Orion Energy Systems - Q4 2023

Transcript

Operator (participant)

Good morning, everyone, welcome to the Orion Energy Systems Fiscal 2023 fourth quarter conference call. At this time, all participants are on a listen-only mode. After some prepared remarks, we will conduct a question-and-answer session. Today's conference is being recorded. I would now like to turn the call over to Bill Jones, Investor Relations, to begin.

Bill Jones (Investor Relations)

Thank you and good morning. Mike Jenkins, Orion's Chief Executive Officer, will open today's call to provide perspective on Orion's current business and outlook. Per Brodin, Orion's Chief Financial Officer, will then review the company's Q4 and full year results, financial position and other financial matters, and then we will take investor questions. A replay of the call will be posted to the investor relations section of Orion's website at orionlighting.com. Remarks that follow and answers to questions may 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, or similar words. Additionally, any statements that describe future plans, objectives, goals, and 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.

Such risks include, among other matters, items that the company has described in its press release issued this morning, as well as in its SEC filings. Except as described therein, the company disclaims any obligation to update such forward-looking statements that are made as of today. Reconciliations of certain non-GAAP financial metrics to GAAP measures are also included in today's press release. Now, I will turn the call over to Chief Executive Officer, Mike Jenkins.

Mike Jenkins (CEO)

Thank you, Bill. Good morning, thanks to everyone for joining us today. While fiscal 2023 posed some challenges, Orion closed the year with our strongest quarter and finished within our revenue guidance for fiscal 2023 at $77.4 million. Over the past year, we have built a pipeline of opportunities, providing us strong momentum heading into fiscal 2024. We believe our company is better positioned for long-term success than ever before, as we now provide a much broader offering of complementary products and services to a larger and more diversified base of customers and prospects. Building on our core expertise in LED lighting and controls, over the last two years, Orion has expanded into maintenance services for lighting and light electrical needs, and more recently, into the rapidly growing market for commercial EV charging solutions.

We expect these two businesses to deliver roughly 1/3 of our revenue in fiscal 2024 versus no revenue contribution two years ago. These new business areas align perfectly with our core mission of helping customers achieve their energy efficiency and environmental goals. They also leverage core areas of expertise and turnkey project capabilities to build upon our customers for life commitment. In both cases, we had been approached by some of our largest customers about our ability to support them in these areas. Orion's proven expertise and skill in designing, managing, and executing large national LED lighting retrofit projects, along with customer demand for maintenance services, led us to enter this space. To expand the capabilities, reach, and growth potential of our maintenance business, we acquired the Stay-Lite operations in January 2022, and continue to build out our service platform and capabilities. Maintenance is a mission-critical business.

As such, we need to ensure that we have the resources, talent, systems, to deliver the reliable, high-quality and responsive services required to build long-term relationships. As with the maintenance business, our entry into the EV charging space was in part driven by national account customers who had asked us about our ability to help them navigate this new area. Our research led us to Voltrek, a pioneer in commercial EV charging solutions. We found their approach to solving customer needs was very much like our LED retrofit business, where the value of the solution starts with site surveys, engineering, and custom solutions tailored to the customer's unique needs and proceeds through construction, installation, and commissioning, all with a centralized point of contact and accountability.

Importantly, we felt the mission and leadership at Voltrek were highly compatible with those at Orion, and that together, we could substantially expand Voltrek's national market opportunity. From a strategic standpoint, Orion made the decision years ago to be a technology implementer, leveraging the benefits of cutting-edge technologies with smart engineering, design, and high-quality implementation and service that forms strong customer bonds. As the complexity of electrical systems grow and become increasingly interconnected, we believe Orion is well-positioned to help our customers and partners navigate this landscape and implement their plans. In addition, by maintaining much of our manufacturing in the U.S., we benefit from high quality and faster and more predictable delivery times, as well as the benefit of providing Made in America products to customers who prefer or require them.

