Good day, ladies and gentlemen, and welcome to the Orion Energy Systems Fiscal 2021 Third Quarter conference call. . As a reminder, today's conference is being recorded. I would now like to turn the call over to Bill Jones. Sir, you may begin..

Thank you, and good morning, everyone. Orion's CEO, Mike Altschaefl, will open today's call with third quarter highlights and an update on the business outlook. Orion's CFO, Per Brodin, will then review additional financial items, after which, 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 Thursday, February 11, 2021..

Thanks, Bill. Good morning, everyone, and thank you for joining today's call. As we expected, Orion's business improved substantially in Fiscal Q3 as our customers returned to stronger levels of activity following the COVID-19 related slowdown. Revenue rebounded sharply to $44.3 million in Q3 2021 from $26.3 million in Q2 2021.

Our third quarter performance reflected continued significant turnkey LED lighting and controls retrofit work for our major national retail customer. The third quarter also benefited from the start of LED lighting retrofits for a new national specialty retailer during the period.

Our customer has been very pleased with the results to date, start-up inefficiencies, which are not uncommon for projects of this scale, did negatively impact our overall gross margin percentage. However, we do expect margins to improve over the balance of the project.

Product development continues to play an important role in Orion's success as we are seeing very solid demand for new product lines such as our Star Line next-generation High Bay LED fixtures, exterior lighting fixtures that expand our offerings in the outdoor market with a highly competitive product design and energy efficiency as well as several linear LED fixtures, which we plan to introduce later this month.

Product innovation is at the core of our strategy as we work to develop designs that deliver improved performance, safer work environments, higher quality lighting and customized solutions to meet the evolving needs of our customers, while also working to enhance our overall margin profile. I will talk about some exciting new products a bit later.

Our third quarter performance also reflected certain SG&A costs for our new Orion Maintenance Services business as we build the team and create the operational infrastructure..

Thank you, Mike. Orion's third quarter Fiscal 2021 revenue increased to $44.3 million from $34.2 million in Q3 Fiscal 2020 and sequentially from $26.3 million in Q2 Fiscal 2021.

The growth reflects a full quarter of healthy business activity following COVID related disruptions that began last March and continued to significantly impact our business through mid-August.

Revenue for the quarter included work on an LED retrofit project for a major national account that we commenced in early August as well as a significant revenue contribution from another national retrofit project for a specialty retail customer.

Q3 Fiscal 2021 product revenue increased 23% and service revenue grew 47%; reflecting the installation and other service contributions principally from these two national products, projects.

Third quarter Fiscal 2021 gross profit percentage improved to 24.9% versus 24.2% in Q3 Fiscal 2020; primarily because of improvement in product margin, partially offset by increased service revenues at lower margin rates, but declined sequentially from 27.6% in Q2, principally because of a change in customer mix and inefficiencies and start-up costs related to the National Specialty Retail Project.

Q3 Fiscal 2021 operating expenses increased to $6.5 million versus $5.8 million in Q3 Fiscal 2020 and $5.2 million in Q2 Fiscal 2021; mainly because of higher sales commissions on higher sales volumes, other incremental costs necessary to support higher revenue as well as start-up costs related to launching Orion's Maintenance Services business.

Given the flow-through on higher revenues, Orion generated Q3 Fiscal 2021 net income of $4.3 million or $0.14 per share compared to net income of $2.3 million or $0.07 per share in Q3 Fiscal 2020 and net income of $1.9 million or $0.06 per share in Q2 Fiscal 2021.

We recognized a very small level of income tax expense in each period discussed because we have a full valuation allowance recorded on our net deferred tax assets..

. First question, we have Sameer Joshi from H.C. Wainwright..

Congratulations on a strong quarter. The first question is about this UV product, the 275 nanometer product that you probably will introduce in the fourth fiscal quarter.

Do you have any sense of what kind of demand you expect? And part two of that question is, are you looking for your existing national customers or the retailer customers to add this product to the orders that we already have with you?.

Sure. We're very excited about the product for, Sameer, so thanks for asking. And the product itself is going to be a trougher product. So think of a dropped ceiling grid product in either 2x2 or 2x4-foot grid, and that product has air movement capabilities so that it can help to moderate the air temperature throughout a room.

But in addition, as the air is being brought through that fixer, there will be a UVC kill chamber, if you will, that will treat the air as it's moving through the fixture. So we're very excited about it. It's a little bit early to say what the demand will be.

We certainly have had conversations, and we expect there to be good demand for this product, and it fits very well into the need in the industry and in the environment for healthy and safe solutions. So we'll probably know more about that in the future, but we're very encouraged, and we're ready to manufacture and talk with our customers about it.

And yes, it is a product that we could take back to our existing customers as on to what we've done for them currently in their environment. So we see this as a possibility..

