Orion Energy Systems Q1 2025 Earnings Call Transcript

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August 7, 2024

There are 8 speakers on the call.

Operator

Good morning, everyone, and welcome to Orion Energy Systems Fiscal 2025 First Quarter Conference Call. At this time, all participants are in a listen only mode. I will now turn the call over to Bill Jones, Investor Relations to begin.

Speaker 1

Thank you, Alex, and good morning to everyone and thank you for joining this call. Mike Jenkins, Orion's CEO and Per Brodine, Orion's CFO, will review the company's Q1 results, its financial position and its fiscal 2025 outlook in the prepared remarks, and then we will open the call to investor questions. Today's conference call is being recorded, and a replay will be posted in the Investors section of Orion's corporate website, orionlighting.com. As a reminder, remarks and answers to questions that follow include statements which are forward looking per the Private Securities Litigation Reform Act of 1995. Forward looking statements generally include such words as anticipate, believe, expect, project or similar words.

Speaker 1

Also, any statements describing future targets and goals, company plans or its outlook are also forward looking. Such forward looking statements are subject to various risks that could cause actual results to differ materially from current expectations. Risks include, among other factors, matters that Orion has described in its press release issued this morning as well as in its filings with the SEC. Except as described therein, Orion disclaims any obligation to update or revise forward looking statements made as of today's date. Reconciliations of certain non GAAP financial metrics to their closest GAAP measures are also provided in today's press release.

Speaker 1

Now I'll turn the call over to Orion's CEO, Mr. Mike Jenkins.

Speaker 2

Thanks, Bill. Good morning, and thank you all for joining our call today. It's been 2 months since our year end call, and the Q1 was in line with expectations. So I'll keep my comments relatively brief and leave more time for questions. Orion's revenue momentum continued with 13% growth in the first quarter, driven principally by strength in our EV charging system installation business.

Speaker 2

We expect positive momentum to continue across the company in fiscal 2025 as reflected in our full year outlook targeting 10% to 15% revenue growth. The bright spot in Q1 was obviously in our EV Charging segment. Recall that fiscal 2024 was the 1st year of Voltruck operations within Orion. Having built out team's resources, capabilities and geographic reach last year, our EV installation platform is well positioned to meet the needs of large customers across the country. We saw the benefits of our EV charging investments in Q1 as revenue grew over 200 percent to $3,800,000 Our EV charging Q1 performance was positively impacted by the activation of construction contracts to install Level 2 and Level 3 charging stations for Eversource Energy's EV Make Ready program.

Speaker 2

We secured over $11,000,000 of contracts for Eversource customers through this program. The projects are slated for completion this fiscal year contributing to our fiscal 2025 growth outlook. In addition, Voaltek has developed a solid pipeline of larger opportunities that now totals over $45,000,000 Of course, we've got to convert those opportunities into deals, but we are very encouraged by our business development momentum. Voltrek has deep expertise and a track record of successful EV charging installations over more than a decade. This experience puts us in a very strong position to compete for large national and regional EV infrastructure projects.

Speaker 2

There is also significant federal funding being made available to drive the needed infrastructure catch up to properly support the growing base of electrical vehicles. In LED Lighting Solutions, we achieved modest growth in Q1 2025 and continue to expect LED Lighting segment growth in fiscal 2025, supported by major account projects as well as demand from ESCO and distribution partners. Q1 included revenue from our Department of Defense LED retrofit project in Europe, which we completed in the quarter. Orion was brought into this project by a global super ESCO that often utilizes Orion as their lighting partner. Our team did an excellent job on this large and complex project, showcasing our superior project execution capabilities with the added hurdle of working overseas.

Speaker 2

We are hopeful that our performance could lead to other large projects with this partner in the near future. For the balance of 2025, we expect growth in LED lighting to be driven by a rebound in activity from longstanding automotive customers after limited project activity in fiscal 2024. We also anticipate strong opportunities in the public sector, growth in logistics and warehousing and the initiation of projects in the technology, retail and government sectors that have been in the planning stages for over a year. We also anticipate ongoing LED lighting projects from our largest customer in addition to their utilization of our maintenance services. We are also working to drive continued growth in lighting product sales within our ESCO and electrical contractor distribution channels.

Speaker 2

These channels have responded well to our expanded line of Triton Pro High Bay and Harris exterior fixtures that were specifically developed to meet their needs for high quality energy efficient LED fixtures that are value priced. We continue to see solid growth in quoting and actual sales of these product lines. We also expect LED lighting demand to benefit from state regulations banning the sale of fluorescent fixtures and their replacement tubes. 7 states, including California have approved such regulations, which begin to go into effect in calendar 2025 with other states expected to follow suit. As the deadline draw closer, we are starting to see customers increasing their attention in this area and begin to develop plans for compliance.

