David Collins - IR Mike Altschaefl - CEO Bill Hull - CFO.

Craig Irwin - ROTH Capital Eric Stein - Craig Hallum Amit Dayal - H.C. Wainwright Joseph Osha - JMP Securities.

Good day, ladies and gentlemen, and welcome to the Orion Energy's Fiscal 2018 Third Quarter 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 be given at that time. As a reminder, today’s conference is being recorded.

I would now like to turn the call over to David Collins. Sir, you may begin..

Good morning everyone, and thank you for joining Orion Energy Systems' third quarter conference call. Participating today are Orion's CEO, Mike Altschaefl; and CFO, Bill Hull. Mike will open today's call to discuss Orion's recent progress, business strategy, and goals, followed by Bill, who’ll provide some financial highlights.

And then we will open the call to questions. An archived replay of this call will be available later today in the Investor Relations section of Orion's corporate website. This call is taking place on Wednesday, February 7, 2018.

Remarks that follow, including answers to questions, include statements that the company believes to be forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally will include words such as believe, anticipate, expect, or words of similar import.

Likewise, 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 than anticipated.

Such risks include, among others, matters that the company has described in its press release issued this morning and in its filings with the Securities and Exchange Commission. Except as described in these filings, the company disclaims any obligation to update forward-looking statements. With that, I'll now turn the call over to Mike..

Thanks, David. Good morning, and thank you for joining today's call. Orion continue to make solid progress in the third quarter towards our goals of driving revenue growth, improving gross margins and streamlining operations by reducing ongoing overhead expenses.

As a provider of enterprise grade LED lighting and energy project solutions with the commitment to delivering unparalleled service and customer responsiveness Orion is focused on delivering substantial value to our customers.

The value proposition for LED lighting and energy project solutions and services is rooted in the following; one, a 50% or greater reduction in energy costs; two, a 50% to 80% improvement in the quantity of light; three, a one-to-four year payback period based on improved energy efficiency at Orion’s smart design; four, industry leading technology with the highest performing products including our Premium ISON Fixture, which has the highest illumine provide output in the market; and five, quality service focused on the best customer experience with unmatched product lead times and fully assembled products designed to reduce installation time and costs.

Orion’s third quarter revenue of $17.3 million represented a 12.3% sequential improvement over Q2 revenue of $15.4 million. We were also able to improve our gross margin to 29.6% in Q3 of 2018 from 23.5% in Q2 of 2018.

While Q3 revenue was below our goal and our year ago performance we feel the adjustments we’ve been making in our sales and marketing efforts are gaining traction and putting us in a solid position to advance the business.

On the expense side, we’ve taken steps to reduce our cost structure and enhance gross margins, which have right sized the business for our current revenue level.

Based on the strength we’re achieving in our national accounts business along with our agent driven distribution model, we believe Orion is solidly positioned for growth, as well as improving bottom-line performance.

Turning to our Q3 sales performance, we continue to execute contracts for two longstanding automotive customers to retrofit their facilities with energy efficient lighting solutions. We now anticipate approximately $12 million in revenue from these customers in fiscal 2018 and $14 million in fiscal 2019.

We also recorded approximately $1.4 million of revenue in Q3 2018 from long-term government related customers. On the product front, we continue to see solid demand for our highly efficient ISON product line from national accounts. We’re also seeing good demand for our light weight modular Harris Interior LED High Bay lighting products.

We developed this line to target customers with more price sensitive projects including new construction, seeking a high quality product that offers improved lighting, energy savings and a quick and affordable installation.

The modular design of these products makes them easily upgradable down the road should the customer decide to deploy advanced controls, more efficient light engines or other enhancements. Of course the plug and play upgrade potential of the Harris line also provides Orion with a range of potential future revenue opportunities.

Our sales efforts are focused on national accounts, which have formed the basis of our business since inception, along with the development of our agent driven distribution model. The agent model is designed to substantially expand our national reach to our broad base of sales opportunities that we were not previously able to effectively pursue.

We estimate that our prior approach touched approximately 13% of total LED lighting opportunities in our markets, whereas adding the agent driven distribution channel has expanded our reach to over 77% of LED lighting opportunities in North America.

Though it takes time to grow into a substantially larger footprint, we’re making progress in teaming up with strong channel partners. Our national accounts business continues to deliver solid results and has been the main driver to our sequential sales improvements the last two quarters.

Our agent driven distribution model is advancing more slowly than we had initially expected. In retrospect we underestimated the time it takes to build productive agent relationships particularly given the newness of our agency efforts compared to our national account effort where we have long established relationships some dating 10 or more years.

