Q1 2024 Orion Energy Systems Inc Earnings Call
[music].
Okay.
Good morning.
And welcome to the Orion Energy systems fiscal 'twenty 'twenty, four 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 adult Jones Investor Relations to begin.
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 protein 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 Ryan's website at Orion lighting Dot com.
Mark's a foul 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 there and 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.
Thank you Bill good morning, and thank you all for joining US. This morning, well Q1 was 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 'twenty three.
Our confident outlook is supported by the expanding 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.
Pat will discuss our Q1 performance and guidance in more detail later in the call well 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.
We're in response to customer inquiries regarding our ability to service needs in these areas.
Well Ryan maintenance services was launched in fiscal 'twenty, one to support our largest client with reactive maintenance services for their lighting and light electrical needs given the scale and geographic scope of our client's requirements. We quickly recognized the need to expand our service footprint and capabilities.
And we proceeded to acquire satellite lighting in Q1 of fiscal 'twenty three.
Last week, we announced the signing of a three year agreement with our largest customer to provide preventative lighting maintenance to approximately 2000 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 system.
Is 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 'twenty. Two we also entered the rapidly growing market for commercial and industrial EV charging solutions with the acquisition of old truck.
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 bolt trek a pioneer in commercial EV charging solutions with deep expertise strong industry relationships and an excellent track record. Most importantly, Voltaire had a business model and philosophy that was very similar to our turnkey.
Led retrofit solution business.
In our lighting business turnkey solutions of all.
Involve initial site surveys and custom product designs engineered for the customer's unique needs from there we've progressed through the onsite 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.
<unk> is positioned to provide ongoing maintenance and support.
Historically <unk> business was focused in the northeast near its headquarters in Massachusetts, We are investing in a variety of initiatives to support <unk> 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 in financial reporting within O'brien.
While the process of building Voltaire X team an entrance infrastructure has imposed short term constraints on their activities. During the first quarter. We are very excited by their progress they are making in building out their team and capabilities.
EV charging revenue dipped sequentially in quarter $1 24, as a unit manage 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 'twenty three and 3.4 here in Q4 of 23, one note that in Q4 of 'twenty. Three there was a large school bus project, which we've previously mentioned that significant.
Improve this quarter's results.
We anticipate substantial growth at full track in coming quarters and years as the business builds upon its expanded base of customers and projects across the U S driving demand for EV charging infrastructure or forecast the evs will represent roughly half of the new vehicle fleet by 2030.
Current administration also recently announced new mileage standards that are likely to drive continued growth in EV adoption.
Importantly, 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 leveraged the benefits of cutting edge technologies, and custom design engineering implementation and high quality service to develop and manage long term customer relationships.
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 U S at our Manitowoc, Wisconsin facility.
Manufacturing capabilities provide flexibility customization and industry, leading delivery timeframes with made in America solutions.
In our maintenance services business revenue declined slightly to $3 8 million in Q1 of 'twenty four.
Four one in Q1 of 'twenty three.
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 stellite 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 and.
In the case of some legacy arrangements, we have secured significant price increases to position the business for appropriate profitability while.
While essential we recognize that this effort will likely result in some loss of business. They 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 the 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 preventative maintenance services to approximately 2000 retail stores on a nationwide basis. In addition to the existing reactive maintenance business in place.
Lighting revenues were $12 6 million in quarter $1 24 versus 39 in Q1, 'twenty three again, reflecting variability in timing of larger turnkey projects.
Several projects are now ramping in Q2, including installations on a $9 6 million dollar 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 'twenty four.
Besides what I've mentioned, we also anticipate solid 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.
Percent, excluding the department of Defense project, and we expect strong growth to continue throughout fiscal 'twenty four and customers in the ESCO channel are particularly focused on energy savings and environmental goals to help them combat higher energy prices and C O two production.
Generally speaking led lighting retrofits provide obvious and very 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, an electrical contractor channels. We recently launched a new line of value oriented high Bay lighting products that we call trait and pro <unk>.
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 'twenty four 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 Ingalls I encourage everyone to take a look at it that report which is available on the homepage of our website Orion lighting dot com and provide us any feedback you have sustainability.
Ability 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 <unk> to discuss our financials in fiscal year outlook in more detail.
