Good day, ladies and gentlemen, and welcome to the Orion Energy's Fiscal 2020 First Quarter Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, today's conference is being recorded.

I'd now like to introduce -- like to turn the call over to Bill Jones. Sir, you may begin..

Good morning and thank you for joining Orion Energy's Systems first quarter call. Orion's CEO, Mike Altschaefl will open today's call with some first quarter highlights, followed by discussion of the company's business strategy and its objective and a review of Orion's financial goals for the full fiscal year.

Orion's CFO, Bill Hull will touch on a few additional 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 Web site. This call is taking place on Monday, August 5, 2019.

Remarks that follow, and 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. And with that, I'll turn the call over to Mike..

Thanks, Bill. Good morning and thank you for joining our call today. Having completed my second year as CEO in May, I'm very proud of what the Orion team has accomplished and focusing our business and our key areas of differentiation, while at the same time substantially streamlining our cost structure and maintaining strict cost discipline.

These efforts have positioned Orion to achieve a substantial improvement in our top and bottom-line results in fiscal 2020. We are very pleased to lead off the year not only with record first quarter revenue, but also record net income, EPS, and EBITDA.

The strength of our first quarter results reflects the progress we have made in building out large scale opportunities within our major national accounts channel.

We have built a turnkey suite of LED lighting and controls retrofits services that differentiates us from power larger competitors and physicians at Orion to compete for major national projects, such as the approximate $100 million in project commitments we secured from one major national customer for expected completion in fiscal 2020.

Our turnkey LED lighting and controls retrofit solutions begin with site assessments and initial energy audits at the facilities of our customers to accurately assess their existing lighting in their future needs for lighting and controls. From there, we work with our customers to determine solutions based on their particular needs and requirements.

Our R&D team is able to develop and rapidly prototype customized LED lighting fixtures, specifically designed for the customer, along with customer-specific recommendations for third-party control systems, which we integrate into the full lighting solution.

We also conduct a comprehensive utility rebate analysis on a location-by-location basis, and source possible project financing options the customer can explore. Once the system requirements are established, we manufacture our state-of-the-art high efficiency LED fixtures in our U.S.

manufacturing facility in Wisconsin, enabling Orion to deliver very high quality, while also adhering to strict production and delivery schedules, typically shipping within 10 days following an order.

Finally, Orion leads and fully manages the installation process at customer locations across the country leveraging our construction management services, including on-site coordinators to oversee the local installation teams.

Throughout this process, Orion is committed to achieving the highest levels of quality and customer service disciplines that complete our turnkey solution.

Our capacity to serve as a one source solution for LED lighting and controls retrofit projects streamlines and otherwise complex and cumbersome process down to just one point of contact, substantially enhancing and simplifying all aspects of lighting and controls procurement for our customers.

Leveraging our turnkey capabilities to build out an even more robust base of national account business is a key component of Orion's growth strategy. We are actively working to replicate our success with additional national account customers. We are in various stages of dialog with a number of other opportunities.

Additionally, we continue to advance our business opportunities and key sectors, including automotive and the public sector, which have been strong sources of recurring business over the last few years. We expect customers in these segments to again represent a meaningful component of our fiscal 2020 revenue.

We have also invested in expanding our sales reach and senior sales talent by recently hiring two new senior sales executives. Both of these professionals possess fast industry experience, strong customer relationships, and excellent track records.

We also continue to support the growth of our agent-driven distribution channel, and our Energy Service Company or ESCO channel. Our agent-driven distribution channel was challenged in Q1 with sales declining compared to the same period a year ago.

The channel caters through a more price-driven customer base, and to better serve this market we're developing additional lower cost fixtures that we believe will gain solid differentiation and traction.

New products include our new Lumen Select LED fixtures with a range of lumen packages that can be set in the field, providing greater efficiency and flexibility for both electrical contractors and their customers.

We've also developed a line of fixtures that are upgradeable to higher power lumen packages or to Internet of Things controls and monitoring capabilities.

We believe the option to upgrade a fixture down the road will continue to be a compelling feature for customers who need to make decisions on price today, but prefer to have the optionality of upgrading down the road.

Beyond product development, we also continue to invest resources to support and train our agents to help them to be more successful in educating our customers on the total value proposition of the Orion products. We continue to be confident that we can be successful in this channel.

In the first quarter, our ESCO channel achieved solid revenue improvement from the year ago period. We believe this improved performance reflects the benefits of our strategy to fully engage in our historically strong ESCO relationships.

