Flux Power Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2024

There are 9 speakers on the call.

Operator

Greetings, and welcome to the Flux Power Holdings Third Quarter Fiscal Year 20 24 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 Maria Rico, Marketing Manager.

Operator

Maria?

Speaker 1

Thank you, operator. Your host today, Ron Dutt, Chief Executive Officer and Kevin Royal, Chief Financial Officer, will present results of operations for fiscal Q3 ended March 31, 2024. A press release detailing these results crossed the wire this afternoon at 4:0:1 p. M. Eastern Time and is available in the Investor Relations section of our company's website, fluxpower.com.

Speaker 1

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 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 revisions 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 discussion of these factors and other risks, particularly under the heading Risk Factors.

Speaker 1

At this time, I will turn the call over to Flex Power's Chief Executive Officer, Ron Dett.

Speaker 2

Thank you, Maria, and good afternoon, everyone. I'm pleased to welcome you to today's fiscal Q3 2024 Financial Results Conference Call. To begin, I would first like to call out our headline themes and then go on to step through supporting context and color. We have experienced delays in new orders since this past January, driven by revised timing of forklift deliveries, which impact timing of our orders and shipments. We see indications in our market sector of the impact of higher interest rates and economic uncertainty during this calendar year.

Speaker 2

While we don't give specific guidance, we are aware of signs of potential abatement of the headwinds later this calendar year. We have been undertaking specific initiatives to increase revenue growth, reduce costs, launch new high demand products and ensure our pricing is appropriate for all our models. Put simply, our two high priorities are revenue growth and reaching profitability. Our reputation in the market and with sustaining Fortune 100 customers we have provide evidence of our value proposition along with over 22,000 flux powered lithium ion packs operating in North America. Turning to fiscal Q3 of 2024 results.

Speaker 2

We did experience reduced revenue of $14,500,000 versus $15,100,000 in the year ago quarter. This reduction in revenue comes following our highest quarterly revenue ever of 18.3 percent in the fiscal Q2 of 2024 this year. Regarding our gross margin, the fiscal Q3 of 2024 decreased slightly to 30% and our adjusted EBITDA was a loss of $1,400,000 compared with a loss of $700,000 in that year ago quarter. Our backlog has seen a similar impact with reduction to $18,500,000 from $25,000,000 a year ago. Regarding our customer base, we have no known lost customers and no lost orders to competition.

Speaker 2

Furthermore, we have not seen any pullback from interest in migrating to lithium ion solutions. Despite our current higher interest rate environment, we believe the trend of flake wide migration to lithium ion solution is still advancing. And micro capital spending trends remained intact as evidenced by the Institute of Supply Management survey released this month showing that manufacturing grew for the first time in 1.5 years in this past March. To support revenue growth, we're expanding our sales force and implementing marketing initiatives to expand awareness of both the value proposition to customers and capabilities of flux power to impact their fleet operations. Our solutions provide increased performance of forklifts, product lifecycle cost savings, asset management improvements from our leading telemetry and carbon dioxide reductions to the environment.

Speaker 2

We also provide integration of most brands of charging equipment to our packs, to our lithium battery packs and provide an integrated solution for the customers. I would like to reiterate that we are highly focused on expanding sales and marketing initiatives to secure new customer relationships and support our customers' continued migration to lithium with their typical very large fleets. Additionally, we are working with our distribution partners to acquire new customers, which includes sales and marketing resources and materials and getting our sales people closer to end customers and their needs as we collaborate with our dealers and distributors. Also, we're taking several actions in support of our targeted sales trajectory. These include new product launches of heavy duty models, addressing customer demand, adding sales people to support new customer acquisition and increasing our marketing resources and initiatives.

Speaker 2

Importantly, we are launching a new private label program this quarter with another top tier forklift OEM. As mentioned earlier, we're also taking actions to increase our gross margins, including cost reductions company wide and selected pricing increases reflecting our total value add to products and services for our customers. We are pleased to report on our continued progress in expanding technology and partnerships. Prototype testing of our fast charging technology is scheduled to take place this summer. Separately, we are launching the automation of modularization of battery cells, which should improve our working capital management.

