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Orion Energy Systems, Inc. (NYSEMKT:OESX)

F3Q2013 Results Earnings Call

February 5, 2013 5:00 PM ET

Executives

Scott Jensen - Chief Financial Officer

John Scribante - Chief Executive Officer

Analysts

Operator

Good day, ladies and gentlemen, and welcome to the Orion Energy’s Fiscal Third Quarter 2013 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded.

I would like to introduce the host for today’s conference, Scott Jensen, Chief Financial Officer. Please go ahead.

Scott Jensen

Thank you, operator. Good afternoon, everyone, and thank you for joining us today for the Orion Energy Systems third quarter fiscal 2013 conference call. Once again, my name is Scott Jensen, Chief Financial Officer. With me on the call today is John Scribante, Chief Executive Officer.

As a reminder, the earnings press release issued today once again includes a section that briefly discusses the supplemental information document that was posted to the company’s website. This supplemental information document provides additional details and analysis on Orion’s financial performance for the third quarter and year-to-date periods ended December 31, 2012. Additionally, John’s presentation today includes materials that are also posted to our website.

I will now read the Safe Harbor statement. Our remarks that follow, including answers to your questions, include statements that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are generally identified as such because the context of such statements will include words, such as believe, anticipate, expect or words of similar import. Similarly, statements that describe future plans, objectives, or goals are also forward-looking statements.

These forward-looking statements are subject to risks that could cause actual results to be materially different. Those risks include among others matters that we have described in our press release issued this afternoon and in our filings with the Securities and Exchange Commission. Except as described in these filings we disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly conference call if at all.

And now, I’d like to turn the call over to John Scribante, Chief Executive Officer of Orion Energy Systems.

John Scribante

Good afternoon, and thank you all for joining our call today. By most measures quarter three was a great quarter for Orion. Our performance was driven by the relentless execution of our strategy, the focuses on delivering financial results and building out our sales organization all the while developing our culture of employees as owners. This strategy is supported by our industry leading products, services and exceptional people.

Our commitment to succeed is demonstrated in our Q3 results and has established an even stronger foundation for continued success into the future. And while we focus day-to-day on delivering strong results, we continue to explore strategic opportunities where we could use our resources for improved shareholder value. We successfully navigated through a management transition with no negative fallout from employees, customers or suppliers. And in fact, our people have risen to a new challenge and welcome the newfound focus and commitment.

Turning to our results, we are very pleased to report both sales and earnings growth. For the third quarter, total revenues grew 6% year-over-year and up 50% from last quarter to $29 million. Our earnings per share returned to positive territory at $0.03 versus break-even last year and a loss of $0.46 in fiscal quarter two. And our cash from operations was off last year, primarily due to our unusually high solar collections and accounts payable aging.

With cash, equity and total assets relatively unchanged, we were able to reduce our debt 9% compared to the prior quarter. And I believe these results directly reflect our renewed focus on our sales organization, operational efficiency and financial discipline.

On our call in November you may recall, I discussed a few key initiatives to deliver sustainable improvement in our financial performance. We’ve made considerable progress, but there’s still more work to do. And I want to briefly touch on our execution to-date as these strategies remain a key ingredient for driving long-term shareholder value.

From an operational standpoint, we’ve realigned our workforce to leverage the talent within Orion to the right areas of the business with the right measures. We shifted the culture among managers and employees towards financial discipline and improving performance and we streamlined the order to ship process, reducing costs and delays.

On the sales expansion front, we recently added several new top sales talents for our direct sales force who have significant experience in the energy management space. We consolidated four different sales forces into one and began collocating our direct sales force within our integration partners in some markets where we overlap, demonstrating the continued value of this channel. And with the renewed focus on direct sales, the month of December was the first in several months where direct sales bookings were higher than our indirect sales.

Regarding new product development, we streamlined the process to be more effective, resulting in a record setting timeframe from concept to market launch with our ISON Class LED line. And in addition, the new InteLite control system version released in October included simplifications and more robust documentation enabling our sales people and integrators to sell and configure more easily leading to a triple-digit increase in unit sales compared to quarter two.

And lastly, we installed a new attitude of financial discipline and cost controls across the organization to include a companywide financial training and incentive initiatives focused on profits and quality.

As a technology leader in the industry, we continue to stay ahead of the competition by bringing new products and technology into the market. While high-intensity fluorescents remain strong, our LED products create a potentially new trajectory of growth for us as we aggressively produce and sell our LED products into markets where we dominate or are first in.