Okay. And as I understand, you already had a 405 nanometer product.

During COVID, did you see any increased demand for that? Or it's just a forward-looking prospect for that too?.

We have had the 405 nanometer product, which is a product that does attack mold and fungus and bacteria. And if you think about 405, what 405 does, it really is addressing on contact. So on the surfaces. So it is a light that is showing on services to attack those bacteria. We have seen increased interest during the COVID-19 situation.

We have not experienced significant additional revenues from that product at this time, but we still think there is opportunity going forward for that product.

And having the two combined, we could envision where customers might want a combination of product like the 405, which is continuously attacking bacteria on a surface contact which can be used while people are in a room.

And then having that matched up with UVC product where the UVC is completely contained within this fixture, so that is not exposed outside, so it can be continuously operating in an occupied space because it is not shining outside of the fixture. So we see some combination of the two, perhaps, having some possibilities..

Understood. Just moving on to the Maintenance Services that are being launched. And then trying to figure out the margins that you could get from these services. I looked at your margin profile and quarter-over-quarter, the service margins, even though revenues, service revenues, increased around 47%.

The margins actually decreased relatively from around 23% to around 19.5% levels.

So how does that profitability profile look for Maintenance Services that you are launching, and are there other operating expenses that also could continue to be higher for that going forward?.

Thanks for that question. Sameer, I think if you think about the sequential change in margin over the quarter, as we mentioned during the prepared remarks that some of that decrease was attributable to start-up costs and inefficiencies associated with a particular project. And we expect to see those improve as we move forward.

I think that you could expect that the OMS service product will be in our historical range for service revenues. So it's plus or minus a little bit. I think it will be in that range, not significantly lower and not significantly higher.

And then with respect to your question on expenses, we have built, started to build, the base of kind of infrastructure for that business. I think we have -- that we're getting there. And the Q3 operating expenses include certainly some expenses related to that investment that will continue to build somewhat more into 2020 -- Fiscal 2022.

As we attempt to build that business, we think we have a good core to launch that business for the time being and then based on success and building that business would potentially need more infrastructure as we move forward..

Next question, we have Eric Stine from Craig-Hallum..

So I guess, quite the change when you've got ten-plus items impacting the fiscal, the upcoming fiscal year versus the past, was a little bit more narrow.

I guess, in keeping with that, could you just talk about your new logistics customer? It sounds like an add in the quarter will impact next fiscal year? I mean, just details whether this is a new -- are these new facilities, are they retrofit? And maybe magnitude versus your existing logistics customer?.

Sure. We are very excited about the addition of another customer to this sector of our portfolio. As I kind of mentioned, we think warehousing logistics will continue -- is continuing to grow, and we think it could be a very substantial part of our business going forward as it has been in the past.

So we were fortunate to start doing business with a second large warehousing logistics company. And the projects for them will be, as we've talked about for the previously announced warehousing logistics company. They're going to be on a project-by-project basis. And it's going to be a mixture, Eric.

I would say most of the business is likely to be retrofit situations as they go back through their existing portfolio of properties and either upon turnover or on an interim basis with their customers upgrade to LED lighting.

But in addition, they may, at times, build new facilities, and we would have an opportunity to work with them on those projects also. So I think it's a mixture, but I probably would say it's going to be heavily weighted towards retrofit activity..

Got it. And then just a follow-up on that. You mentioned that you expect or very possibly, logistics is one of, or the largest, component of Fiscal 2022.

I mean, when you think about that since this is project to project for both customers, is that commentary based on the acceleration you see with what you currently have in hand? Or does that also include the expectation that there are others out there? Just curious what type of look you're getting at all the logistics business that's potentially out there?.

It's a combination of the fact that we've been in the warehousing logistics space for a number of years. We have always done and worked well and have great customers in cold storage, in distribution facilities. So this really is not a new area for us.

And our product line is very well suited for these, including some of the new products that we've launched over the past year.

So when we are saying -- when I am saying that we think Fiscal 2022 could start to have that warehousing logistics area of our business be one of our largest revenue segments, it's our existing customer base with the addition of these two larger global warehousing logistics companies that those all combined, we think, could become a very significant part of our revenue stream going forward..

Got it. So not necessarily new targets you have out there, it's more adding these more penetration to what you already have in hand..

Yes..

Okay. And then last one for me. Just -- I know you've talked about no real impact from COVID, at least in the third quarter.

Just curious on some potential supply chain issues or how you see the health of your supply chain and any steps you're taking there proactively?.

Sure. From a supply chain standpoint, with respect specifically to COVID-19, there certainly have been certain little gaps or aspects that have come up that we've had to work with. We routinely work hard to have backup suppliers and on high-volume items, they have multiple suppliers.