Thank you Mike.
Our Q1 'twenty four revenue was $17 6 million versus $17 9 million in Q1 'twenty three.
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 24 compared to 19, 8% in Q1, 'twenty three with both periods experiencing under absorption of fixed costs on lower revenues in the current year margin pressures experienced in the maintenance business that Mike discussed earlier.
Yeah.
Gross margin on products increased to 26, 4% in Q1 'twenty four from 23% in Q1, 'twenty three 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 'twenty three.
The deterioration in services margin, primarily relates to legacy multi year maintenance services contracts from our acquisition of stay light lighting combined with inflationary pressures in subcontractor costs.
As Mike mentioned, we are actively addressing the situation and 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 to rebound has been depressed through the year with some quarterly variation based on our business volume and revenue mix.
Q1, 'twenty four operating expenses were $9 6 million in line with Q4, 'twenty three but up from $7 2 million in Q1 2003.
The increase primarily reflects higher consolidated G&A expenses from the addition of both Trek in Q3 2003 as.
As well as the $1 1 million acquisition related earn out accrual in the period.
Orion recorded a Q1 'twenty four net loss of $6 6 million or <unk> 21 per share versus a Q1 'twenty three net loss of $2 8 million or <unk> <unk> per share primarily due to flow through on a reduced gross profit the additional bolt trek.
<unk> costs.
$1 1 million earn out accrual.
Our cash used in operations was $7 3 million in Q1 24 due to the operational results and timing of payments for projects that were completed in Q4 fiscal 'twenty three.
As follows strong cash flow in Q4 23 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 'twenty four.
At June 30, we had networking capital of $26 million, including inventory investments of 17 7 million accounts receivable of $14 6 million in cash of $8 2 million.
Total liquidity, which is cash plus borrowing availability on Orion 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 started several larger projects and we finalize the nationwide maintenance agreement with a national retailer all of which will contribute to our full year revenue growth outlook.
Collecting these and other factors, we have reiterated our expectation for revenue growth of 30% or more for fiscal 'twenty, four 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.
<unk>.
And second half revenues to be meaningfully above those in the first half of the fiscal year.
And with that I'll turn the call back to Shannon for questions.
Thank you.
To ask a question. Please press star one on your telephone and wait for your name to be announced choice draw. Your question. Please press star one again.
Please standby, while we compile the Q&A roster.
Yeah.
Okay.
Our first question comes from the line of Eric Stine with Craig Hallum. Your line is now open.
Yeah, Hi, this is aaron's bahama on for Eric Thanks for taking the questions might compare.
Hey, Aaron acres here.
Hey, 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 you know opportunity with 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.
<unk> 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.
Sure first I'll touch on the maintenance contracts. So this was something that was underway as we referenced for many months actually at a better part of a year.
Based on our level of performance with this customer first on the reactive side of their business we.
We built credibility and infrastructure to be able to take on the preventative piece of business and we feel very fortunate to have secured debt.
Overall that should be a low seven to mid seven figures piece of business for us.
With very good.
Reasonable profitability.
And I'd add erinn on that profitability.
Think about some of our legacy overall margins, we expect to perform is to perform above that level. So 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.
In addition to the maintenance improvements will also help improve margin as we move forward.
Okay. 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 is from and then just broadly.
<unk> from from customers as you'd like to expand that across the country.
Sure there are 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 <unk>.
We have over $3 million of cross selling in our pipeline today, which was one of our key initiatives.
<unk> that business and we see both significant level too as well as the DC fast charge level three opportunities. So we're focused both on the level two to support businesses with their employees their customers as well as moving into some of their fleet operations with the DC fast charge.
Solutions, so very encouraged with the pipeline that's building on the EV front.
Alright, Thanks for taking my Darrin I guess color.
I'd just add.
If you think back to the conversation we had at year end, the EV business and Mike's comment about the bus project debt somewhat skewed the results in Q4.
We are.
Our confidence level and what we can achieve in the EV business for the full fiscal year still remains strong and in line with the discussion we had back in June .
Thinking about $6 million in the second half tempered a little bit for that bus project, but being able to exceed that on a run rate basis.
Okay. That's good.
Good thanks for the color I appreciate it I'll turn it over.