Speaker 2

We have also been successful in using the regulatory timeline to initiate new customer dialogues and expect to see projects related to these bands begin in the second half of our fiscal twenty twenty five and accelerate into fiscal twenty twenty six and beyond. Turning to our Maintenance Services segment. As anticipated, maintenance services revenue declined 11% in Q1 'twenty five to $3,300,000 The top line performance reflects the impact of 3 legacy Sta Lite customers that chose not to renew long term contracts following our price increases. The price adjustments were required to return the segment to appropriate levels of profitability following a variety of inflationary factors that have impacted the business over the past 2 years. Importantly, our objective of returning this business to a suitable gross profit is proving successful.

Speaker 2

Our quarter 125 gross profit percentage increased to a positive 3.8% from a negative 1.4% in the year prior and we anticipate further strengthening as we progress through 2025. Given our outlook and Q1 2025 performance, we have reiterated our fiscal 2025 revenue growth target 10% to 15% or total revenue of between $100,000,000 $104,000,000 This outlook is based on anticipated robust growth in EV charging station revenue as well as expected revenue growth in LED lighting solutions. We anticipate large national LED lighting projects for customers across a wide range of sectors including automotive, retail, technology, logistics and distribution, banking and the public sector. We also anticipate growth in our ESCO and agent channels, driven by an expanded focus on new high quality energy efficient value priced LED products. We continue to expect fiscal 2025 revenue to be significantly weighted to the second half of the year as it was in fiscal 2024 and subject to the timing of larger projects.

Speaker 2

We also expect to finish fiscal 2025 with positive adjusted EBITDA. Let me now pass the call to our CFO, Per Brodine, to provide more details on our financial performance for Q1.

Speaker 3

Thanks, Mike. Q1 2025 revenue rose 13% to 19,900,000 dollars The quarter benefited particularly from the activation of EV charging stations construction activity for customers of Eversource Energy. Our Lighting segment continued to benefit from the completion of an approximately $9,000,000 Department of Defense retrofit project in Europe. $1,900,000 of revenue was recognized for this project in Q1 2025. As expected, maintenance segment revenue declined in Q1 2025 due to 3 unprofitable legacy Staylight contracts that did not renew following planned price increases from Orion.

Speaker 3

Offsetting this impact somewhat was the 3 year preventative lighting maintenance service contract for our largest customers' 2,000 retail locations. Longer term, we see the potential for growth with other current customers on the maintenance side to mitigate some of the lost revenue from the lapsed unprofitable legacy contracts. Importantly, our actions are turning around the profitability of this business. For the company as a whole, our gross profit percentage or gross margin improved 360 basis points to 21.6 percent in Q1 2025 versus 18% in Q1 2024, reflecting the benefit of pricing increases and termination of negative margin contracts in our Maintenance segment. Improvements in LED lighting product margins as well as improved fixed cost absorption due to higher revenues.

Speaker 3

In addition, Q1 had a couple unusual items that negatively impacted margin. First, on the product side and as part of restructuring the maintenance business, we wrote off approximately $200,000 of inventory that could not be used or salvaged. 2nd, in services, as we wrapped up the Germany project, the final quarter came in at lower margin rate than other quarters due to the nature of the work performed. Gross margin on Orion Products improved approximately 6 70 basis points to 33.1 percent in Q1 26.4 percent in Q1 2024. We saw improvements on both manufactured and sourced products, including new product sales as well as the benefit of improved fixed cost absorption from higher sales.

Speaker 3

Reflecting steps taken in the maintenance business and our expectation for the business overall, we expect our blended gross margin rate to remain strong in fiscal 2025. Operating expenses declined to $7,700,000 from Q1 2025 in Q1 2025 from $9,600,000 in Q1 2024 due to a lower voltrac earn out expense accrual of $329,000 versus Q1 of 20 $4 of $1,100,000 The earn out reduction is based on our estimate of expected performance relative to the fiscal 2025 earn out target, which is significantly higher than the fiscal 2024 target. Other reductions have come from the maintenance business as well as a strong focus on productivity over the past year that has led to cost savings in our base business. We incurred severance costs of $123,000 and restructuring costs of $270,000 in Q1 'twenty 25 related to the rightsizing and realignment of our maintenance segment following the loss of 3 legacy accounts and expect to record another $150,000 to $200,000 to complete these cost management initiatives. Higher Q1 revenue, improved gross margin and lower operating expenses led to Orion's net loss improving to $3,800,000 or $0.12 per share in Q1 2025 from $6,600,000 or $0.21 per share in Q1 2024.