Speaker 2

We are working with new potential customers to implement second life use of our packs are reaching the end of their initial application. This would include stationary storage opportunities for those packs. We have an initiative with 1 of our Fortune 50 long term customers to implement a nationwide installation of telemetry, which we call our Sky BMS. And this is all to improve customer asset management. Our software and cloud accessibility includes the development of an application of machine learning and AI features for product support tailored to large fleets.

Speaker 2

Now I do want to mention 2 of our recent appointments. I'm also pleased to highlight our new CFO, Kevin Royal, who joined in early March this year and also our newly elected Board Director, Mark Liposky. They both bring impressive depth of experience successfully building high growth businesses and are key resources to achieve our strategy of scaling our business with top tier customers. In the longer term, our strategy revolves around building scale to sell our packs, products to large fleets, building on our momentum in revenue, gross margin and operating leverage. Currently, we are growing organically within our capital resources, but have begun to explore and develop strategies, including those already mentioned, to build partnerships that can leverage revenue growth, technology and profitability and achieve our goal of building scale to meet the needs of our customers.

Speaker 2

As I mentioned earlier, adjusted EBITDA loss of $1,400,000 during the fiscal Q3 resulted primarily from the impact of lower revenue and a one time warranty related expense. As presented in the previous slides, we are experiencing a pause, you would call it, due to the higher interest rate environment, yet we do see signs of a gradual return to our growth rate in the second half of calendar twenty twenty four. Our current customer base continues to reflect large fleets of well known companies seeking the value proposition of higher performance, lower lifetime costs and asset management tools and services. Our full product line caters to large fleets who seek ongoing relationship partnership to meet current and future needs, not just one time transactional purchases. These customers represent well known household names having large fleets who require high performing suppliers who provide best in class products and especially services.

Speaker 2

While the forklift growth rate has historically been single digit, the adoption of lithium ion batteries is growing at a much higher rate, driven by the compelling value proposition of lithium compared to lead acid and propane for that matter. And especially in larger multi shift operations. The material handling sector is not unaffected by economic downturns, but it is critical to support to transport goods and provide services throughout the business cycle. Our strategy includes adjacent verticals such as airport, ground, support equipment referred to as GSE, and we continue to explore additional adjacencies to leverage our core competencies and capabilities. Gross margin initiatives have dramatically improved over the last 2 years and we expect continued improvement.

Speaker 2

Gross profit was down slightly during the Q3 to $4,400,000 and gross margin held steady at 30% compared to the year ago. With strategic supply chain and profitability improvement initiatives, achieving lower costs and higher volume purchasing, we are targeting gross margin improvement to continue with a long term goal of exceeding 40%. All these initiatives are part of our plan to accelerate gross margin and reach our target goal. As of May 6, 2024, our open order backlog was $18,500,000 Our backlog reflects longer lead times of incoming purchase orders from major OEMs to align with their schedule of new forklift deliveries and extended delivery times for certain model lines for new GSE equipment. Beyond our backlog of open orders, the future continues to look bright with growth of current customer adoption and new customer potential acquisition.

Speaker 2

With that, I will now turn it over to Kevin Royal, our newly appointed Chief Financial Officer to review the financial results. Kevin? Thank you, Ron.

Speaker 3

Now turning to review our financial results for the quarter ended March 31, 2024. Revenue for the 1st fiscal quarter of 2024 decreased 4% to $14,500,000

Speaker 2

compared to

Speaker 3

$15,100,000 in the fiscal Q3 of 2023 due to lower capital spending in the market sectors that we serve, resulting in shipments of fewer units during the quarter. Gross profit for the fiscal Q3 of 2024 decreased 7% to $4,400,000 compared to a gross profit of $4,700,000 in the fiscal Q3 of 2023. Gross margin decreased to 30% in the fiscal Q3 of 2024 as compared to 31% in the fiscal Q3 of 2023. Gross profit margin decreased slightly by 100 basis points as a result of higher warranty expense during the current quarter, partially offset by lower average cost of sales per unit achieved as a result of our product cost improvement initiatives. Selling and administrative expenses increased to $5,300,000 in the fiscal Q3 of 2024 as compared to $4,700,000 in fiscal Q3 of 2023, primarily attributable to higher staff related expenses, including certain severance expenses and increases in stock based compensation, recruiting expenses, outbound shipping costs and professional service fees, partially offset by decreases in sales commissions, E and O insurance expenses, travel expenses and depreciation expense.