Turning to some fiscal 2023 highlights, we acquired Voltrek in early October 2022, and that launched us into the EV charging space. The business is off to a strong start, delivering revenue of $6.3 million in the second half of fiscal 2023, versus our initial expectation of $3 million-$5 million. We anticipate substantial growth at Voltrek in the coming years as we build out their capabilities to support the rapid growth of electric vehicles and associated infrastructure across the U.S. As an example, during our fourth quarter, Voltrek secured an initial order for Level 3 DC fast charging infrastructure for an electric school bus pilot program in Boston. The first phase involved charging systems for 20 out of a fleet of 120 buses, with a contract value of approximately $1.5 million and the prospect of additional orders in the future.

Driving the demand for EV charging infrastructure are forecasts that estimate EVs will represent about 50% of the new vehicle fleet by 2030, and 80% by 2040. The administration has also recently announced new mileage standards that will likely accelerate growth in the EV market. Given the rapidly growing demand, we are investing in a variety of initiatives to support Voltrek's ability to scale its business. Historically, Voltrek's business has been concentrated in the Northeast, surrounding its base in Massachusetts. To support Voltrek in building out a national footprint, we are funding infrastructure, personnel, and other resources to enable them to both source and execute projects across the U.S. We are also working on opportunities for cross-selling to build new revenue opportunities from customers across our business portfolio.

These efforts take time to engage, though we believe they will begin to bear fruit in the second half of fiscal 2024. Turning to maintenance services, revenues rose approximately 150% to $14.6 million in fiscal 2023, benefiting from organic growth and full year contribution, from our Stay-Lite Lighting acquisition. Excuse me. Maintenance services provide an ideal complement to our project-related businesses, allowing us to expand our value to add new and existing customers while creating a growing base of recurring revenue. We believe Orion's competitive advantages in customer service and turnkey project management transfer well to the maintenance business. Recently, we signed a preventative maintenance agreement with our largest customer, building on our existing reactive maintenance program and supporting our growth outlook for fiscal 2024.

We are adding capacity in this business and are also getting processes in place to support long-term growth, just as we are at Voltrek. In both cases, there is plenty of opportunity, but to ensure high levels of customer satisfaction, it's critical that we put the right infrastructure and processes in place. Turning to our LED lighting business, the end of our fiscal year into Q1 is typically slow, except for rollover projects from the prior year. A previously announced $4 million project from a long-term automotive customer completed in Q4, and we are gearing for the start of a $9 million Department of Defense project, which shifted into fiscal 2024. We expect this project to ramp in quarter two and to be largely complete by the end of this fiscal year.

We also have a logistics-related project that is also picking up in early fiscal 2024. This customer is expected to be $5 million-$10 million in annual revenue range, with the potential for additional business in subsequent years. In our energy service company or ESCO channel, we anticipate growing demand from key partners. This growth is a reflection of their customers' increasing focus on ESG goals, in addition to cost savings and ROI targets. Generally speaking, LED lighting retrofit projects provide very clear ESG benefits, with some of the most compelling returns on investment ranging from 30%-50% or more with rebates, providing two to five-year payback periods. This compares to solar installations that typically involve 15-20-year paybacks. On the marketing front, our digital marketing strategy continues to make progress in expanding awareness and engagement with Orion Solutions. We launched a new friendly...

sales-friendly website in late 2022, which is providing a nice lift in page views, unique user visits, and qualified leads. I encourage you to take a look. From a sales leadership standpoint, we hired Ken Poole as our EVP of sales in January. Ken is a highly experienced sales executive who comes to Orion from a Super ESCO. In just a few months, he has helped us focus our efforts and demonstrated himself as an important asset supporting our future growth. To support our sales efforts, we are making selected investments in our sales team, as well as in our EV and maintenance businesses. Importantly, in this tight labor market, we are finding that Orion's ESG focus, as well as our involvement in the EV charging space, are proving helpful in attracting talent to our company.

