Flux Power Q3 2023 Earnings Call Transcript

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May 11, 2023

There are 6 speakers on the call.

Operator

Greetings, and welcome to the Flux Power Holdings Third Quarter Fiscal 2023 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 Shawn Stewart, Financial Planning and Analyst Manager.

Operator

Sean, you may proceed.

Speaker 1

Your host today, Ron Dutt, Chief Executive Officer And Chuck Shiley, Chief Financial Officer, will present results of operations for our Q3 of fiscal year 2023 ended March 31, 2023. A press release detailing these results crossed the wires this afternoon at 4:0:1 pm Eastern Time and is available on the Investor Relations section of our company's website at fluxpower.com. Before we begin the formal presentation, I would like to remind everyone that statements made on the call and webcast May include predictions, estimates or other information that may be considered forward looking. While these forward looking statements represent our current judgment on what the 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.

Speaker 1

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. You should also review our most recent Form 10 ks and Form 10 Q for a more complete discussion of these factors and other risks, particularly under the heading Risk Factors. At this time, I will turn the call over to Flux Power Chief Executive Officer, Ron Dutt.

Speaker 2

Thank you, Sean, and good afternoon, everyone. I'm pleased to welcome you to today's Q3 fiscal 2023 Financial Results Conference Call. Firstly, please note that on Slide 3, if you're following the deck, there's a short reminder of what we do, Calling out electrifying commerce. We are powering material handling, airport ground support equipment, Solar energy storage, port authority equipment and other applications with new and clean technology And our products and services are focused on very large fleets, including those located nationwide. Now on to our Q3 results.

Speaker 2

Our Q3 reflected our cadence of strong revenue growth as we continue to focus on fulfilling orders. In Q3 'twenty three, revenues were $15,100,000 Up 14% from $13,200,000 in the prior year, marking our 19th Consecutive quarter of year over year revenue growth. We also continued to improve gross profit in the 3rd quarter, up 146 percent to $4,700,000 and the growth Expansion gross margin expansion of 16 percentage points to 31% compared to the prior To the year ago period, our revenue growth and gross margin expansion Provide continued operating leverage given our modest increase in operating expense of only 5% for that period. Adjusted EBITDA loss was $700,000 And $3,100,000 for the 3 9 months ended March 31, 2023, An improvement from adjusted EBITDA loss of $3,400,000 $11,900,000 For the 3 9 months ended March 31, 2022, respectively, Adjusted EBITDA losses declined 24% on a sequential basis From the 3 months ended December 31st. For the 3rd quarter, Our customer order backlog decreased from $30,400,000 to $25,000,000 As of March 31, 2023, reflecting continued lithium adoption, Although partially impacted by timing delays of production of some forklift models.

Speaker 2

In the Q3 fiscal 2023, we received $9,800,000 in customer purchase orders From existing and new Fortune 500 customers. New orders were down for the quarter due to supply chain issues, Increasing lead times on some new forklifts and ground support equipment product lines, Which all cause delays in anticipated orders and existing orders to be pushed out. We anticipate these extended lead times continuing, although diminishing in the coming months as supply factors normalize. To highlight the importance of building strong partnerships with our existing customers, Over 95% of revenue during the quarter was contributed from customers with whom we have long term relationships. Our commitment, consistent performance and trustworthiness are the foundation for long term Sustainable relationships with our customers.

Speaker 2

Our emphasis on product quality, technology and service Continues to support ongoing new purchase needs and service requirements. We have experienced that business Our installed base will help drive new customers to our technology and developing our technology internally Also ensures our customers have the most up to date products and services on a sustainable basis. We were pleased to see that our supply chain disruption continued to abate during the Q3, While at the same time, we continue to pursue strategic supply chain and profitability improvement initiatives. Also and importantly, we made progress with new accounts in the Q3 with 2 new customers with large fleets Added and we have other new large customers in our pipeline planned for shipments in the coming months. For the past 12 months, we have taken aggressive efforts to mitigate supply chain issues and also to build scale with our business.

Speaker 2

We have leveraged increased sales volumes to resource steel and board components to low cost regions and to higher volumes suppliers. We have also implemented Inventory kitting process improvements that have provided sustainable productivity enhancements. We are progressing on new product designs based on a new modular platform for our battery packs To address customer needs, some of the improvements include higher capacities for more demanding shifts, Easier servicing and other features to solve a variety of existing performance challenges of the diverse customer operations we serve. At the same time, our new designs provide a reduction Achieving Commonality across models. We're now building and shipping the first few models of our new platform having recently received UL certification on models of the new platform.