Speaker 3

Cash used in operations was $3,000,000 in Q1 2025, improvement from $7,300,000 in Q1 2024, reflecting improved operating results and lower working capital requirements. Orion also enhanced its liquidity position through the proceeds of the $3,500,000 mortgage in Q1 from a new bank facility on our Manitowoc corporate headquarters, which resulted in cash increasing to $5,700,000 at the end of the period and $5,200,000 at the beginning of the period. Current assets less current liabilities or net working capital was 17 point $4,000,000 at the close of Q1 2025, up from $16,800,000 at March 31, 2024. Bryan's financial liquidity was $14,000,000 at June 30, 2024 as compared to $15,300,000 at March 31, 2024. Considering our financial liquidity and growth outlook, we believe we are in a good position to fund each of our businesses and our growth goals for fiscal 2025.

Speaker 3

And with that, operator, could you please begin the Q and A session?

Operator

Thank you. We will now begin the question and answer session. And your first question comes from the line of Samir Joshi. Please go ahead.

Speaker 4

Hey, good morning guys. Thanks for taking my call. Hi, Larry. EV charging business, I think you mentioned a pipeline of around $45,000,000 What does this look like? What sector does it come from?

Speaker 4

And what portion of this is likely to be converted to orders in fiscal 2025 and delivered again deliveries against those are expected?

Speaker 2

Yes, good question, Sameer. The $45,000,000 pipeline that we have for EV is made up of a wide segment of sectors and verticals. There's certainly some municipal business in there. Private companies are in that as well. Obviously, we've referenced the Eversource situation, which is a utility in Massachusetts and they work with private companies as well.

Speaker 2

So I would say it's a wide grouping. Also included in that is some cross selling opportunities with Orion's lighting customers. In terms of how much of that pipeline we think is going to be converted this year, our as we've said, our budget for EV, essentially our target is $18,000,000 in revenue plus. And we expect that the pipeline that we have right now will deliver on that.

Speaker 4

That's good to hear. Thanks for that. And then just in terms of capacity, are there any supply constraints or any challenges that you're looking at? Or if you are able to convert more than $18,000,000 do you have enough capacity to say deliver $25,000,000 or so?

Speaker 2

Yes. Right now, we do not have any major supply constraints across the business and nor do we anticipate any as we move forward.

Speaker 4

Understood. And then just a clarification on the adjusted EBITDA exiting fiscal 2025. That will be like the 4th quarter positive adjusted EBITDA. Is that the expectation?

Speaker 3

The expectation is that for the full fiscal year based on our revenue outlook, we would expect to be cash flow positive for the year. I'm sorry, adjusted EBITDA positive.

Speaker 4

Adjusted EBITDA, yes. Good, good, good. Good to hear that. And then lastly on the LED business, what kind of responses or like in the 7 states, what kind of reception fiscal year?

Speaker 2

Yes. So I think that the 7 states you're referencing are relative to the fluorescent lighting ban. And we are engaging in dialogues. I would say that a lot of businesses in those states unfortunately aren't even aware that this legislation is in place and that the state is approaching. So we've been talking actively to customers.

Speaker 2

We've been marketing this so that the awareness is growing. We are engaging in dialogues with key customers who have locations in those states to make sure they're ready for that. And again, it's really the ban of sale of fixtures and tubes. So it's not that somebody is going to come into facilities and remove anything or anything along those lines, but it is going to prohibit as their lighting fails from getting replacement products. And so it's better to approach it as a system change.

Speaker 2

So we are seeing growing interest there and we are actively working with some of our larger customers to make sure they're ready.

Speaker 4

Good to hear. Thanks for that and good luck.

Speaker 2

Thanks, Sameer. Appreciate it.

Operator

Your next question comes from the line of Eric Stine with Craig Hallum Capital. Please go ahead.

Speaker 5

Good morning, guys. This is Luke on for Eric Stine. We've got a couple of questions here. First off, how should we think about maintenance services over the next few quarters? Are you seeing opportunities in the pipeline to offset the loss of the 3 legacy contracts?

Speaker 5

And if so, when do you think we could start to see top line recovery?

Speaker 2

Yes. We have said in terms of guidance for the year that we expect that business to contract $4,000,000 to $5,000,000 That's offset by some growth on our other business that we've talked about with our largest customer as well as some additional opportunities. In terms of the pipeline, we do have some additional opportunities that are in the pipeline, But we and we would expect to see any of those potentially come through in the second half of the year.