Reflecting on our expected growth across LED lighting, maintenance services, and EV charging solutions, we currently expect fiscal 2024 revenue to grow 30% or more to approximately $100 million, with a greater proportion of revenue expected in the second half. This outlook anticipates at least $30 million in aggregate revenue from maintenance services and EV charging solutions, and the balance from the LED lighting business. Today, our customers' carbon and emission goals, such as getting to net zero, electrification strategies, and related ESG goals, are opening new areas of engagement and opportunities across our business, particularly with larger national accounts. For example, a major Orion customer highlighted their conversion to LED lighting in their annual ESG report, demonstrating the importance of environmental progress to all of their stakeholders.

We are proud of the hard work our team has undertaken to diversify and strengthen our business, though we still have work to do in integrating our new businesses and enhancing our sales, marketing, and cross-selling initiatives. Reflecting on the progress we have made, I am excited about our growth prospects for fiscal 2024 and moving forward. With that, I will hand the call to Per Brodin to discuss our financials and our financial outlook for fiscal 2024.

Per Brodin (CFO)

Thank you, Mike. As Mike mentioned, we ended our fiscal year 2023 with our strongest quarter of the year, with Q4 revenue of $21.6 million, versus $20.3 million in Q3 and $22.6 million in Q4 2022. Our Q4 performance reflected an expected rebound in project activity. As anticipated, full fiscal year 2023 was within provided guidance range and finished at $77.4 million, which declined from $124.4 million in fiscal 2022, primarily due to the expected year-over-year decrease in activity with Orion's largest customer and with a global online retailer, as well as delays in certain large projects. The wind down of the multi-year project with our largest customer resulted in a $47 million revenue decrease in fiscal 2023 versus the prior year.

As Mike mentioned, Orion was successful in diversifying its revenue base, growing business outside of our largest customer and the online retailer by $6.4 million or 11% over fiscal 2022. Gross margin was 21.9% in Q4 2023, as compared to 23.8% in Q4 2022, reflecting a shift in product mix and under absorption of certain fixed costs on lower revenues. We expect our gross profit percentage to trend higher in fiscal 2024 on a full year basis, with some quarterly variation based on the revenue mix and fixed overhead absorption.

Total operating expenses were $9.6 million in Q4 2023, compared to $6.6 million in Q4 2022, with the increase primarily due to a $2.5 million earn-out accrual related to the Voltrek acquisition, as well as some added G&A costs related to the consolidation of Voltrek. For fiscal 2023, total expenses were $33.5 million, as compared to $25.5 million in the prior year, reflecting Voltrek acquisition costs of $4.8 million and higher G&A expenses related to the consolidation of Voltrek and Stay-Lite Lighting, which was acquired in Q4 2022 and therefore not fully reflected in the prior year results.

We recorded a Q4 2023 net loss of $5.1 million, or $0.16 per share, versus a Q4 2022 net loss of $1.2 million, or $0.04 per share, primarily due to higher operating expenses related to the Voltrek acquisition. Orion reported a fiscal 2023 net loss of $34.3 million, or $1.08 per share, compared to fiscal 2022 net income of $6.1 million, or $0.19 per share. The decrease reflects a $17.8 million non-cash valuation allowance charge against deferred tax assets in fiscal 2023, as well as lower revenue, acquisition costs, and associated operating expenses in fiscal 2023. The non-cash tax charge does not impact Orion's ability to offset future income with existing NOLs.

Our cash flow from operations was strong in Q4 2023 at positive $3 million due to strong cash receipts on certain projects and some inventory reductions. For the year, Orion used $2.3 million of cash for operating activities in fiscal 2023. Some of that related to maintaining higher than normal inventory levels to ensure against supply chain disruptions. Based on a return to more normal supply chain activity, in Q4 2023, we began to actively reduce inventory levels and plan to further reduce our inventories by another $4 million-$5 million in fiscal 2024, assuming near normal supply chain conditions continue through the year. In fiscal 2023, we had approximately $600,000 of capital expenditures and expect those investments to double in fiscal 2024 in support of our maintenance and EV businesses.

At the close of fiscal 23, net working capital was $24.9 million, including inventory investments of $18.2 million. Liquidity, which we define as cash plus borrowing availability on Orion's credit facility, was $23.2 million, including $16 million of cash and $7.2 million available on our credit facility. We had $10 million of borrowings outstanding on this facility at year-end. We expect our cash and liquidity position to remain healthy in fiscal 24, putting us in a solid financial position to support growth initiatives across the business.