As a testament to this shift we recently announced the dynamic new suite of LED lighting products, integrating our unique thermal and optical technologies. These new products take full advantage of significant improvements in the performance and quality of LED components, growing market recognition of the affordability of LED and increased utility support.

Our recently announced ISON Class LED will leverage our InteLite control platform as well as our proprietary technologies, thermal and optical technologies. These products join the existing proven Orion LED offering, including our Cold Storage High Bay LED, all now branded as ISON.

The initial response from our customer base has been very favorable and we are already taking orders for these newer products. With this line, we will now penetrate markets, we have not historically played in such as hospitality, healthcare, general office buildings and educational institutions.

Now, let’s take a look at some key customer wins for Orion during the quarter. Our core fluorescent lighting platform remained steady and growing. First, beginning of a large national big box rollout opportunity through one of our integration partners.

Second, we landed a regional retail food store who chose Orion to handle exterior parking lot lighting as well as light pipes for all their future stores.

Third, we won a large retrofit at a commercial printer that included our intelligent lighting controls with expected energy savings well under the six figures. And fourth, we landed a multi-location win at a national discount retailer where the purchase orders were just signed in December.

Our fluorescent product platform will remain our primary run rate business as LED ramps up and will continue to have significant value in the marketplace. But by diversifying our product portfolio, we create multiple ways to increase value to our existing customers and attract new ones.

We also had strategic wins with some new customers in new markets with our LED offering during the quarter, which included a win at a large water park resort utilizing Orion’s first LED Wallpack retrofit and utilizing Orion’s first ambient temperature High Bay LED project in a large southern state manufacturer, where we were able to install substantially fewer Orion LED fixtures than were removed, while achieving the same required light levels.

And continued penetration in the market which we dominate the cold storage, food distribution where LED fixtures and controls generate dramatic savings even over high-intensity fluorescent. All of these installs were competitive and Orion prevailed in large part due to our superior controls, thermal and optical technologies and general sales capabilities.

Let me shift gear slightly and take a moment to talk about Orion’s position in the energy management industry. With the unique product portfolio that is ahead of our competition in terms of innovation, we are focused on expanding our already solid market position, which enjoys a strong and dedicated workforce, a dominant market share position in the commercial and industrial retrofit space, a geographic distribution across North America and recently establishing a footprint into Europe.

The expanded diversification of our strong national customer base with over 8,800 project installations, and technology leadership with the product reputation of quality and reliability. And adding to that strong market position is the diversity among our sales channels. Our national accounts represent 19% of our sales, our in-market direct sales channel is 25% and our wholesale market channel is 56%.

As a result of these changes we have made in our direct sales force, our sales opportunities are growing and we are moving these opportunities through the sales cycle more efficiently. While we recently had some great wins and strong product introductions, the uncertainty that persists throughout the global economy does give us some [pause] as we look into the next 12 months. That said, the demand in the energy management industry as a whole gives us confidence in the year ahead.

Some tailwinds we see across the industry include an aging power grid that is overburdened, proactive regulatory energy efficiency initiatives, an evolving LED technology and customer acceptance of that technology and a decline in the solar PV raw material prices.

Conversely relevant potential industry headwinds include limitations on customer spending, our customer’s appetite for long-term contracts, LED margins which will shrink as component costs and average selling price drop and less attractive federal solar incentives.

Our focus on our strategic initiatives and the increasing need for our energy solutions has set the foundation for sustained profit improvement throughout the coming year. And in the near term, we will focus on financial and operational discipline, we’ll create shareholder value through increased revenue and profits, we’ll enhance our more profitable direct sales team, streamline a more focused product development approach, we’ll maintain our commitment to innovation new products and new markets. And in the longer-term our strategy remains unchanged.

We’ll increase shareholder value through consistent growth in earnings per share, we’ll develop a talented and effective management team and workforce, we’ll innovate and be the market leader in performance and return on investment to our customers, we’ll increase capital investment in support of growth and margin expansion initiatives and we will sell premium products into strong markets where we dominate.

At this time, I’d like to turn the call over to Scott for his comments.

Scott Jensen

Thank you, John. Consistent with our prior earnings announcement we’ve provided a fair amount of content within the supplemental information document, which was posted to our website earlier this afternoon. Covering the third quarter and our year-to-date fiscal 2013 performance. Accordingly, I will not be walking you down the P&L on a line-by-line basis, but I do want to address some of the key areas. We’re very pleased with our results for the fiscal 2013 third quarter. Revenue of $29.1 million exceeded our prior year third quarter by 6%.

