

We deal regularly with these customers that have the warehouses. There is the level of robotics and automation that's happening putting lithium in there is the is what they're all driving towards so it provides a lot of synergy to us.

A little bit of.

Our strategy has always been have a full product lineup because you go to these big customers.

And they don't want to have to go to five or six different companies to get there their lithium products. So.

It's a natural extension I think theres a lot of synergies there. The other one I think you alluded to was deemed global that has the mobile charging stations that are solar power and we provided the backup.

And.

We have a great relationship with them I think it's going to be.

Ongoing and some.

Form or fashion. They are located about 45 minutes from us however.

However, today, they felt that with.

Necessary to.

Bring into their own organization, a battery cell supplier. They had dealt with one before and brought that in house. So we will gradually their needs will gradually be turned over to them but.

I think.

That's been helpful. There could be some future other activity that comes with them number one number two it gives us experienced in that sector, which is a natural extension for us to provide lithium energy storage to applications like that.

Project that we had in the past with high voltage autonomous.

Shuttle vehicle.

So we continue to look at a number of alternatives.

Four four.

Battery packs come off our <unk>.

<unk> assembly lines that could be.

Fifth third for that that kind of usage helps us build scale.

It's certainly a very key part of our strategy. So yes, continuing to look at that but also applying a business case.

To that.

It's got to fit with our near term strategy of getting to <unk>.

Profitability.

In the very near future and so it's got to fit with the business, but we say no to many more things than we say, yes to so as we grow and get get position that profitability.

<unk> positioned for even stronger growth, it's going to be very exciting for plug power.

Perfect.

I appreciate the thoughtful answer there.

Back in queue. Thanks.

Thank you thanks.

Thank you.

Ladies and gentlemen.

If you would like to ask a question. Please.

Please press star one on your telephone keypad.

Yeah.

Okay.

No.

Yes.

Okay, but no questions at this time, so I would like to turn the call back over to Mr. <unk> for closing remarks.

Yes, Thanks Peter.

I would like to thank each of you for joining our financial results conference call today.

And look forward to continuing to update you on our ongoing progress and growth.

If we were unable to answer any of your questions. Please reach out to our Investor Relations firm MZ group, who would be more than happy to assess.

Thanks again.

Right.

Yes.

Thank you.

This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.

Yeah.