Speaker 3

Research and development expenses increased to $1,300,000 in the fiscal Q3 of 2024 compared to $1,200,000 in the fiscal Q3 of 2023, primarily due to higher staff related expenses, including severance expenses, stock based compensation and general research and development costs. Adjusted EBITDA loss was $1,400,000 in the fiscal Q3 of 2024 as compared to a loss of $700,000 in the fiscal Q3 of 2023, primarily attributable to the impact of lower revenue. Net loss for the fiscal Q3 of 2024 was $2,600,000 compared to a loss of $1,400,000 in the fiscal Q3 of 2023, primarily attributable to decreased gross profit and increases in operating expenses and interest expense to support our planned growth. Cash was $1,300,000 on March 31, 2024 as compared to $2,400,000 at June 30, 2023 based on timing of utilizing our credit line. Net cash used in operating activities decreased by $900,000 to 4,300,000 dollars in the 9 months ended March 31, 2024 compared to $5,200,000 in the 9 months ended March 31, 2023.

Speaker 3

Available working capital includes our line of credit as of May 6, 2024 under our $16,000,000 credit facility from Gibraltar Business Capital for the remaining available balance of $3,200,000 and $2,000,000 available under the subordinated line of credit with Cleveland Capital. Credit line with Gibraltar, subject to eligible accounts receivables and the inventory borrowing base, provides for expansion up to 20,000,000 dollars Now looking at capital allocation, we have been impacted by slowing revenue this calendar year, which is extending the timeframe to reach cash flow breakeven. We are working with Gibraltar, our lender for our working capital line to revise our financial covenant requirements to support our current trajectory. As a result, we needed to include a going concern clause in our 10 Q filing, which we anticipate to file on Monday, May 13, 2024. I'd now like to pass it back to Ron to offer some closing remarks.

Speaker 2

Thank you, Kevin. To summarize our comments so far, the fiscal Q3 of 2024 saw lumpiness from timing of deliveries and customer new forklifts, orders and interest rate variability. We do, however, remain confident in our recovery and are highly focused on additional selling strategies to support our historical sales trajectory. Gross margin initiatives have dramatically improved margins over the last 2 years with strategic supply chain and profitability improvement initiatives, lower costs and higher volume pricing, we continue to experience gross margin improvements. We're highly focused on expanding sales and marketing initiatives to secure new customer relationships and support continued migration to lithium of current customers.

Speaker 2

We're very excited to add another Tier 1 OEM private label program to supplement our strong OEM relationships and approvals. We're also working with our distribution network to expand customer acquisition. We're leveraging our position with growth oriented projects and developing partnerships with vendors, technology partners and opportunities to further drive growth. We are working to expand product lines for multiple customer segments and adjacent markets with new products and filling gaps in our energy storage offerings. Recently, we introduced our new 2nd generation lithium ion battery pack for Class 2 narrow aisle forklifts and Class 1 4 wheel counterbalance forklifts, and we'll be adding heavy duty models to most of our product lines in coming months.

Speaker 2

Our telemetry, which includes asset management features, is in the pilot stage with a Fortune 50 company for nation for implementation nationwide. Finally, be assured our top priorities are revenue growth and reaching profitability. Fortunately, underlying interest for migration to Lithium Ion Solutions has never been greater. I look forward to providing our shareholders with further updates in the near term as we strengthen our leadership position in lithium ion technology solutions with our growing list of new and diverse large customers. I thank you all for attending.

Speaker 2

And now I would like to hand the call over to the operator to begin our question and answer session. Operator?

Operator

Thank you. We will now be conducting a question and answer The first question we have is from Craig Irwin of ROTH M. K. Please go ahead.

Speaker 4

Good afternoon. This is Andrew on for Craig. Thank for taking my questions. So the first question I have here is on the announced private label, the second one with the OEM. I was wondering if you could just kind of describe maybe the scale of the partnership, any details on the rollout there?

Speaker 4

Just more color would be much appreciated.

Speaker 2

Sure. Yes. The private we have another OEM private label and we've had for 4 or 5 years. This is going to be equal to or bigger than that. So it really provides very consistent, almost monthly, definitely quarterly orders.