Regarding our financial outlook, we have reiterated our expectation for fiscal 2024 of revenue growth of 30% or more to approximately $100 million, with momentum building as we progress through fiscal 2024, and a greater proportion of revenue in the second half of the year. Our revenue guidance is based on approximately $34 million of aggregate revenue expected for maintenance services and EV charging solutions, our newest businesses, and the balance from LED lighting products and solutions, which includes projects for national accounts, ESCO partners, and distribution channel sales. M&A, while we will continue to maintain a pipeline of future opportunities, for the near term, our focus is on integrating the two recent acquisitions and investing in their growth and success, which are primary growth drivers for Orion. With that, I'll turn the call over to the operator for questions.

Operator (participant)

If you'd like to ask a question at this time, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. In the interest of time, we ask that you limit yourself to two questions and rejoin the queue for any additional questions. Please stand by while we compile the Q&A roster. Our first question comes from the line of Eric Stine with Craig-Hallum.

Eric Stine (Senior Research Analyst)

Hi, Mike,Per.

Mike Jenkins (CEO)

Eric, hey.

Eric Stine (Senior Research Analyst)

Hey, good morning. Wondering if you can just maybe drill down a little bit more into the outlook for fiscal 2024. Appreciate you breaking out the EV and maintenance services piece. For the remainder of it, you know, maybe just how you see that or a little more color between, you know, national accounts, ESCO, distribution, or electrical distributors, those channels. Just curious, you mentioned some of the projects that you expect to move forward and have good visibility in. I mean, how would you kinda put your visibility as it stands today versus what it might be in a normal year as you're entering it?

Mike Jenkins (CEO)

Sure. Good questions. In terms of the business segments, we're really right now planning for growth across the board in all the segments. Clearly, we have a very major government piece of business, which is coming through, as we talked about before, $9 million, which effectively is ramping in Q2. That'll be a big contributor for the fiscal year. We do see nice growth in our with our top customer going into next year. We expect double-digit growth there, both on the project side and on the maintenance side, as well as our ESCO channel as well. Distribution, I think we also have an opportunity to grow double digits. Right now we're forecasting double digits for all the segments in the next year.

In terms of visibility, there's certainly some vagueness as we look farther and farther out, but the near term, we feel pretty good about the pipeline, about the projects that we see and the initiation. We are waiting for a few larger things to activate in the second half of the year, but at this point in time, we don't see any reason that those won't materialize.

Eric Stine (Senior Research Analyst)

Got it. Maybe for my second one, just, when thinking about Voltrek, I mean, how do you anticipate the decisions being made, say, at the national account level? I mean, do you think that this will be, you know, kind of a site-by-site decision, or, you know, given that these were done or, you know, part of the reason you did this was because of feedback from some of those large customers, that it would be more of a, you know, a national decision?

Mike Jenkins (CEO)

I think it's gonna be a mix moving forward. I think some accounts may take a proactive approach and do something on a national basis as part of their brand image and to support their guests and customers. I think probably the majority, it's gonna be more localized, regional. Obviously, the states have different incentives in place to support EV, so I think it will be a bit more localized and regional. I think that most of the large accounts right now are working through their strategy of deployment over the next couple of years. The deployment may be, you know, regional and local, but I think ultimately, they're all gonna get to the same place, that they're gonna have to have a national strategy.

Eric Stine (Senior Research Analyst)

Okay, thank you.

Mike Jenkins (CEO)

Sure.

Operator (participant)

Our next question comes from the line of Amit Dayal with H.C. Wainwright.

Amit Dayal (Managing Director and Senior Equity Research Analyst)

Thank you. Good morning, everyone.

Mike Jenkins (CEO)

Good morning, Amit.

Amit Dayal (Managing Director and Senior Equity Research Analyst)

Hi, guys. With respect to the EV pipeline, can you share what kind of customers, you know, are in that pipeline? I know you mentioned fleet-related type or fleet type customers. Is there any retail, just any color on, you know, what type of customers are looking into deploying these solutions?