Nonetheless our agent driven distribution model contributed 45% of our third quarter product sales and we expect continued progress as we fine tune our support and management of this sales channel. At the close of the third quarter we had approximately 50 agency relationships.

We’re working to expand our productive agent base through a range of initiatives including product education, training and support as well as sales incentives.

Part of the process is simply spending more time with agents so that they can become more comfortable with Orion, our products and gain first step experience with our service and responsiveness. In any business, strong relationships take time to develop and we are committed to continuing investment in this effort to expand our sales reach.

We are also revising our business relationships with agents, when it make sense. As indicated in today's release, after careful evaluation, we have identified additional cost reductions including opting not to renew the lease of our Chicago office and a related workforce reduction.

In total, we expect to eliminate an additional $1.5 million in annual expenses on top of the $4 million to $4.5 million in annual savings from actions already implemented yielding approximately $6 million in lower costs each year.

Given our solid financial position, operational discipline and confidence that our sales execution will steadily improve going forward, we believe Orion is well positioned to deliver improved financial results.

Moving to our fiscal 2018 outlook, based on our Q3 2018 performance we now expect our Q4 2018 revenue to be roughly in line with the third quarter, which should imply total fiscal 2018 revenue to be approximately $62 million, compared to our earlier expectation of approximately $70 million.

We previously stated our goal of achieving 30% gross margins and breakeven EBITDA before non-recurring items by Q4 of 2018. Our Q3 2018 results demonstrated our progress towards these goals through an improvement in gross margins and a significant reduction in our sequential quarterly negative EBITDA.

Due to our reduction in expected revenues in Q4 caused by industry softness and other factors, we now hope to reach these goals by Q2 of fiscal 2019.

While our revenue ramp is progressing more slowly than anticipated, we do see a range of factors in our national accounts, in our agent driven distribution model that support our positive outlook for fiscal 2019. Finally, I did want to comment regarding our NASDAQ listing status.

As you may know, in December we announced that Orion have been given 180 days until May 29, 2018 to regain compliance with the NASDAQ $1 minimum closing bid price rule. Given anticipated improvements in the business, we expect our share price should begin to reflect this progress and cure the minimum bid price requirement prior to May 29, 2018.

If for some reason the bid price requirement has not been cured within the given timeframe, Orion would request an extension with NASDAQ and seek an additional 180 day period. While we have no plans to implement the reverse stock split at this time, we would serious consider it should it be the only certain way to retain our NASDAQ listing status.

For now, we still have over three months in which to regain compliance through normal trading activity. With that, I will turn the call over to Bill to provide more detail on the financials.

Bill?.

Thanks, Mike. I will focus my remarks on providing some additional metrics and perspective on our financial performance, balance sheet and our outlook. Our Q3 revenue rose 12.3% sequentially to $17.3 million versus Q2 revenue of $15.4 million, but was $3.3 million lower than in Q3 2017.

LED product revenue rose to $14.5 million or 91% of total lighting product revenue, compared to $13.9 million or 90% of total lighting product revenue in Q2 2018. However LED product revenue declined compared to $15.5 million in Q3 2017.

A significant portion of the year-over-year total revenue decrease is related to fluorescent lighting product sales, which declined by $2.1 million in Q3 2018 versus last year. Orion has focused its effort on LED lighting products, though we still provide certain fluorescent products based on customer request.

However that demand is very limited given the ROI of LED solutions. Gross margin also continue to improve on a sequential basis to 29.6% in Q3 2018, compared to 23.5% in Q2 2018 and 21.6% in Q1 of 2018, principally due to higher revenues and better overhead absorption along with cost management efforts.

Q3 2018 gross margin was slightly below the 29.9% achieved in Q3 2017, as margin improvement progress was not enough to completely offset higher overhead absorption achieved in the year ago period, on higher revenue. Total operating expenses decreased by approximately $700,000 to $6.5 million in Q3 compared to $7.2 million in Q3 of fiscal 2017.

We expect approximately $250,000 of nonrecurring charges to be recorded primarily in Q4 of 2017 with the implementation of the additional $1.5 million in annual cost reductions. General and administrative expenses decreased to $2.9 million in Q3 compared to $3.5 million in Q3 of fiscal 2017.

Orion generated $1.6 million of positive cash from operating activities in Q3 of fiscal 2018, As the net loss was more than offset by active working capital management efforts.

At the close of Q3, Orion had $3.6 million in long-term borrowings under our revolving credit facility, compared to $3.1 million at the close of Q2 2018 and $6.6 million at the fiscal 2017 year-end.