Speaker 2

And they are both top 5 OEM globally. And we found that it's very helpful because these Class III walkie pallet jacks, which is the program, are found almost in every installation around the country. And the OEM dealerships feed that interest and really provide very helpful, efficient distribution strategy for us. So we already are getting we work closely with the OEMs and with the OEMs and projecting their forecast for this. They're both of similar magnitude and size at this point and very excited about launching this.

Speaker 2

We've just started it. It involves 3 or 4 variations of that product line, very excited about it.

Speaker 4

Great. Thanks for the color and it's great to hear. Second one here, kind of touched on different initiatives to kind of stimulate revenue between the prepared remarks and in the press release, kind of mentioning direct to consumer initiatives and working with your marketing team and even I think Ron you mentioned potential partnerships earlier on the call. Could you just kind of talk through what you're looking at there and the different ways you can kind of boost demand here?

Speaker 2

Yes. I think it's pretty exciting. We found while we have a good core customers on shown on our slide, on our website in the presentation of all the household customer names. I think we see it as time to aggressively expand our sales and marketing reach by adding more salespeople. We're in that process right now.

Speaker 2

We brought on a new one, another salesperson bringing on another one. I fully expect to at least double, possibly triple that over the coming year. We found that there's a very strong interest to get more exposure of who we are, what we do, references of having Flux as a supplier to help them understand what configuration of lithium is best for them, to work with them. It's a long term partnership. So our salespeople are just not out there quoting deals trying to get the lowest bid, get this deal and move on to something else.

Speaker 2

It's building that reputation and those references that show how we can provide a complete package for them of understanding their needs, instructing their people and all their installations around the country, their techs, provide the product support network, confidence that we can deliver our packs on time to them and also that long term relationships that we will continue to have the technology and product features in the future as this sector evolves to have confidence that we're a player that can do it. So our salespeople, our marketing initiatives, we're looking now to really get aggressive with those. There's a great opportunity for that to attract that interest, particularly now that we have a reputation in the marketplace, very strong. We just had an annual trade show in Atlanta in March and we certainly got reassurance of that, which is very helpful because when the investors are investing in a deal, nobody wants to be the first one in. And the same way with trying a new product.

Speaker 2

So I think we have we've built a lot of leverage over a lot of hard work over the past 10 years, developing this. We've been validated in the marketplace and now is the time to certainly expand our exposure.

Speaker 4

Great. Well, thank you for answering my questions and I'll hop back in the queue.

Speaker 2

Yes. Thanks, Andrew.

Operator

The next question we have is from Rob Brown of Lake Street Capital Markets. Please go ahead.

Speaker 5

Hi, good afternoon.

Speaker 2

Hi, Rob. How are you doing?

Speaker 5

Great. Thank you. On the sort of the order activity and the market demand, I know it's slowed down a little bit. How's the visibility there? Do you get a sense of things starting to pick up from kind of customer conversations?

Speaker 5

Or is there sort of a time cycle or seasonality to the orders that you feel comfortable with that can get some growth in the back half?

Speaker 2

In the past, in past years, we've had some seasonality for the summer, particularly for the food and beverage distribution companies who don't like to install new equipment in the summer. So there has been some of that end customers of the interest rate activity and it's what we suspect. We got a lot of input across the sector at the trade show along with what our salespeople get and we see as well. So I think we're we the December past December quarter, we had our highest revenue month. What was the underlying current was there was if you look at gross output starting to have be impacted back in the fall.

Speaker 2

So there's a little time lag effect of that to when we and really our competitors in the sector start seeing as it follows through and affects us. So we see that continuing. We work with our largest customers on long term forecast and they're all there. They're just pushing, delaying some of these out. So the hard numbers are the backlog that you get because those are orders, definite timing.

Speaker 2

Then we work with forecasts of our end customers and also our OEMs who are matching the new forklifts with our batteries. We see and hear a lot of talk about the impacts across the whole sector. So we have indications and I say indications, we don't give guidance, but things starting to pick up and having less caution on putting new equipment into place in the latter half of the year, particularly more towards the Q4. There are lead times on forklifts, there are lead times on batteries. So that has to be factored into the understanding of timing.

Speaker 2

But I would say, we see us coming out of that in the back half of this year.

Speaker 5

Okay, great. Thanks for the color there. And then on the new product launches, could you remind us again sort of how where you're at in that? And I know there were some models that were launched and some are coming, but where you have the new product kind of refresh and enhance models?