Speaker 2

We are now pursuing forklift approvals and UN38.3 certification, which is required for shipping compliance. We also expanded our in house testing and production validation capabilities With all the equipment needed to satisfy the UL requirements and UN38.3 compliance testing, Including an on-site vibration table, therefore eliminating The need to outsource any aspect of the testing for either UL or UN certifications, which all expedites the process. Achieving in house testing under UL oversight reflects successful building of both technical experience and recognized confidence by UL. Our efforts to scale our business Have included implementing lean manufacturing process, enabling us to more quickly monetize backlog and increase Output with existing resources. On May 1, we opened a new facility in Atlanta To supplement our customer support services and help support our 18,000 packs we have in the field, Investment in the Atlanta office broadens our geographic footprint to bring comprehensive And responsive services to customers in the Eastern half of the United States, while also And importantly, resulting in lower service logistics costs associated with personnel travel And shipping the batteries to and from our California facility.

Speaker 2

The Atlanta facility augments our current partnership With Arkon Equipment located in Killeen, Ohio, which operates a service facility, Which concludes use and repair of our packs. As supply Chain disruption is declining. Our profitability improvement initiatives have continued to gain momentum. For the 1st 9 months of fiscal 2023, cash used by operations declined By $14,100,000 or 73 percent from fiscal 2022 to a level of $5,200,000 In the Q3, we also saw sequential and year over year improvement and gross margins, from cost and price initiatives. This was helped by design cost actions to lower material cost and assembly and reduce inventory requirements.

Speaker 2

Improved production processes, Including progress in implementing lean manufacturing, as I mentioned previously, have resulted in increased Efficiency and higher throughput. Availability as of May 10 This year under our new our 2 credit facilities totaled 7.8 $1,000,000 which includes $3,800,000 remaining balance under our renewed revolving Line of credit with First Citizens Bank and secondly, 4,000,000 Dollars available under our subordinated line of credit. Our efforts on Increasing revenue and margin improvement, specifically for adjusted EBITDA are reflected on Slide 7, Showing the upward trend over the past fiscal year. We are executing our specific supply chain and cost reduction initiatives to continue this momentum. Further, our realized successes are being applied across various Our current and potential pipeline of customers Continued to expand this past quarter with 2 new customers having large fleets.

Speaker 2

Our full product line caters to large fleets who seek a relationship partner to meet current and future needs. These customers represent a diverse base in multiple sectors, all of whom are seeking lower costs during the life of the product And higher performance from lithium ion battery packs. Our primary revenue As customer adoption of lithium solutions Increases across fleets, we anticipate increasing orders to replace lead acid batteries reaching into life Prior to forklift in the life, given the generally longer life of lithium We have taken actions to restore our gross margin trajectory. As highlighted on Slide 9, our gross margin improved sequentially to 31% In the past Q3 from 24% in the Q2 of fiscal 2023 And from 22% in the Q1 of 2023. Our improvement initiatives A number of actions that have begun to impact our gross margin.

Speaker 2

Price increases to offset Pandemic related commodity increases continue to impact results Other drivers for margin include increased pack volumes, more competitive shipping costs, Lower unit costs, more reliable and secondary suppliers of key components, Improve manufacturing capacity and production processes and transition of product lines to a new modular platform, All of which are part of our plan to accelerate margins both now and moving forward. During the Q3, our backlog was reduced to 25 million, partially reflecting extended delivery times for some models of forklifts and GSD equipment. Normalization of global supply chains, as I mentioned previously, and ongoing adoption of lean manufacturing principles Are driving throughput and capacity improvements as we continue to monetize a healthy customer backlog. Our strategic initiatives are also improving sourcing actions to mitigate part shortages, accelerating our backlog conversion to shipments and increasing inventory turns to help mitigate And the inventory expansion. These initiatives are key drivers of gross margins along With operating leverage discussed previously.

Speaker 2

Although our supply chain disruptions have improved, We have increased our inventory raw materials, finished goods and component parts to $21,000,000 as of March 31, 2023. In order to mitigate supply chain disruptions and accommodate delays of forklift deliveries as previously mentioned. With that, I will now turn it over to Chuck Scheibe, our Chief Financial Officer, To review the financial results for the quarter ended March 31, 2023. Chuck?