What differentiates ESCO from other channels is their performance-based contracting methodology, which sometimes dictates that their compensation is directly linked to the actual energy savings they've realized for their customers.

This business orientation motivates ESCO to deploy lighting solutions that deliver the strongest performance in terms of energy efficiency. Our goal is to support our ESCO partners by developing LED lighting and controls solutions designed for their specific project needs with respect to energy efficiency, features, and functionality.

Government and industry estimates suggest that the adoption of LED lighting solutions remains only about 15% to 20% in our primary markets. So, while it may take some time to realize the full benefits of our market development efforts, we feel very confident in the growth potential of all of our segments.

Orion is maintaining its prior fiscal 2020 revenue goal of $135 million to $145 million, representing growth of more than 100% over fiscal 2019. While the timing of revenue remains highly dependent on customer schedules, we currently anticipate revenue in the first-half of fiscal 2020 to be higher than revenue in the second-half of fiscal 2020.

We are also reiterating expectations of achieving positive net income and diluted EPS, as well as an EBITDA margin of at least 10% for fiscal 2020. And with that, I will turn the call over to Bill, to provide some detail on our Q1 financials.

Bill?.

Thanks, Mike. Orion's fiscal Q1 2020 revenue rose 207% to $42.4 million compared to $13.8 million in Q1 of 2019, primarily due to increased sales of our turnkey LED retrofit solutions to major national account customer.

The customer has awarded Orion $110 million in potential contracts, approximately $100 million of which we expect to record during fiscal 2020. Gross margin was 24.3% in Q1 of 2020, compared to 25% in Q1 of 2019, and 19.5% sequentially in Q4 of 2019.

The Q1 margin reflects an improvement from Q4, but declined slightly versus a year ago, principally due to higher mix of services revenue and increased large national account activity, partially offset by ongoing efforts to enhance manufacturing efficiencies.

Despite the revenue increase, Orion was able to hold total operating expenses flat at $6.1 million in Q1 of 2020 compared with Q1 of 2019, as slightly lower G&A costs were offset by higher sales and marketing expenses.

Reflecting higher revenue and gross profit complemented by low operating expenses, Orion's Q1, 2020 net income rose to $4 million or $0.13 per diluted share versus a net loss of $2.7 million or a loss of $0.9 per basic share in Q1 of 2019.

Similarly, Orion's Q1, 2020 EBITDA increased to $4.6 million compared to an EBITDA loss of $2.1 million in Q1 of 2019.

Turning to our cash flow and balance sheet, Orion generated $2 million of cash from operating activities in Q1 of 2020 versus $100,000 in Q1 of 2019, as higher net income was partially offset by working capital needed to support increased business activity. Likewise, our balance sheet and capital metrics also improved in the first quarter.

Cash and cash equivalents increased to $10.2 million at the close of Q1, 2020 compared to $8.7 million at year end March 31, 2019. Net working capital increased to $17.9 million in Q1 of 2020, up from $14 million in Q4 of 2019. And shareholders equity increased to $22.1 million at June 30, 2019, compared to $18 million at year end March 31st 2019.

Outstanding debt was $9.1 million at June 30, 2019 consisting primarily of borrowings under our revolving credit facility versus $9.4 million at March 31. As of June 30, we had additional unused borrowing availability of $11 million on our credit facility.

We continue to believe that our improving cash position combined with credit available under our revolving facility and anticipated future cash flows provided sufficient resources on our business going forward. With that, let's open the call for your questions.

Operator?.

Thank you. [Operator Instructions] And our first question is going to come from Craig Irwin from ROTH Capital Partners. Your line is now open..

Good morning, and thanks for taking my questions..

Good morning, Craig..

So the first thing I wanted to ask is that the total available business out of your national accounts customer that's driving things right now.

Can you maybe share with us if there's potential for similar material orders out of this customer over the course of the next year? Do you have more than half of their business, their total available business booked already, or is there still substantial room for additional orders over the next year or two?.

Sure. All right, we continue to feel there is additional opportunity with this particular customer going forward into fiscal 2021. We at this time have the most visibility with respect to the contract that we signed with them for this fiscal 2020.

There also are other areas within their business that we think provide opportunities for us, Craig, and so we're looking at those also.

And so, while the magnitude is not going to be determined for some period of time yet until we have further conversations with them about what happens after our fiscal 2020, we are optimistic about this digital business with them as well as other customers that might utilize some of the same technology and services that we've provided for this customer..