Speaker 2

Yes. Sure. We have been working on well over the past year, actually longer than that, having a series of what I would call heavy duty models for all our lines. Our customers with their forklift, they need different power needs depending on whether they're lifting and moving potato chips or engine blocks, to add color to it. And so we're introducing these heavier duty power capable across really almost all our lines and getting that through all those through UL listing and then they have to be approved by the engineers and all the OEMs that are putting this on the forklift.

Speaker 2

And so that process has just taken longer actually longer than we anticipated. But that has been happening and getting approved and we are going to be rolling those out in the coming months. And in line with the concept of heavy duty, we've also seen in among end customers that we're using large forklifts or very large forklifts, both indoor or outdoor, had in the past been using propane or diesel because it was outdoors and those configurations handled those jobs better. As lithium has now coming in to be a very viable choice, We're seeing the higher need for higher voltage process such as our 80 volt. Now we do 80 volts for the airline sector, but we have not been the demand hasn't been there in the material handling side.

Speaker 2

However, it's now emerging. We are developing those 80 volt applications. So we see the future very bright and continuing to supply to those higher voltage larger trucks. The margins are higher in that area, also requires more capability on the supplier side to meet those requirements. Okay.

Speaker 2

Thanks, Ron. I'll turn it over. Okay. Thanks, Rob.

Speaker 5

The next question we have

Operator

is from Eric Stine of Craig Hallum. Please go ahead.

Speaker 6

Ron, hi Kevin. I've been jumping around on calls, so I hope I don't double up on questions or topics. But maybe we could just go back to the interest rate dynamic and I can appreciate the impact on the order book or the order lumpiness. But can you just talk about, I mean, do you get a sense that it's more interest rate uncertainty or is it level of interest rates? Because I guess those two points have a very different conclusion as to when things might start to lift.

Speaker 2

Yes. That's a great question, Eric. Having come off really a very long area era as we know of very, very low interest rates, you hit 4%, 5%, 6%, 7%, 8% and it rankles a lot of people, creates a lot of uncertainty. The forecast at the national level really haven't been all that accurate recently, which I think has caused a, isn't it my opinion, a degree of uncertainty. Well, what's really going to happen with interest rates?

Speaker 2

And as a footnote, I think in some way a fallout from the pandemic and the disrupting of a lot of the economic forces at work. But so if you look historically, interest rates aren't extremely high. But I do think that apparently there's a very wide perception of input that we get that people, a lot of end customers are waiting for interest rates to mitigate a little bit before they execute these orders on forklifts and batteries thinking that growing some forecast interest rates are going to decline.

Speaker 6

Guys, you're not saying yes, sorry, go ahead.

Speaker 2

Yes. No, I'm just saying it's one that's a little bit requires a little bit of crystal ball to interpretate exactly what's happening. But you have to remember that the equipment we're talking about, particularly the forklift, more of the forklift than the batteries, but the forklifts don't suddenly die and have to be replaced. And that gives the asset managers in these warehouses and factories some wiggle room on the timing of this stuff. So, there's not a big high risk in that.

Speaker 2

Now having said that, these forklifts don't last forever. The battery sure don't. The batteries have a limited life. And so I think I don't see this as a long term a very long term nor do we get that from the input of our large customers.

Speaker 7

Okay. All right.

Speaker 6

That's helpful. And then maybe just on the additions to the sales organization And I think you said doubling or potentially tripling that. I mean, any way to kind of quantify maybe before doing this, what percentage of the market or the opportunities you might have got to look at and what you expect that to be once you're whether you've doubled or tripled that organization, the capabilities?

Speaker 2

Yes. No, we've had 3 salespeople in the field covering the 3 large geographies of the country. And focused on where the very large Fortune 100, 500 companies are located and going after what I would call the low hanging fruit. What I have in mind is we need to at least double that here as fast as we can digest and train the people. We I don't believe this is any place for somebody new to the industry to cut their teeth.

Speaker 2

We need to have people with relationships understanding in this sector. We just hired a really good hire that was recommended by one of our partners in the industry. And so I feel very confident and also confident in that approach. So my VP of Sales is also in process with 2 other potential ones. So we get that added coverage and along with staffing our marketing back office and sales support with that, I think our strategy is certainly to be able to get a much wider exposure, whether it's double or not.