Speaker 5

Got it. Thank you. And just one more follow-up here on the EV charging segment. So we've obviously seen a lot of growth there in the past year. We were wondering how much of that growth can be attributed to business with Voltrex existing customers at the time of the acquisition versus new customers introduced from cross selling synergies with your LED and maintenance business or just new customers in general?

Speaker 2

Yes, we I would say that the cross selling piece is a growing area. It's still not the majority, but we have a very significant pipeline, which we expect as we continue to move forward to grow that business. The customers that we have, our legacy customers through the VoalteTrak acquisition are for the most part growing and we've added new customers just through that team's efforts on top of that. As well as working with key suppliers and others on opportunities. That may not have come through cross selling per se, but those are also new opportunities which have been created in the business.

Speaker 2

So it's a combination of legacy customers growing, new customers that were coming from the EV team that they're sourcing and a growing base of cross selling.

Speaker 3

And maybe just for a little more context, just since the acquisition of Voltaire, they have done business in 29 states as far away as Hawaii. So it is no longer just a Northeast centric business that certainly is where a lot of their business occurs, but that breadth has certainly expanded over the last 18 to 24 months.

Operator

Your next question comes from the line of Chris Sakai with Singular Research. Please go ahead.

Speaker 6

Yes. Hi, good morning.

Speaker 3

Good morning, Chris.

Speaker 6

Could you elaborate on the assumptions underlying that the 10% to 15% top line growth guidance for fiscal 2025. Specifically, what factors are expected to drive the difference between the lower and upper ends of this range?

Speaker 2

Well, we have different we always go through and look at projects and customers in our pipeline, what is committed to hit, what is likely to hit, etcetera, and make sure that we feel like we've got an adequate amount of contingency built in when we talk about those projects and forecast. So we have a lot of things that I referenced in my comments, larger projects in the technology space, government space, etcetera, which are anticipated to start in the second half of the year. And so clearly that's built into our guidance along with other activities. The EV business as we've mentioned will grow approximately at least 50% this year from a base of 12% last year to 18% plus this year. So that's all built into the guidance along with the $4,000,000 to $5,000,000 of contraction on the maintenance side.

Speaker 6

Okay, thanks. And then consider the import tariffs on Chinese electric vehicles and recent results and commentary from companies like Tesla and GM, are you observing any hesitance from clients regarding the EV opportunity?

Speaker 2

No, not at this time. It's a question we get asked quite a bit. I think there's clearly some EVs in general are in the news a lot. We get asked a lot about the political situation in the upcoming elections and what we see is how that potentially could impact it. I mean, we really see the EVs are a growing part of our transportation system.

Speaker 2

The what's key for them to be successful where they're at today and growing in the future is infrastructure. And a lot of these projects have been funded and the monies have already been appropriated from the federal level to the states. So we really don't see any impact on the infrastructure regardless of whether EVs, the rate of change slows to some degree or accelerates. I think the need for infrastructure is significant and will be a continuing driver over the next, let's say, 5 to 7 years.

Speaker 6

Okay. Thanks. And lastly, regarding the price negotiations with legacy maintenance customers, is this issue now resolved or is there more to address?

Speaker 2

No, we basically addressed all the issues that we had in the maintenance business. As referenced in Per's comments, in addition to the top line and the customer situation, we have taken some restructuring actions to right size that business to make sure that we have the right cost structure in place moving forward as well.

Speaker 6

Okay, great. Thanks for the answers.

Speaker 3

Thank you.

Operator

Your next question comes from the line of Bill Dezellem with Tieton Capital Market Management. Please go ahead.

Speaker 7

Thank you. A group of questions. First of all, you referenced in the release the success that you're having with the value products on the lighting side. When you look at the market, what is the split between value and I don't know if premium is the categorization for the other part of the market, but how does that how does the industry look?

Speaker 2

Hi, Bill. Yes, that's a good question. Clearly, like in all industries, when you get into kind of a good, better, best situation, the further you go up the pyramid and the further up in pricing, the smaller the pyramid in terms of addressable market. Really the strategy for us getting into this was we did recognize that we were missing a larger potential volume piece that we were currently operating in. And so we launched the Triton Pro, particularly to help our ESCO partners and our distribution and agent partners access that market.