Great, thank you for that. So, one of the notable items on your P&L this quarter is the substantial uplift quarter-to-quarter in gross margins going from 19% to 26.3% sequentially. I'm going to guess that there're some substantial efficiencies from your major national accounts customer that allowed that to happen.

Maybe can you walk us through some of the larger items that drove that that improvement? Utilization is clearly a factor, but some of the other things that you've been doing operationally to help drive that?.

Sure. Thanks, Craig. You hit you know, one of the nails on the head.

Certainly we've talked in the past that we have our assembly and manufacturing facility located in Wisconsin, which carries certain fixed costs to it, and we were -- it's been very helpful to have additional volume that goes through that facility, it helps to have some additional utilization of capacity.

And so, that's been somewhat of the impact of the positive increment in margins on a sequential quarterly basis. We also continue to look all the time at what we can do from a cost standpoint, and work very hard to look at our products, and continue to make technical innovations to those to make sure that the costs are as low as possible.

So I would say volume has had a very big impact. Secondly, we worked very hard in our supply chain and make sure we are doing the best job we can to minimize the cost of the inputs also..

Yes. If I could, Craig, just to add a little bit more color, so if you think about at this level of production, we're able to consistently run products, so we don't have to stop and start.

So, set-up times, starting and stopping cost, and we just get more efficient with people and the product lines and we continue to find better ways to manufacture the product cheaper, less time as we have something like that.

And also as Mike said, with the economics of working with suppliers and realizing contracts like this really -- they give you the opportunity to improve your pricing on a product..

Great, thank you for that. And then I also wanted to ask about the balance sheet. So, well, I guess cash flow you did have a couple of million dollars in cash flow this quarter, healthy, but it looks like the receivables balance has gone up by close to $18 million over the last two quarters.

You did say that seasonally we'd be looking sort of a stronger first-half than second-half or at least that's what it looks like at the moment.

You know, when would you expect the receivables, the cash and receivables to probably be released on to the balance sheet? I mean is this something that we have to wait until maybe the third or fourth quarter, or do you expect the cash flow to improve in the second quarter?.

Well, so as far as the receivables, yes, they've gone up. It's really just tied in with the business, Craig, and maybe we have a couple more days in day sales outstanding, but we're still below 50 days. So you can tell from sales, we have good collections and pretty much within standard payment terms.

So I think you'll see that come into the normal course of business on the receivable side.

Hope that answers your question?.

Thank you. Our next question comes from Eric Stine from Craig-Hallum. Your line is now open..

Hi, Mike; hey, Bill..

Good morning, Eric..

Hey, so just wanted to go back to the national account, the big one you're working through this year. I mean, just to confirm, I mean, this is business, sounds like there's additional business to be had provided that you execute well. With what you're doing right now, you would expect to get follow on work.

And then I guess as a follow-up to that, you talked about the first-half, second-half mix dynamic there; are you thinking about follow-on work if you are successful being more of a fiscal 2021 event or do you think that, I mean, as -- are we at the time in the year where it's possible that you could get some work that hits I guess not included in guidance at this point but would hit in fiscal 2020?.

Little bit of longer answer, Eric. I would have to say it could be somewhat both. So, given the particular situation, timing of the contracts and fiscal years that if there is additional follow on business with this particular customer, some of that could hit in our fiscal 2020.

At the same time, we're always cautious to tell people that while we're very pleased with the progress you're making on this project and we believe it's going very-very well and we've got a substantial amount yet to do in this fiscal year.

At times things can happen and customers might push things back somewhat for particular business reasons they may have. So, we continue to believe that the contract we've announced will most likely get during our fiscal 2020. We believe there's opportunity beyond that and that follow-on opportunity some of which could fall in the fiscal 2020.

But we're primarily focused on building our opportunities and additional business for fiscal 2021..

Got it, okay. And then maybe just more broadly with national accounts. I'm curious if this large contract win, if that's had any impact with other customers? And I know in the past you've talked about, I think it's 40% of your businesses is Fortune 500.

You know, just curious, when you think about the pipeline in fiscal 2021 and beyond, maybe how you think about penetration with those customers? I would assume it's a pretty small percentage of their footprint at this point and hopefully grows from there..

We have found in the past that when you have success on a contract like this, it does help build additional opportunities for us in the business.

In addition, given the magnitude of this, it really has helped us to refine and fully demonstrate our ability to carry out a national rollout, doing multiple locations on a weekly basis across the country and improving our systems and processes to do that, Eric. And so, it gives us another stronger credential.