Speaker 3

Thanks, Ron. Now turning to review the Financial results in the quarter ended March 31, 2023. As Ron mentioned, revenue for the fiscal Q3 of 2023 Increased by 14% to $15,100,000 compared to $13,200,000

Operator

in the fiscal Q3 of 2022.

Speaker 3

This was driven by increased sales volumes and models with higher selling prices. Gross profit for the fiscal Q3 of 2023 increased to $4,700,000 compared to a gross profit of $1,900,000 in the fiscal Q3 of 2022. Gross margin was 31% in the fiscal Q3 of 2023 as compared to 15% in the

Operator

fiscal Q3 of 2022.

Speaker 3

This reflected a higher percentage of units sold at new increased prices and lower cost of sales as a result of our gross margin improvement initiatives. Selling and administrative expenses increased $4,700,000 in the fiscal Q3 of 2023 from $3,900,000 in the fiscal Q3 of 2022. This reflected increases in marketing expenses, commissions, insurance premiums, depreciation and outbound shipping costs. Research and development expenses decreased to $1,200,000 in the fiscal Q3 of 2023. This is compared to $1,700,000 in the fiscal Q3 of 2022, primarily due to lower staff related expenses And lower expenses related to the timing of development of new products.

Speaker 3

Adjusted EBITDA loss decreased to $700,000 in the fiscal third For the 9 months ended March 31, 2023, adjusted EBITDA loss decreased 74% to $3,100,000 compared to $11,900,000 in the 9 months ended March 31, 2022. Our continued initiatives, business growth and operating leverage all contribute to drive this trajectory. Net loss for the quarter for the fiscal Q3 of 2023 decreased to $1,400,000 For a net loss of $3,700,000 in the fiscal Q3 of 2022, this principally reflected the increased gross profit. Net cash used in operating activities decreased to $3,300,000 in Q3 of 2023 This is compared to $3,900,000 in Q3 of 2022 and to $5,200,000 for the 9 months ended March 31, 2023 compared to $19,300,000 for the 9 months ended March 31, 2022. The net cash decreases were primarily due to a decrease in net loss and increase in accounts payable.

Speaker 3

We recently announced the renewal of the available credit on our existing facility with Silicon Valley Bank, Which is now a division of First Citizens Bank at renewal of $14,000,000 to support the working capital requirements related to our customer demand. First Citizens Bank is a top tier financial institution And we are pleased to now be partnering with them on our revolving credit line. This renewal along with our existing cash will Also continue to explore alternative capital opportunities to enable us to meet the demands of our aggressive program. Now I'd like to pass it back to Ron to offer some closing remarks.

Speaker 2

Thank you, Chuck. While we're on track executing our gross margin improvement and cost control initiatives, We are exploring increases to our working capital availability. Looking ahead, we believe the combination of existing customer orders And acquisition of new customers who want the benefits of lithium ion technology business can drive continued Product quality, Leading technology and service are key factors as to why we continue to win and maintain business relationships And we'll ensure our goal to continue our growth trajectory. And our current production facility Also should support annual revenue up to $150,000,000 given our current facility footprint, 2nd shift build out and lean manufacturing implementation. Looking beyond reaching profitability And building on our success in the material handling industry, we are also focused on broadening our reach into related verticals such as warehouse With our operational strategy, including 6 assembly lines, we are well positioned To continue to leverage our capabilities as the adoption of lithium energy solutions continues to accelerate, Initiatives to ensure leadership in technology that expands product and service value to our customers.

Speaker 2

In summary, we are well positioned to execute our strategy of electrifying commerce As we offer customers stored energy solutions to increase productivity at lower cost during our product's life. We are encouraged by strong purchase orders, improving backlog and continued expansion Margins through improved sourcing and supply chain management, continual process improvement and pricing. We continue to execute actions to improve adjusted EBITDA as shown on Slide 7, which is a key indicator to achieve profitability. And further, we anticipate expanding into new markets having strong demand for our value proposition of high performance and lower cost of ownership. I look forward to providing our shareholders with further updates in the near future.

Speaker 2

As we continue to leverage our leadership position in Lithium Ion Technology Solutions With our growing list of new and diverse large customers. I thank you all for attending. And now I'd like to hand the call over to the operator to begin our question and answer session. Operator?