We ended the quarter with $10.6 million in cash and we believe our working capital position combined with potential borrowings under our revolving credit facility should provide Orion with sufficient financial resources for the foreseeable future.

Again as Mike mentioned, we expect the full benefit of our cost reduction efforts to be substantially reflected beginning in our fiscal 2019 and our current estimate for total annual savings has increased to approximately $6 million, up from $4 million to $4.5 million previously estimated.

As noted in our press release, we are also pleased with the favorable resolution of a lawsuit brought against the company by its founding CEO. And with that, let's open the call to your questions.

Operator?.

Yes, sir. [Operator Instructions] And our first question will come from the line of Craig Irwin from Roth Capital. You may begin..

Good morning, and thanks for taking my questions. So you are pretty transparent or you have been for the last few quarters about what you expect from your two major automotive OEM customers, obviously both of them have been doing business with you for quite a while.

I noticed that you have a pretty healthy forecast for next fiscal year, this year as well healthy, but there was a minor sort of step down there. Can you maybe share with us what require the adjustment in the forecast for this year.

Is it Orion related or is this maybe some accommodation on the customer side, and maybe even an external supplier?.

Sure, Craig. I think what you are referring to is we had previously said we thought, we’d be at about $12.5 million to $12.6 million of revenue from the automotive customers for fiscal 2018, we bumped that down to $12 million at this point in time.

It is entirely been caused by some of the pacing with those automotive customers, while we have certain purchase orders in place and we have known business coming down the pipe with them, we are times are at the need to pace with their ability to have us in the plants, working on the product.

And also with respect to one of them we are usually using the labor of that automotive customer. And so as they have availability and ability to have us in the plants so it can impact it. For example, as they get busier at times, sometimes the only day you can work in the plants might be on Sunday or Saturdays and Sundays.

So it's not any loss business it’s simply some stuff that has split out a little bit perhaps into the next quarter and that's why we downgraded it about $0.5 million. .

Okay, excellent. Second thing, I wanted to ask one of the things that you attributed your margin improvement to was improved sourcing during the quarter, understand last number of weeks, you let go your head of sourcing that is someone you would absolutely raise the doubt to investments, someone who is promoted twice in the last year.

Can you help us understand really the thought process at the company to continue making these adjustments when you have been pretty emphatic about the ability to achieve growth over the next number of quarters and can you may be complete that for us?.

Sure, I will Craig. As we mentioned we did make additional cost reductions, recently including some headcount reductions included in that were someone who was fairly seen here in the sourcing side of our business.

Good person, did great work for us, we felt given where we were at with our company the sourcing we had in place, the other people involved in the sourcing decisions and some of our senior executives were also directly involved in the sourcing aspects, as well as relationship with the suppliers that we were able to continue those efforts going forward.

So we don’t see it having a significant impact on us going forward and our ability to continue to source product and or find cost reductions through sourcing. And it was a decision made in terms of structuring the business for the size and where we are at as a company today..

Thank you. And then another important question, so your shareholders found Bill to be someone that inspires confidence that those sound judgment at Orion let’s just call it turbulence the last couple of years something that I think Bill has maybe been able to with a strong hand in helping investors understand the longer term vision.

And the decision not to renew the lease for Chicago something that weighs flags for a bunch of people given that Bill predominantly worked out of this, I was hoping maybe you could say something about your work plans going forward, Bill. I know lots of people work remotely as do I.

Can you maybe describe sort of the thought process and the importance of the Chicago office and really whether or not it’s relevant for Orion going forward?.

Craig let me cover in two parts, I’ll cover the first half, Bill will cover the second half of your question. First of all we felt it was a natural time to look at the Chicago situation because our lease was expiring at the end of May. And so the ability to exit that situation without any incremental costs.

A significant portion of the headcount reductions were with respect to that location. We had some people who we departed, but we also have certain individuals in Chicago that will be working remotely for us going forward.

And we felt that the resources we had there were either moveable, could work remotely or we have those functions were covered in other locations. I’ll allow Bill to talk about his personal situation..

Well, hey Craig. Thanks for all the complements I appreciate that. So, yes, I mean that was a tough decision to make on Chicago, we think it’s for the right reasons it was the decision we had to make. As far as me, yes, I’ll be working out of the office up in Wisconsin. So I'm going to relocate up there.

I mean, we’ve been very successful in turning this company round, getting the start up off the ground and I just want to be part of taking it to wherever we could take it to. So hope that answers your question, but count me in..

Thank you. And our next question comes from the line of Eric Stein from Craig Hallum. You may begin..