Thank you.
Our next question comes from the line of.
Alex Rygiel with B Riley Securities. Your line is now open.
Thank you good morning, gentlemen.
Yes.
Good morning, Alex.
Couple of quick questions here first G&A expense stepped up.
Can you discuss this a little bit more.
Is this the new sort of normal dollar level run rate that we should be modeling going forward.
Okay.
I'd say, it's at a pretty normalized level understanding that they're in.
Excluded in the amount is one point.
$1 million of earn out we would expect that will continue but that's clearly unrelated to.
Just the operations, but based on the nature of the agreement.
Recorded through G&A.
Helpful and then as it relates to bolt Trek AT&T quantifying the pipeline that they have today and how that compares to maybe when you acquired them.
Okay.
And our pipeline is as I've mentioned, it's over double what it was we're looking at.
So our pipeline thats significantly grown it's today, it's going to be over $30 million and growing.
So we're very confident that we'll be able to drive significant growth this year.
And when you think about that just clarify just to clarify that is total opportunities that as pipeline not what we disclose as backlog that's correct. Yeah those are opportunities.
<unk> you will see in the 10-Q that our pipeline sits at $19 million total company I'm sorry.
Now I'm getting it.
Backlog at the end of Q1 was $19 million.
That is.
Helpful and then.
Regarding the $10 million led retrofit in Europe .
With deep.
It was there.
Normal amount of sort of that.
Front end expenses that may be weighed on you in the fiscal first quarter.
That will.
Obviously sort of be more of a tailwind.
Moving toward.
Did some of that I'm not sure I'd call it significant but if you think about.
The projects.
Had prep work that we did back in fiscal 'twenty three and if you saw in the 10-K. There was approximately 200000 recognized for that contract in Q4 of 2003.
We have no revenue associated with that contract in Q1, although we did have activity.
During the final prep work and getting people in place and then as we disclosed in the press release last week.
True installation.
Activity began in July so the rest of that revenue will get recognized here between.
July and March of next year.
And there is theres always some inherent there is always some inherent.
Costs that don't line up with the associated revenue such as.
The auditing we do in some of the design work. So it's tough to put a true number on that Alex.
Yes.
Thank you.
Thank you.
A reminder to ask a question at this time. Please press star one one our intention telephone we ask that you. Please limit to three questions. The re queue for any additional questions.
Our next question comes from the line of Andrew Shapiro with Lawndale Capital Management. Your line is now open.
Thank you.
Good morning, guys.
The link with the link wasn't working so it was a little late to your prepared comments. So please forgive if my questions.
That's something that was in your screw.
The script, but.
Two areas of questions.
First on the maintenance and service subsegment.
About what portion of this sub segment business is with fixed pricing that carry the risk of declining and in some instances it appears negative margin.
Well a substantial piece of the overall maintenance business is contracted and therefore has defined rates.
For various types of things, whether they'd be preventative or reactive.
Did mentioned in the call that those contracted rates have been fixed in place a lot of those with our acquisition from Stellite and these typically are three year increments contracts. So some of those have been fixed for periods of three some longer.
Due to some of the inflationary pressures that we've seen primarily with subcontractors, we have initiated price increases throughout the network to the to the contracts that require that to be profitable.
But maybe one legacy gain.
Go on.
Just one clarification on that.
Sure well we are in negotiations.
Mid stream on.
Amending those contracts worst case on a couple they expire next spring. So we don't we're not locked in for long periods of time on the legacy daylight contracts anymore.
Okay.
And that's the longest duration of the column embedded loss contracts.
Okay.
Yes, yes, yes, okay.
And.
And based on based on their annual run rate and all of that if youre not successful in getting an improvement in.
<unk>.
Do you have a rough estimate of what the embedded loss might be.
It's really hard to judge at this point Andrew as we've said we are currently in negotiations to update those.
We've had success on some fronts of getting those updated already.
So we're optimistic that we'll get that done it so it's very difficult.
To put a number on what that might be overall, we don't see it as a.
Significant number in connection to the whole.
Business.
And we have are looking at some other ways to mitigate what that is based on how we use subcontractors. So.
Our objective is to keep that.
Any loss contracts set a minimum for the remainder of the period, we said sorry.