Operator

Thank you. We will now conduct a question and answer session. A confirmation tone will indicate your line is in the question A question at this time. One moment while we poll for our first question. Our first question comes from Chip Moore with EF Hutton.

Speaker 4

Ron and Chuck, I wanted to ask on margins. Congrats On getting to 30, that's a great milestone. I guess, is there anything with regard to mix in the quarter to sort of help you there and then Help us think about moving forward, you've got another number of initiatives underway that are sort of just ramping, and then of course volume leverage. Is there a way to think about where margins might be able to get sort of near term and long term?

Speaker 2

Yes. Chuck, you want to handle that one?

Speaker 3

Yes. Chip, I think There is a little bit of slight amount of mix there that drove it a little higher than what we actually even Forecasted a little bit, but not much. There's a little bit of that. Right now, if you kind of look at the margins, We've done a lot in terms of what we've done internally. As you know, we're creating the Grouper product, which is a different Product is going to have different margins.

Speaker 3

We're not fully vetted on those yet. So in the short term, I think that we're going to stay in that range As we continue to move forward for a little while here, we're also seeing a little bit of pressure on steel prices again, which is, if you watch the commodities markets, That can affect us on the steel side and that's a big part of our product as well. Okay. So it sounds like

Speaker 4

Yes, sort of sustainable here right now, right, some puts and takes, but longer term, clearly, you've got, yes, upside from here. That's very helpful.

Speaker 2

And a follow-up there

Speaker 4

on margins, I guess, specifically to the new Atlanta facility that just opened, that should give you some benefits as well. Can you maybe expand on what that brings in terms of profitability potential?

Speaker 2

Yes. Chuck, let me jump in here. That does with reducing ultimately reduce warranty And another way to think about it, Chuck, in addition to what Chuck said, us think about it as We have an ongoing margin improvement strategy. And we as you've seen, We've done a lot of work on our initiatives via our weekly War Room items we've mentioned, but we want to continue value engineering. We're roughly 30% now and we realize that we need to move higher and we will.

Speaker 2

And one of the enablers of that is going to be our operating leverage we have with our fixed Operating costs, which are largely fixed and with the growth in revenue that we have as well. So hope that helps, Chip.

Speaker 4

Yes. No, that's great, Ron. And

Speaker 3

if I

Speaker 4

could ask another, I guess, specifically on the pipeline, it sounds like it's Still very strong. You talked about adding some new potentially large accounts, maybe talk about the size and scope Potential there. And then in terms of timing, obviously, backlog, I think you talked about the forklift lead times Being an issue there and I've heard that welding in particular has been a real constraint for some of the OEMs, but Maybe just help us think about that sort of very near term versus what you're seeing in terms of underlying demand? Thanks.

Speaker 2

Yes. No, no, sure. The pipeline, yes, we live and breathe on that because our customers Want us to build scale. They're big. The bigger we are, the better we can address and support Deliveries and service all over the country, Canada, Mexico and some of these want to take us internationally at some point in the future, Not in the near term, but the point is they want us to build scale.

Speaker 2

Fortunately, that's been our strategy for 8 years. So We're on that track. I will mention that just yesterday, we got a big order for our next new big customer, which is not Part of the 2 I mentioned, some of these companies really don't like you mentioning their name, but I thought I'd mention this Procter and Gamble. We just got The first big order for that and they're an example of some of our other suppliers that you see on our PowerPoint In our deck, on our website, this is a long term relationship we have with them. They It's very disruptive for them to change suppliers.

Speaker 2

Typically, they have lots of different locations, How things are operated, how things connect with the forklift, how things connect with their chargers. So It can be a very sticky business. Now that doesn't mean that we have a long term guaranteed contract. That's Not part of the profile of the sector we're in. It's how good were you each month.

Speaker 2

And frankly, I'm used to that having been in a lot of other industries. And However, I really like the idea of that our customers even want a long term relationship. So we're working on another of other customers in the pipeline. That one took over 10 months, but others can take 6 weeks, so we have a variety of others. I'm not going to mention them.

Speaker 2

I just wanted to throw out an example to give you some sense Turning to the lead times, yes, we have mentioned a couple of times here. We were just a ProMat at the largest Just trade show, the annual trade show in Chicago in March and everybody was talking about The delayed lead times on forklift delivery and that has impacted us. Now it's not on Every line, every truck line, it's some of them, some of the bigger ones. And We don't get any assurance of when that exactly when that's going to be, but we believe it's a residual hangover from the Pandemic and the supply chain disruptions, but we're working through that. We're adding new business, trying to fill in any gas, and I think That's good.