Mike Jenkins (CEO)

Yeah, it's really across the spectrum right now. I mean, we have businesses we showcased earlier, fleet opportunities with municipalities, that the fleet project we did in Boston was with Boston Public Schools. That project was phase one, and we expect additional phases through them. We're seeing a lot of private businesses in our the same vertical sectors that we participate in on the LED lighting side, getting very interested in this, and we are actively engaging with national accounts right now. That's one of the reasons why we're aggressively trying to build out the infrastructure at Voltrek, so that we can activate more comprehensively our cross-selling efforts across the business. I it's a difficult question to answer, whether one is more than the other.

We're seeing broad acceptance of the need for EV charging infrastructure. I think customer or customers and accounts are really starting to think through their electrification strategy. It's really coming from all areas.

Amit Dayal (Managing Director and Senior Equity Research Analyst)

Understood. Thank you for that. Then, you know, now you have sort of three distinct business lines. Just trying to get a sense of, you know, what the operational synergies are, you know, that you can exploit for these different types of products you're offering. Then, you know, along those lines, where will you focus, you know, in terms of where do you see the bigger opportunity, I guess? Is it maintenance or EV or continuation of the LED side? Like, all of these looks like, you know, they're growing at double digit for you. If you had to prioritize, like, you know, which would you choose to really go after?

Mike Jenkins (CEO)

Well, I think I would answer that by going back to a point you made, which is that we see all of these businesses growing double digit. We see them as highly synergistic, which is why we think they fold in nicely to our customers for life model, so that as customers evolve from LED projects, customers can move to maintenance, and clearly, all customers, as I said earlier, are thinking about their electrification strategy. From an operational standpoint, our priority is to unleash the top line synergies and cross-selling efforts between all three of them to help our customers. There's a lot for our customers to navigate here, and we think that we can be a strategic partner to them in all three of those areas.

In terms of the business, we feel comfortable that we can grow all of them independently and even faster together, moving forward.

Per Brodin (CFO)

And then maybe- Just to touch on the first part of your question, Amit, I think from a leverage standpoint, think about that probably mostly as, you know, the back office functions that we should be able to leverage a fair amount for these operations. The operational level, they run relatively independent, so it's mostly the back office functions.

Amit Dayal (Managing Director and Senior Equity Research Analyst)

Okay. Yeah, I have some follow-ups around this, but I'll take it offline. Thank you so much, guys.

Per Brodin (CFO)

Thanks.

Mike Jenkins (CEO)

Thank you.

Operator (participant)

Our next question comes from the line of Alex Riegel with B. Riley Securities.

Alex Riegel (Equity Research Analyst)

Thank you. Good morning, gentlemen. If I appreciate the guidance on the top line and the directional guidance with regards to gross margins, but if you could dig a little bit deeper into sort of the path to a rebound in gross margins over the coming quarters and years, and to talk about, you know, longer term, where you hope to get gross margins back to?

Per Brodin (CFO)

I'll start off on that, Alex, it's Per. I think that the projects that we have visibility into for fiscal 2024 give us confidence to make the comment that was in, you know, my comments about, you know, having a rebound in gross margin rate as we perform through fiscal 2024. Well, as part of that, you know, inherent in that is the increase in overall revenues, which will help us absorb some of our fixed costs. That'll be both, say, from an overall OpEx standpoint, as well as obtaining better absorption within the plant for our LED lighting manufacturing.

I would think that from a product standpoint, we ought to get back into the mid-to-high 20s, and from a services standpoint, at least back to that 20 range, and potentially should be better than that in the coming year. As we continue to grow, we would expect to continue to leverage the infrastructure so those would increase over time as revenue grows.

Alex Riegel (Equity Research Analyst)

Similar question as it relates to G&A. How should we think about that, either in a $ basis or a % of revenue basis going forward?