Hi Mike, hi Bill..

Hey, good morning, Eric..

Good morning.

Maybe just a few questions on the agent channel and I know it’s something that has taken longer to come together, but in terms of I think right now you’ve got 50 I think that’s the number that’s pretty much been unchanged and that the total number of agents in that 700 range are you confident that that’s the right number that that is something that also can be a limiting factor or is this really about completely just making sure that you get who you have up to speed?.

No, great question, the quantity of agencies is not a limiting factor, we have substantial coverage of North America with the agencies that we currently have in place. So as we go forward it is about working closely with those agencies to make them as productive as we can to support them, help them build our business together.

And hopefully do that with as many of the agents as we can and making sure that we have the resource in place to do that right now. Part of that 50 agencies, actually 36 at this point have been worthless for more than 12 months.

And so that’s a positive indication that we’re regaining those agencies and getting them up to speed and we think we’ll see some benefits from that. So we covered from a territory standpoint I would expected the number of agencies to stay around 50 number level..

Okay. And then another thing, I know that with those agencies they cover multiple products, because I mean, that's what the market requires. I mean, is there any -- and maybe this is part of getting them up to speed.

But are there things that you can do so that Orion's products are viewed as the primary source or the primary product versus being a second or third source or option?.

Sure, you are correct. In many cases, those agencies have other lighting lines. And our job is to support them with our regional sales managers, as well as additional technical support from the company to one, make sure they really understand our product and what it can bring to their customers.

We support them in the field from a sales effort standpoint. We provide more leads to them including past customers we had for them. If you step back, our job is to make the life of the agency as easy as we can to interact with their customers and interact with Orion to sell products.

And then finally what we have found competitively, while they at times will place business with us is our ability to provide a high quality product on time to their customers. And the nimbleness we believe is one of the key advantages that we have over some of the other lighting products that they carry..

Okay, thanks for that color. Maybe last one for me and just more of a bookkeeping things. I know that in the first half you had some delayed projects, weather related Texas and Florida. I'm just curious, how many of those have been completed to-date.

Are these things or projects that you expect to be completed in fiscal 2018?.

Yes, any weather related issues that we had will be fully completed by the end of the fiscal year. And fortunately we were impacted modestly on the weather issues..

Thank you. And our next question comes from the line of Amit Dayal from H.C. Wainwright. You may begin. .

Good morning, Mike, Bill. .

Good morning Amit. .

Just one question on the sequential revenue improvements we're seeing definitely a good sign, but still year-over-year declines. Can you help us understand where we may have lost ground relative to last year, is this industry softness? Any granularity on this would really be helpful..

Sure. Because we are a project orientated business, so we are always selling new projects and new solutions. And so we can't simply go back and say last year, last quarter we sold X-to-X customers and this year it was down, and why was it down.

We do think there has been some softness in the industry Amit, as we hear what other industry players are commenting on in the marketplace. We've got to fight through that and get our share of the business.

We also have had some very nice opportunities, with some large national accounts that often take a little longer than you expect to come to fruition. And so those continue to work and be in progress. But I really won’t point it to any couple of things that would significantly impact why we had an annual decline from the last year.

So we’re kind of focused little more sequentially of saying we're at where we are at, and how do we build going forward and keep improving on a quarterly-to-quarterly basis..

Got it. And in terms of your two large automotive customers, they continue to come through for you guys.

How much more room for growth within these two customers, do you have and where do you see these relationships continuing to sort of evolve?.

Fortunately, as long as we keep doing our job, we see a long runway to both of those customers. I was with one of the two customers last week, meeting with the kickoff for their calendar 2018 and the projects that they have in the pipeline.

And we had a great conversation and they have multiple plans that still need to be retrofitted with LED lighting. And frankly these companies are so big by the time they get through retrofitting the plans they have. They probably will need to upgrade the early LED retrofits to higher level LEDs because of the improvements that have coming into play.

And in fact in certain situations we are already on the second version of LED implementations in their facilities because the energy savings just make sense. So we think we still have a good path in front of us for those two customers.

We also are making some progress with some other automotive customers that we would expect to achieve some business within fiscal 2019..

Thank you and our next question comes the line of Joseph Osha from JMP Securities. You may begin..

Thanks, that’s a bit of a mouthful. Good morning, guys. .

Good morning..

A couple of questions. First really a macro one, you’re talking about getting to 30% gross margin you are almost there. And you're going to be flat this quarter and then typically the business gets stronger over the summer and then rolls off again.

I'm just wondering it seems as if you're talking about getting to breakeven sort of during the strongest part of the year and then the business generally sort of tends to roll off again later in the year.