We feel we had very strong credential already. And in the past, we have done some very substantial projects with national accounts across the country. So we feel good about it. We think it's positive and it helps to bring additional opportunities. We also think we're seeing some reasonable momentum with larger multi-site accounts in the U.S.

that they are moving towards more capital with respect to LED solutions from an energy cost saving standpoint. So we think it points positively for us going forward..

Thank you..

Thank, Eric..

Thank you. And our next question comes from Amit Dayal from H.C. Wainwright. Your line is now open..

Thank you. Good morning, Mike. Good morning, Bill..

Hi, Amit..

Good morning, Amit..

Just looking to, you know, the growth on the services side of the business. It's not been talked about a lot, but there's been a big change or little to say a year ago and you were doing 7% on the service side and you are up to almost 24% from service revenues.

Can you give us a little color on what's happening over there, how it's impacting margins, and you know, how this should trend going forward?.

Well, the biggest reason for the increase in the services has been the fact that the particular large national account that we have talked about includes a significant amount of services related to it as we manage all of the turnkey needs of that customer installation, et cetera. So that is a driver for that.

From a margin standpoint, we typically have somewhat lower margins on services than we do on our product margins and so it can have somewhat of an impact. But again, the volume aspect helps us from a fixed cost standpoint to help mitigate that to a certain extent..

And I believe that, you know, with the turnkey type business that we have here that, if we secure more projects like this, this is our plan. Then you can see services, you know, remain at more or less this level..

Understood. And Mike, just in your prepared sort of the press release, you're calling this a transformational year and the results are reflecting that. And does the statement imply that further periods or the future period sorry, will be supported by a significantly large orders like your recent follow on, in what context is this transformational.

Just wanted to see what color you can provide on that thing?.

I mean, we feel it's transformational because we think we -- going back a couple of years, we focused very heavily on cost structure and cost disciplines and got that in shape during our fiscal 2018. We started focusing on revenues right from the beginning, but sometimes it takes a little bit longer to come to flourish.

And so we were pleased that going into our fiscal 2020, we had the revenue picture in better site also for us to have both things come together both revenues and a better cost structure.

We believe that, the second thing is we think that our single source of accountability, turnkey capabilities is a very key differentiator for us in the marketplace, compared to some of our competitors being able to bring together both our product design and our services to handle the installation process.

So we are have continued to increase our focus and our resources in making that continue to be a significant part of our business. So going forward, we've always had larger national accounts. We've talked in the past.

So we've had a very large business in the automotive sector as well as the public sector, and we will continue to do that going forward, but we also feel that probably the biggest opportunities for us going forward are continuing to land national accounts where they need the breath and services that we can bring to the table.

So we're trying to we are working at building that pipeline, so that we can continue to deliver those things that we move into future fiscal years..

Understood.

And just one last one on the lower cost products that you are trying to put into the agency channel, when are these products potentially going to launch? Is it fiscal 2021? Or is this potentially happening this year?.

No, they will be launching in fiscal 2020. We just recently launched the lumen select product that I talked about a little bit which is a field adjustable lumen package. We have additional product that is being launched with our customer base later this week and we will have additional product rollouts as we head throughout this year.

So the product launches that I've talked about are targeted for fiscal 2020..

Understood. Thank you. So that's all I have..

Thanks, Amit..

Thank you. [Operator Instructions] Our next question comes from Marc Wiesenberger from B. Riley FBR. Your line is now open..

Thank you. Good morning. In your prepared remarks….

Good morning, Marc..

-- you did highlight that you're working to finalize the scope for existing customers.

If you were to land another large account, do you face any capacity constraints that in the back half of the year, they'll prevent you from doing work for them?.

No, we don't believe that we would. For us to continue to ramp up what we primarily need is some physical space which we have access to and we need to add people talent as we might grow. But fortunately for us, it does not require significant amount of CapEx in order to grow.

And currently in our facility that we have, we are running primarily one shift for most of the operation, sometimes some extended hours. And so we feel we have significant capacity availability to grow from where we are at today..

Understood, thank you.

Can you talk about maybe some inflationary pressures you're seeing in terms of raw materials and maybe your ability to pass that on?.

We actually have seen prices from a component standpoint and input standpoint, somewhat moderate during this year, after some more significant increases during our fiscal 2019.