Speaker 2

We're very comfortable that in terms of our progress, we're seeing increased sales and significantly increased quoting from that. I do believe that most of that has been additive to the business at this point. So we feel pretty good about that. I can't give you a precise answer as to how much more significant that band is, but it is larger from a market size standpoint, we believe than the one that we've traditionally operated in and is opening up some new avenues for additive sales.

Speaker 7

That's helpful. Thank you. And when you look at the Triton products, what do you see as your competitive differentiation or advantage versus the competing products that are already out there?

Speaker 2

Yes, great question. When we built the Triton Pro line, that basically is incorporating a lot of the features and benefits that people expect from Orion. That doesn't mean it's all it's the same product as the Harris, which is a Signature product. But in terms of relative to our competition, things like temperature ratings, efficiency, warranty, etcetera, are all at the upper end, which is where Orion places. Whatever price tier essentially we're in, we want to be at the upper end of that in terms of quality, features, reliability, etcetera.

Speaker 2

So we feel like relative to that new set of competitors and that new set of competitive landscape that we are differentiating.

Speaker 7

Great. Thank you. And I'm going to switch gears entirely here. You mentioned in your opening remarks that you are hopeful that you have more business coming from the ESCO that was involved with the German military base. Is that additional business that you were hopeful for, is it another base or something entirely different?

Speaker 7

And would you please characterize how you see that unfolding please?

Speaker 2

Sure. Yes, that is a Super ESCO that we've worked for historically. We've done a number of installations and retrofit projects, both domestically and now this large one abroad. We have other opportunities in our pipeline with this Super Asco and are hopeful, optimistic that some of those will convert this year.

Speaker 7

And those other opportunities fall into what type of facility characteristics?

Speaker 2

Right. So some of those are a number of those are DoD kind of bases or facilities.

Speaker 7

Great. Thank you. And then The Department of Defense.

Speaker 2

Sorry, Bill, I just want to clarify.

Speaker 7

I cut you off.

Speaker 2

EOD is Department of Defense, just to clarify.

Speaker 7

Great. Thank you. And domestic or outside the U. S?

Speaker 2

Both. We're working on domestic as well as some international opportunities.

Speaker 7

Great. Thank you. And then one additional question. You talked about the EV or Voltriq business at $18,000,000 of revenue this year. You have $11,000,000 from the Eversource contract that you anticipate to complete this year.

Speaker 7

That means you only need $7,000,000 from your $45,000,000 of pipeline that you referenced. That seems very doable, if not potentially quite conservative. Can you provide some additional perspective behind that? And if we're getting over ahead of our skis here or whether there is some conservatism?

Speaker 2

Yes. I think certainly that yes, is a significant pipeline out there. You're right in terms of generally the math and how it works to get to the 18. We feel good about reaching the 2018 level and think there could be some upside from there. But again, the year is early and we'll see how these projects unfold and it's nice to see a growing pipeline.

Speaker 7

And then one thank you for that. And then one additional question tied to that is, as you pointed out in the release, there's $7,500,000,000 of government funding for charging stations. Dollars 45,000,000 is not even a rounding error in that. So are you seeing the number of opportunities exploding or about ready to explode that you will potentially have in your pipeline? How are you thinking about that?

Speaker 2

Yes. A lot of that government funding is for the NEVI, which was the single largest piece of it. The NEVI, which is the National Electric Vehicle Infrastructure, which came out of the Infrastructure Act. The way government money tends to flow, at least federal money is number 1, slow. And number 2, it goes from the fed to the states, then the states have to go through their process to disperse the monies.

Speaker 2

And that whole kind of timeframe, we're just starting to see some of that funding hit states moving forward. I think this calendar year, second half in particular and accelerated into next calendar year as well. So we are participating in quoting some opportunities to gain access to those funds, but it's just really starting right now.

Speaker 7

Great. Thank you. Appreciate the time.

Speaker 2

Thanks, Bill.

Operator

This concludes the Q and A session. I'll now turn the conference back to Mr. Jenkins for the closing remarks.

Speaker 2

Thank you all again for joining us today. We look forward to updating investors when we report our Q2 results and as we progress through fiscal 2025. We also hope to speak with you at an upcoming investor event, including the Sidoti Virtual Conference on Thursday, August 15th the H. C. Wainwright Global Investment Conference in New York, September 9th through 11th and the LD Micro Main Event in Los Angeles, October 29th through 30th.

Speaker 2

Please contact your conference rep to request a meeting. You may also contact our Investor Relations team with any questions concerning today's call or to schedule a call with management. Contact information is in today's press release. Thanks again and have a great day.

Operator

Thank you. This concludes today's conference call. You may now disconnect.

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