Speaker 2

Those things are hard to determine and also the timeline on that is harder. I'd say also with those new product introductions we have, those also provide a lot more ammunition for some of these fleets. The fleets like do not like going to 1 forklift supplier for 1 battery and then another one for another battery. So there's a fair amount of one stop shopping, particularly when it comes to lithium because you have to go in and the application set up and so forth is becomes a practical point. So I think I feel pretty confident we are going to really expand, I think to your question, well, how much?

Speaker 2

It's a little difficult to say, except through my own network, I've got a lot of feedback. Look, there's a real opportunity to get some more people out there and execute marketing campaigns.

Speaker 6

Got it. Thanks a lot.

Speaker 2

Thanks, Eric.

Speaker 5

The next question we have

Operator

is from Matthew Galinko of Maxim Group. Please go ahead.

Speaker 8

Hey, thanks for taking my questions. I guess maybe just following up on something you just mentioned about end market preference for one stop shopping. Do you have a sense of opportunities that maybe you weren't competitive in, in the past if the products weren't there and you think you're able to fill going forward or has the market just not developed enough that you haven't missed out on any opportunities, but you believe that it's kind of greenfield from here?

Speaker 2

Matt, the first part of that didn't come through very, very clear. What opportunities potential opportunity you're talking about?

Speaker 8

I'm just kind of stitching together a couple of themes that I think you talked about on the call. One being that you mentioned filling some void potentially in the product line and then also end market preference for 1 stop shopping. And that was really the impetus of the question where I'm just curious if there have been competitive situations where you've lost out, but you think you could go back after or whether you just see the market developing to the point where it's time to put those resources into play?

Speaker 2

No. Your sense is spot on. We have missed some deals that were kind of agonizing to miss because there was a certain variation of product we weren't offering. If you want to go somebody counted all the forklift up and there's like 440 different variations. Now some of them are small variations on the model.

Speaker 2

But the point is, there are some what we believe to be a little lower volume gas that in fact, there's one we're coming out with and selling that now. But we've missed some orders because a customer wanted to go with someone. They needed like 3 different types of forklifts and they didn't want to they wanted to go to 1 supplier to do all 3. Well, one of them was the order picker that we hadn't developed yet. And so we didn't get the business.

Speaker 2

So there's some examples of that. And I really understand that and I think all of our folks do. So we think we can get acquire more business as we continue to fill out our lineup.

Speaker 8

Got it. Thank you. And I guess just a follow-up to the adding sales heads in the not too distant future, just given where macro is? And I guess, what are your expectations for how quickly those new sales additions start contributing to top line? Is it something that contingent on macro?

Speaker 8

And when purchasing starts again, we'll see that come through meaningfully? Or is it you think they could find spots to contribute in the relatively short term even in the context of the current spending environment?

Speaker 2

Yes, sure. No, there's a rule of thumb in the sales circuit. Well, when you hire a new salesman, it takes about a year and a half to get fully up to speed. Well, I think that's in the case when they're new to the sector and new to a lot of things. I'm not recruiting from that group of people.

Speaker 2

The person I just hired has a network, has contacts, understands the industry and feeding off that network and know how. We've sat down and discussed how much he could bring in, in this coming 12 months. And I thought it was a little aggressive, but I like that. And I think they can start bringing in business definitely within in 3 to 6 month period and really start to increase that because they're not starting from ground 0. And also the other big factor here is 4, 5, 6 years ago, we were having problems hiring salespeople who could really sell anything.

Speaker 2

They were more order takers. And I think to the extent that when you hire salespeople in this sector, where you're dealing with top tier companies, you really require a certain skill level, capability level along with that network I mentioned as well. So you get that firing on all those cylinders. And I think this fiscal year 2025, I'm definitely counting on revenue. How much?

Speaker 2

It's a bit of a crystal ball exercise for that. But I think what we have learned is you just don't hire salespeople, the first one that comes in the door. You're very focused, very determined. We found we have a lot of interest because we've had a very high growth rate over the past 4 or 5 years, not these past months, but and salespeople love that and they also love we've got an advanced energy solution product, hot market and hot demand. So exciting, really interesting time to be expanding the sales force.

Speaker 8

Great. Thank you.

Speaker 2

Okay. Thanks, Matt.