Additionally, we experienced improved gross margin and positive indications that our cost containment initiatives are beginning to contribute to our operating margins. Our profit of $0.03 per diluted share for the third quarter was improved over our prior year’s breakeven third quarter. Revenue for the third quarter included $9.6 million or approximately 33% of our total revenue from solar project revenues through our Engineered Systems segment. We continue to see our solar order backlog progress through the construction stages.

On the efficiency side our wholesale revenues accounted for 52% of total revenue during the quarter. This was down from the prior two quarter of 56% and 62% respectively. As John discussed earlier increasing our direct sales is a key part of our strategic initiatives moving forward bringing more profit to our bottom line.

For the year-to-date fiscal 2013, our wholesale contribution is 56% of total efficiency revenues. And from a long term perspective, we are targeting growing our mix of direct efficiency revenues towards 60% of overall efficiency revenues as we build out our direct sales workforce.

We did incur several unusual expenses during the third quarter. We continue to experience high legal expenses, which we do not consider part of our normal operations. For the third quarter, these legal expenses were approximately $400,000 and for fiscal 2013 year-to-date, we’re just over $700,000. These legal expenses relate to the SEC solar restatement inquiry, a whistleblower claim which has been investigated and dismissed and other legacy legal matters.

Additionally, during the third quarter, we took a non-cash charge of $517,000 to selling expenses related to the write-off of a customer note receivable. Excluding the impact of these unusual charges our operating income for the third quarter would have been $1.5 million in total and would have resulted in an incremental $0.04 of diluted earnings per share. We’re working as prudently as possible to put these legal expenses behind us but we do anticipate that they will continue for several more quarters.

Turning to the balance sheet we ended the third quarter with $13.1 million in cash and cash equivalents. There were no borrowings outstanding under our revolving credit facility as of December 31 which has availability of $13.3 million.

During the third quarter we successful executed on our cost containment initiatives identifying and implementing reductions that would generate future savings of over $5 million in annualized cost decreases. Furthermore, we continue to work towards implementing an additional $2 million in cost reduction opportunities. These additional initiatives will take some time to complete due to contractual obligations and further analysis required to effectively manage potential business disruption and risks.

As John mentioned earlier, the expansion of our direct sales force is a key component of our growth and profit initiatives for fiscal 2014. We currently anticipate increasing our sales and marketing expenses by approximately $1.7 million related to new sales hires. The net effect of the cost containment initiatives that I previously mentioned along with our anticipated head count additions and sales is anticipated to decrease overall operating expenses by $3.3 million annually.

Focusing on our cash flow we generated $2.3 million in cash from operations during the third quarter. Our inventory balances declined by $1 million from the September quarter as we implemented a tighter purchasing and product development controls. More significantly though, we reduced existing September 2012 inventory balances by $3.2 million. However, we increased inventories of our new product offerings during the third quarter by $2.2 million. These legacy purchase commitments related to components for our recently announced LED product lines and for the components for our basic motion InteLite platform that John discussed earlier.

Additionally, we resolved approximately $5 million of legacy accounts payable disputes during the third quarter. This resulted in $2 million of aged payables being paid during the third quarter and an additional $3 million in payables that was paid in early January.

During the third quarter we significantly reduced our capital expenditures when compared to our historical quarterly run rates for CapEx and we halted our share repurchase program. We continued to look to conserve cash as we execute on our plan to strengthen the balance sheet.

At this time, I’d like to turn the call back over to John for some final remarks.

John Scribante

Thanks, Scott. To conclude we are very pleased with our fiscal third results which is starting to reflect the benefit of the initiatives we put into place. We have more work to do, but we’re in a much better position to drive profitable growth going forward than we were three months ago. We believe we have the right strategy and the right people in place to extend our leadership position.

Finally, I’d just like to say that there is an incredible sense of energy around the company as we align our efforts with the same goal in mind and that is driving shareholder value. Thank you very much.

Scott Jensen

This concludes our prepared remarks. I would now like to turn the call over the operator for the question and answer portion of the call.

Question-and-Answer Session

Operator

(Operator Instructions) Please hold for our first questions. This will end our Q&A session, I’ll turn the call back to John Scribante. Please go ahead.

John Scribante

Okay, well thank you very much for attending our Q3 conference call. We look forward to talking to you again at the end of our fiscal year coming in May. Have a great day.

Operator

Ladies and gentlemen, thanks for participating in today’s program. This concludes the program. You may all disconnect.

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