And I'm just wondering how you square that circle, is what I am saying?.

Sure, couple of comments. First, as you said, we are very close to our interim goal of a 30% gross margin we are very close this quarter.

Part of the economics that we look forward to is that we do know that as we can incrementally increase revenues, we achieve a nice bump in costs by absorbing more of our overhead costs from having a U.S.-based manufacturing operation.

So we were encouraged to get close to 30% margins on the revenues that we had this quarter and as revenues increase that will be helpful to us. The second half of your question, we currently would not expect to drift backwards as we go through fiscal 2019.

We’re not at the point yet until next call to give more color on fiscal 2019, but we don't anticipate just jumping above 30% and then falling back below..

Okay.

Yes, that was really more my question there is some seasonality to this business as you know, perhaps I didn’t state the question well I just was trying to understand whether you might blip into profitability during the -- the summer of 2018, but then fall back again as is the business weaken seasonally towards the end of the year?.

Yes, I think -- Joe, this is Bill. So just thinking about -- it's not really a function of the raw gross margins, we think we have done a great job in managing that, but it is more volume related and overhead absorption like I mentioned earlier. So that's where we’re focused on..

Thank you. [Operator instructions] Our next question comes from the line of George Gaspar. you may begin..

Thank you. Good morning, everyone..

Good morning, George..

Good morning, George..

I like to do a little follow up on the Chicago situation, where does this leave the R&D effort that was channeled into Chicago because it was more attractive pick up engineering town I believe the specialist in that.

Could you describe what you're doing on all that?.

You bet, George. We don't feel like we’re taking any steps backwards on that front, we actually over last year most of our engineering talent is focused in a combination of our Jacksonville Florida location and our Manitowoc location.

And the -- we had as asked earlier by Craig we did have a sourcing person located in Chicago, which we’re able to cover with the other people we have in the two locations. So there were not reductions in the engineering talent or the R&D talent as part of the past cost reductions and we feel covered in the other two locations..

Okay.

In terms of total if you would possibly share, this the number of personnel in total that were in Chicago and how many of those personnel will end up being with Orion and moving to Manitowoc, I assume?.

Well first of all, before I turn over to Bill the reductions were not entirely in our Chicago location, we had some other changes of personnel in all locations and some remote people also. The total headcount reduction was approximately eight people. And I'll let Bill give a little bit of flavor on Chicago..

Yes, so what we’ll have left in the Chicago area working remotely is about five people, five, six..

Okay, all right.

Next question would be on further developments in your R&D in the quarter, was there anything special that you improved upon in terms of your product line that you’re on the edge of bringing out going forward here that would give you some extra boost?.

There have been and the one I’ll focus on today is as you may recall we had talked previously about a Harris line, which is our entry level somewhat lower priced line of products.

And we had a Patriot line of linear four foot product that we came out with back in August and then updated in October it’s been very favorably received, particularly in the agent channel who are working often with distributors and contractors.

And so we’re expanding that line somewhat, we’re bringing out an 8 foot of that same product literally brought out last week. And then some other different lumen packages for that Harris Patriot line. So we still expect that that lines could have some very nice possibilities for us going forward.

And then secondly we have continued to evolve some of our controls and expanded our reach working with other companies in the controls area to either integrate them or have those as add-ons to our fixtures.

And also exploring relationships with some large OEMs that are developing some proprietary controls that we can work with them to make sure they are -- can be integrated with our products. So we still have some very exciting R&D projects on the table things that we are rolling out currently and have on the roadmap for the next six months..

Thank you. And I'm showing no further questions at this time. I would now like to turn the call back to Mr. Altschaefl for closing remarks..

Thank you, operator and thank you all for joining us on today’s call. In closing, I firmly believe that Orion offers compelling industry leading enterprise, great LED lighting and energy project solutions with exceptional customer service to a growing base of customers that includes nearly 40% of the Fortune 500.

Building off our solid base of national accounts business we are pursuing growth through our agent driven distribution model, while also working to optimize opportunities from our national account base.

By providing substantially improved illumination and a clear ROI from upgrading to more efficient LED lighting solutions all wrapped in industry leading customer service and responsiveness we see substantial long-term potential to grow our business with the enormous potential market for LED lighting upgrades.

We have right sized our cost structure and improved our gross margins in an effort to deliver improved bottom-line performance in a near-term path to profitability.

By executing on this plan we believe we will create substantial value for our shareholders, as investors gain confidence in both our revenue potential and our ability to become profitable. Thank you for joining us on today’s call..

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day..