Speaker 5

The next question we have

Operator

is from Craig Irwin of ROTH Capital Partners. Please go ahead.

Speaker 7

Hi, good evening. Thank you for taking my questions. So I guess, Ron, you did a really good job last quarter communicating the air pocket for the March quarter. So So I guess financial results are they are what they are, right? But one thing that impressed me was the gross margins, right?

Speaker 7

The fact that you still had very strong gross margins. And that's one of the areas where you've kind of outperformed, done a really impeccable job over the last couple of years. You talk a little bit about this target longer term of getting to 40% gross margins. Can you maybe update us on anything that might have changed there? Are there any things likely to cut in over the next couple of quarters that might give you a little opportunity to capture more margin dollars on the products you're making?

Speaker 7

And is it a business mix issue or manufacturing efficiency? Any color would be helpful.

Speaker 2

Yes, sure. No. We are the beneficiaries of a lot of hard work on improving our vendors and that comes with costs along with the volumes that we've had as we've grown in volume. Although you haven't seen that volume this past quarter, but underlying a lot of that pricing. I'd say one of the most significant, if I had to point to one thing, you've heard a lot about how you may have thought about lithium battery packs declining in price coming out of China.

Speaker 2

And we are the beneficiaries of that with a high single digit reduction in the cost of those packs. And packs are like a third to over half of the BOM cost of our products. So that's going to begin flowing through soon, kind of flows through gradually through the inventory of goods. But we're certainly keen on that. That's a nice boost.

Speaker 2

I'd say the other boost along with ongoing cost reductions from an early stage product to more mature from the designs to the manufacturing elements. We're 2 thirds of the way through lean We're starting to get elements up there that affect that BOM cost quality with warranty as well, though we had a warranty blip a few months ago, which happened. But those things all have bearing on that. And I'd say the last thing that has bearing on this is that our pricing and really our competitors' pricing are in part a function of the competitive marketplace that's also a function of the value add that the customers see. So to the extent that we execute on our quality, our delivery, our training attacks, our responsiveness of our product service.

Speaker 2

And I'd say building trust with the supplier from all of that that goes on really gives us more pricing leverage. I remember 4 or 5 years ago, I didn't have a lot of pricing. We were innovating a product at pretty high failure rates. You just didn't have the leverage because of the uncertainty. It's the whole risk return principle.

Speaker 2

So we see something coming from that to fuel to help fuel, it's not just one thing, but helps fuel March eventually to 40% or beyond. Excellent.

Speaker 7

And then a big picture question for you. Adjacent markets outside of lift trucks, right? Have you considered other potential opportunities like military batteries or other industrial batteries, medical batteries that would benefit from your existing manufacturing footprint and also retain really chunky margins that your engineers and your salespeople would be a good match for delivering these into the market. I mean, are you looking at diversification?

Speaker 2

Yes, very much so. Our strategy has always been to add adjacencies where we didn't have to create a whole new infrastructure or get distracted with. But now that you mentioned DoD, we just put in a bid on a DoD proposal, which we think would be very, very interesting with a partner. I'm keen on getting into that DoD business because I think we needed to help fuel our strategy to build scale. So we have a couple of partners that on actually 2 different proposals on that.

Speaker 2

Our fast charging technology that we talk about, we have R and D partner back east is one approach that we're using and that has connections to the DoD too as well. So yes, we're very keen on that. We have done by the way, we did a project with a company called Local Motors for automated shuttle vehicles, 400 bolt, 8 passenger fully automated shuttle vehicles and we made about a dozen of those. And the local motors went under, new company came along, so we're working with them. So we are exploring opportunities.

Speaker 2

It has to satisfy our business case on the one hand. At the same time, to build scale, we need to explore, we are exploring those. So yes, absolutely, Craig.

Speaker 7

Fantastic. Well, congratulations for the progress. I'll hop back in the queue.

Speaker 2

Okay. Thanks, Craig.

Operator

There are no further questions at this time. And I would like to turn the floor back over to Ron Dutt for closing comments.

Speaker 2

Thank you, operator. I'd like to thank each of you for joining our financial results conference 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 IR firm, MZ Group, who would be more than happy to assist. This concludes our update for this past quarter. Thank you.

Operator

Ladies and gentlemen, that concludes today's conference.

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Earnings Conference Call
Flux Power Q3 2024
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