Per Brodin (CFO)

I think, you know, we don't typically guide dollar basis. We expect to continue to leverage the fixed costs. I think one of the things that we mentioned in our remarks is, you know, we are making some investments in the EV business to help them to nationalize, if you will, expand their footprint to be more national in scope. There's certainly some investments on that side of the business. Overall, I would expect, you know, that we'll get back to, you know, a 10%-ish EBITDA level, and that, you know, as we grow in the future, we can go beyond that as well.

Alex Riegel (Equity Research Analyst)

Thank you very much.

Per Brodin (CFO)

Thanks.

Operator (participant)

As a reminder, to ask a question at this time, please press star one on your telephone. Our next question comes from the line of Andrew Shapiro with Lawndale Capital Management.

Andrew Shapiro (Founder and CEO)

Hello, can you hear me?

Per Brodin (CFO)

Yes. Well, hi, Andrew.

Andrew Shapiro (Founder and CEO)

Okay, thanks. I have a follow-up on Alex's questions on gross margins, and then I have a Voltrek question here. You referred in your release and comments to certain fixed cost impacting gross margins. Are we talking about your historical overhead and it's just absorption, or can you expand on what some of the new costs are and whether they are of a recurring nature? This is the fixed costs you're referring to inside the gross margin.

Per Brodin (CFO)

Within, margin, I'd say, are primarily our historical costs. There would be the under absorption of the manufacturing facility based on lower sales. We also have fixed costs, within gross margin, on the services line, because we do have some, let's say, human resources that are fixed in nature, on the services line that as, you know, can either leverage or deleverage.

Andrew Shapiro (Founder and CEO)

It's just your historical fixed costs. There's nothing new that got put in through gross margin. Those incremental investments are all in your SG&A set. Is that right?

Per Brodin (CFO)

That's correct.

Andrew Shapiro (Founder and CEO)

Okay. A Voltrek question here is: you know, you took an accrual on the earn out, I think it was two and a half million. Was that just for the quarter? Are you able to share what Q4 Voltrek was for you versus prior year private Voltrek's Q4 revenues were? Just to get a feel for what its growth cadence is.

Per Brodin (CFO)

I guess what I would comment on is, you know, we have publicly commented on their fiscal, their calendar 21 business being a $4.8 million business. I am gonna stay away from commenting on their historical since, you know, we did not account personally for those results. I think I would just stick with the 3.4

Andrew Shapiro (Founder and CEO)

Okay.

Per Brodin (CFO)

That we did in the current year.

Andrew Shapiro (Founder and CEO)

Your earn out, was that for the quarter then?

Per Brodin (CFO)

Yeah.

Andrew Shapiro (Founder and CEO)

That was based on revenues or cash flow generation? What triggered that particular earn out amount and achievement of it?

Per Brodin (CFO)

The earn out is based on EBITDA. It's an EBITDA target.

There was two point five that was recorded in the quarter. There was a previous amount recorded in Q3 of $1.5 million. Just so that we're clear, the $3 million of that $4 was accrued for the fiscal 2023 earn out target, and that will be paid probably in July of this calendar year. Then an additional $1 million was accrued for there's a cumulative potential earn out, which would occur after the third year of owning Voltrek, so that would be paid potentially in 2025.

Andrew Shapiro (Founder and CEO)

Okay, thank you. I have other questions. I'll back out into the queue and come back. Thanks.

Per Brodin (CFO)

I'm sorry, I'll correct that. That would be 26 of that cumulative payment.

Operator (participant)

That concludes the question and answer session. I'll now turn the call over to Mike Jenkins for closing remarks.

Mike Jenkins (CEO)

Thank you, operator, and thank you all for participating on today's call. I look forward to updating you and meeting and engaging with many of you in the coming months as we execute our growth plan in fiscal 2024. As part of our investor relations outreach, we are conducting meetings at the LD Micro Invitational in California today and tomorrow, June 6th and 7th, and we are participating in the Virtual Ideas Conference on Wednesday, June 21st. For more information on these events, or if you would like to schedule a call with management, please contact our IR team, whose information is included on today's press release. Thank you.

Operator (participant)

Today's conference call is now concluded. Thank you, and you may now disconnect.