Speaker 2

It's impacted us a bit this quarter. It could impact us a bit next quarter. We're not giving guidance, but I'm just explaining that this factor is affecting us and others. I know one supplier that's nearly driving out of business. But it does have an impact.

Speaker 2

But the good news is we're not losing any business. The forklifts are coming And it just pertains well to the future, particularly as we get past a few months ahead And that supply situation begins to normalize.

Speaker 4

Got it. That's great to hear. Appreciate all the color and I'll hop back in queue. Thanks very much.

Operator

Thank you. We have a question from Matthew Galinko with Maxim Group. Please proceed.

Speaker 5

Hey, guys. Thanks for taking my question and apologize if I if this was already answered. But I think I heard you mention That you've passed through some price increases. You also mentioned that steel prices have been somewhat or We'll be somewhat of a limiter to your gross margin upside just based on recent trends. So can you maybe talk about as We move forward a little bit and if material prices remain high, do you have the ability to continue Pushing price increases to

Operator

your current customers or what does that look like going forward?

Speaker 2

Yes. Chuck, do you want to field that one?

Speaker 3

Yes. Matt, we've got the we can of course push some pricing and we continue to look at that and we will It's more product by product instead of overall at this point. So we're looking at specific products that make sense to do pricing increases. And There are numerous gross margin initiatives we continue to have going on harnesses and Boards and all the other components, so steel is just as you know a piece of it, which it's not It's a significant part, but it's there's plenty of other stuff we're working on that will continue to increase margins. So it's not like that is Stopping anything at this point.

Speaker 3

I think it's more of a we've got Activities going every week that's starting to pull cost out of there. So we'll continue to do it. I just think you're not going to see a 6 point jump. It's going to be more A steady growth from here on out.

Speaker 2

Yes. Another element, Matt, If you look up on Google, the price of cobral steel, it just really went up like a mountain During the pandemic and it's really, really largely come down. And it's interesting as Chuck pointed out, we have seen Some recent upward adjustment to that. But I think that's the world we live in Yes. I know all of us are getting used to dealing with that.

Speaker 5

Thanks. That's helpful. And then I guess as a follow-up, with respect to your in house testing capacity, Given some of the supply chain dynamics that you talked about, are you going to be able to see the benefits of that? Or can you talk a little bit more about How that

Operator

benefits your processes and ability to deliver product Timely.

Speaker 2

Yes. It's a good question. It's a twofold answer. There's two points to make We started this UL testing back in early 2015 and went through it for the first time with our initial product. And There's a lot involved.

Speaker 2

There's just more than you'd believe. On the surface, it's really testing for durability and safety of the packs. So we felt that was really important with lithium and being new. And it actually took us forever because we had to go out And get all this 3rd party testing. So you had to reserve space and time and facilities in Texas and elsewhere and UL had to come in and out all the time.

Speaker 2

So over the past 6 years, we've UL ed all our packs, our 1st generation. Now we just went through this new platform. So we've developed a lot of experience And confidence by UL and what we can do. So along that journey, we say, hey, let's buy some of this equipment Because you know what, we could use it for just internally developing our products, shake test, vibe test, High temp tests, low temp tests, durability and so forth. So We bought that equipment and that's an enabler to accelerating the timeline it takes To develop products internally, to and any of the elements of that.

Speaker 2

And secondly, UL testing is not cheap. We spent 100 of 1,000 of dollars on that. And being able to do that test internally where they just they have to Monitor certain tests as part of their requirement and compliance. So they can do it either on-site, On Zoom or we can tape it and give it to them. So we really and we're not sending anything to Texas and other places For 3rd party testing, so it has a Benefit with many aspects to us, both financially, cost wise and time wise.

Speaker 5

Great. Thank you and congrats again on the gross margin trajectory.

Speaker 2

Yes. Thanks, Matt.

Operator

There are no further questions in queue. I would like to turn the call back over to Mr. Dutt for his closing remarks.

Speaker 2

Thank you, operator. I would like to thank each of you for joining our financial results conference

Speaker 3

Call

Speaker 2

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 or if you have further questions, please reach out to our IR firm, MC Group, We would be more than happy to assist. Thank you.

Operator

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

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