Just to add one more point that we did say in our prepared remarks that we thought this would generate some slight headwinds for this segment, but basically would not jeopardize our our guidance of $100 million.
Well that's on the revenue side.
Okay.
Customers are going to.
Do whatever maintenance they can knowing that there is a price increase coming at the exploration if they stick with us. So im just trying to understand what kind of loss of night might eat.
Yeah, we've kept tracked yes, we.
Typically we will not see an acceleration based on something like that because there is a very defined schedule and you don't want to disrupt those operations. So.
Okay.
And again, just Flushing this out just a little bit more when you are getting.
These rates adjusted to the extent your customers are working with you to be cooperative and do that is it just get it up at a breakeven level or is it.
I know your aim is but as you are your customers and your relationships with it such that they're willing to give you some modest amount of margin for the remainder of the contract.
Yeah, our clearly our goal across the board is to have profitability in all of our individual contracts and so the actions that we're taking right now will drive.
Profitability for these individual contracts.
Okay and on the new one what pricing or margin provision protections are in the large multi year maintenance contract here with the nationwide retailer that recently announced these at the same kind of terms or are there some better protections for us.
Yes, we really don't get into the specifics of individual contracts, but we feel good about this three year contract that we will be solidly profitable during the for the duration.
Okay.
Follow up questions on volt truck, but ill back out into the queue, because I think that checked on so many questions on the maintenance and service area here.
Okay. Thanks.
Thank you.
That concludes today's Q&A session I will now turn the call over to Mr. Jenkins, operator, Brian right.
Sorry, I don't think Andrew realize Theres no one else in the queue. So I think he was going to jump back in if you give him a minute.
Sure.
Oh no follow up question is from Andrew Shapiro with Lawndale Capital Management. Your line is now open.
Yeah, Hi, guys. So when you said that could do it again, that's when your conference call service has this.
Voice it interrupts and tells me that my hands right. So I didn't hear you, but thank you for letting me back in.
On <unk>, what do you feel remains an incremental SG&A spend in and time involved in order to build out the sales and service infrastructure required to extend <unk> reach across the U S.
Yes, well, we've said previously as we were looking to double the size of the organization primarily in new sales roles in project management and execution capabilities, we are well on our way.
Down that path, we're not completely there yet, but we're well on our way I would say probably at least half way from where we were to where we need to be.
Okay.
And in terms of the earn out.
Remind us what is the duration on the rest of the earn out and it's based on revenue or <unk>.
EBIT or cash flow generated.
It's a three year <unk>.
Fiscal.
Year earn out so the first year was completed.
At the end of fiscal 'twenty three two years remaining their earn out is based on EBITDA.
And.
There is a there are discrete targets for each fiscal year with a cumulative kicker potential at the end of year three.
Okay, and Youre able to since it's EBITDA youre able to allocate appropriately the incremental hires in costs.
You are putting in place.
For the build out yes.
That's correct it fairly self contained operation.
Okay great.
And last regarding just Investor relations calendar whats on the slate for your upcoming non deal road shows or <unk>.
Investor outreach activities over the rest of the year or the upcoming quarter.
We have a non deal road show coming up that's virtual.
In.
10 days or so of the 21.
Then we have.
Another.
Conference in September and November .
We can send you those details offline.
Yeah.
Just which which are the conferences for the benefit of the transcript here for others to be able to read do you have that off hand.
One is Craig Hallum, and one is H C Wainwright and I think I.
I won't name the non deal Roadshows since that's usually done fairly discretely, but we can get you an invitation if you will.
I'd like to do that offline.
So the calendar works out that'd be great. Thank you.
Okay.
That concludes today's Q&A session I will now turn the call over to Mr. Jenkins for concluding remarks.
Thank you operator, and thank you everyone for joining our call today I look forward to updating investors in coming months and quarters as we execute our growth plan in fiscal 'twenty. Four. Additionally, we continue to pursue opportunities to meet with investors in person or virtually for example, as we just discussed we expect to attend the H C. Wainwright.
<unk> Conference in New York in September .
For more information on planned events or if you would like to schedule a call with management. Please contact our Investor Relations team, whose information is included in today's press release once again, thank you for attending.
Thank you that concludes today's call you may now disconnect.
Okay.
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