And in addition, as we grow our volume, it put us in a better position to work with our suppliers to obtain some better pricing or better technology for the same pricing because of the volume that we can bring to them. So we have not had a significant impact.

In addition, the tariffs that have been previously announced in our industry that are now at 25% for finished products coming into the country and certain components, we've been able to manage that through both our supply chain and where we are sourcing, as well as the fact that we do not source as much product as really most of our competitors have.

And as an example, we recently issued our newer price list for some of our customer base, where we were able to hold prices steady from where they had been and expect to be able to hold them steady throughout this calendar year. So we think we're in a pretty good place from a supply chain standpoint..

Understood.

And just one more from me, with regards to your ESCO clients, are you seeing any increase traction around them offering lighting as a service where the ESCO's are actually owning the fixtures and then their customers are kind of making monthly payments which is maybe a shift from their initial models or their - that they more heavily were on before?.

Yes, we are seeing more activity in that area with our ESCO customers and we're very supportive of that and have been able to help them in some respects also, so we also can help to introduce to financing sources.

We were also seeing is that there appears to be a significant amount of capital available in the industry to finance lighting as a service projects. So, yes, we are seeing more momentum and activity in that area..

Great, thank you very much..

Thank you, Marc..

Thank you. Our next question comes from George Gaspar [ph], a private investor. Your line is now open..

Thank you. Good morning and very wonderful report that you have here. I'd like to extend a little bit on the technology side. This Internet of Things, if you could highlight a little bit more.

It's an application that's obviously ongoing and from my perspective would seemingly have a lot of potential for your lighting systems and going forward expansion to that input.

If you measured your business, for example, in the last quarter; what was the Internet of Things impact in terms of revenue stream there? I know it's probably small, but can you effectively tell us how much it related to certain and solve (ph)?.

Sure, George. First sight, I completely agree that I think the Internet of Things, smart ceilings, smart ceiling grid continue to have a lot of potential for us in the marketplace and in the lighting industry.

Our view of some industry statistics show that we're probably under 5%, maybe even lower single digits from having controls and control functions implemented on lighting fixtures. You've got fixtures in every single room usually of every buildings, it's very natural place to have controls installed.

Plus, you have the power existing to the light fixture.

We continue to stay technology agnostic; meaning, that we work with roughly 12 different controls manufacturers and have the engineering knowledge to integrate those controls through our power supplies into our drivers so that we're not locked into one or two technologies depending on what our customers want to use.

At the same time, currently we don't disclose very granular numbers of how much of this is impacting our business. But I think it's safe to say that it's relatively still low, probably 5% or so that have control features related to our fixtures.

But we do think it's growing and we think we've put ourselves in a good position to be successful going forward by lining up with some of the more successful controls technologies and continue to be agnostic, so we can roll those into our fixtures.

Bill?.

George, I would add to that, you know, even though if you think about the actual dollars coming in from controls, it gets you to the table. So, if you don't have those capabilities, I mean, it's -- you're going to short your business. You're not going to have those capabilities and you're not going to get the opportunities that we get..

Okay. And just one additional point, appreciate your comments on this so far, the application looks pretty exciting from the perspective of going forward, going from 4G to 5G. How do you perceive 5G opportunity on the Internet of Things for you? Would it….

I would probably say -- yes, go ahead please..

Okay.

Would it -- I would assume that it could be a larger measurement of opportunity on your install?.

It should increase the opportunities as 5G becomes more prevalent, just having the broader bandwidth and volumes that can be handled, allowing you to flow other things through the systems that would be on the fixtures.

For example, sometimes we get asked, "Would cameras on light fixtures make a lot of sense?" And sometimes, they do, but there's a lot of data that flows through there that has some impact to what has to be wired to the fixtures.

So, yes, I would think globally and generically that having 5G for the roll, that would provide further opportunities for the Internet of Things and the smart ceiling grids..

Yes, okay.

And lastly, what are your plans for appearing at conferences along the way? Do you have anything on your schedule in the near term, let's say, two to three months?.

We don't have anything in the next two months. We're probably more in the December timeframe from a conference standpoint at this point..

Thank you. And that concludes the Q&A session. I would now turn the call over to Mike Altschaefl, for closing remark..

Thank you, Justin. I'd like to recognize and thank the entire Orion team for their hard work and dedication in achieving our strong financial results in Q1. Thank you for joining us on today's call, and I look forward to updating you on our business progress and outlook on our Q2 call. Have a good day..

This conference is now concluded. Thank you for attending today's presentation. You may all disconnect your lines now..