But I will say there's been more activity of us having to move things around and find alternatives to make sure the supply chain stays in good shape on the COVID-19 front.

A more significant area today that we are seeing and others in our industry is that the logistics aspects, both domestically and internationally are rather strained right now with volume. And particularly where we do source a certain product out of China, there are some challenges of getting things out of the ports in China.

There are challenges getting things through the ports on the West Coast. And so those are probably causing more stress on the supply chain right now. And then that linked a little bit with the fact that there is a global supply issue with respect to semiconductors, which I think will filter down somewhat. So we -- I think we're managing it very well.

We have not had any significant impact to our customer base. But we do think ourselves as well as others in our industry and other industries are going to be dealing with some supply chain challenges from a logistics standpoint over the next perhaps a couple of quarters..

Thank question. Next question was have Craig Irwin from ROTH Capital Partners..

Mike, I wanted to ask you about the guidance, right? 117 plus for the fiscal year, kind of points to a fairly significant sequential contraction.

It's 117 plus that you guided to, but can you maybe scope out for us the range of things that might cause that number to be higher or possibly lower given that we are, what, five, six weeks into the quarter? You will have basically stuff in hand that you're going to ship over the next two weeks, but there is quite a lot of business that happens in the very last two, three weeks of a quarter.

How much variance can we see around that number?.

Well, I think I go back a little bit to our last quarterly release and call, where we, in somewhat of an unusual position, decided to provide pretty specific guidance on what we thought the second half of the fiscal year would be.

And if you go back and look at that, we're seeing very similar to that of saying we thought the second half of the year was going to be $80 million, and that would be at least $117 million for the year. We certainly had a very strong Q3 with the revenue that we had.

And as we look at our current pipeline in our backlog, which actually was quite strong at the end of the quarter, we still feel that we're at that same level. So we really have not changed our view for the whole fiscal year. And so right now, Craig, yes, things can happen in the last few weeks of the fiscal year and move things around a little bit.

But at this point, we think it's best for us to be consistent. And what we had said earlier that we think the full year is likely to be somewhat in excess of $117 million..

Understood. Understood. That makes sense. So then as we look at 2022, you were also pretty clear about doing something similar to 2020, maybe better as well. You did say a third of the revenue is going to come from your home center customer. That's clear. They obviously share their plans with you, and you've done a great job for them.

The logistics customer, the anchor logistics customer that you brought on, most of those new build facilities, I would kind of expect that those would be planned six months, nine months, even a year ahead of the of the actual completion for the lighting. So can you talk about the new logistics customer and the old logistics customer, not so old.

How these contribute to the visibility that you have? I mean, have you changed your assumptions for turn business at all in the year? And there are a few other customers where there potentially are some chunky orders.

I was just wondering sort of how you're handicapping different things to get to your sort of 150-plus that you're pointing to?.

Sure. You got it. So first of all, we continue to feel confident about the 150, which starting a couple of quarters ago, we thought it was important just to have people and investors and the market understand that we feel very confident getting back at that level going forward.

And we think having likely $80 million in the second half of this year demonstrates that we're at that pace. We also think it's important that we understand too much concentration is not a good thing for many businesses.

And we think between this three-year period of Fiscal 2021 and 2022 of having that great, large customer of ours get down to a one-third of our revenue, but still maintain the $150 million of revenue is a good sign for us. So that visibility is helpful, and we -- and it's also expanded with that customer.

So it's not just the retrofit in the retail stores, but a variety of projects that we're doing for them. We see those being healthy for the business. To the second part of your question, I would break it into two different buckets.

And first would talk about the fact that we have this project that has been ongoing, which we talk about as a global online retailers, new facilities. So on that part of our business, which was the second item I talked about of the things that give us visibility to Fiscal 2022.

That is actually -- we have a fair amount of visibility into that because those are new construction, they are planned and there are time lines. And so that gives us comfort of the amount of revenue that we are predicting for that particular piece of business.

The third element, which are these two now, now two global warehousing logistics industry customers; the one that we had announced some time back and the one that we're just recently talking about.

Those, for us, while we see them as having significant opportunity, the projects will be on a facility by facility basis in most cases where they pick facilities that they want to retrofit. We work with them on those and provide them with the project proposal for those, and then those get awarded and you move forward.

So the negative part is it's not quite as visible as a rollout of national stores or the rollout of new construction, but the magnitude, we think, could be significant. So those are estimates that we -- when we think about the $150 million, we're trying to put our best estimates in place of what we have talked about with that customer.

We think the potential could be our opportunity to get those. And lastly, I would just say, Craig, we've been talking about the first one for a while. We think the relationship with that customer is excellent.

It has developed a little more slowly than we anticipated, we think, partly because of the COVID and their access to facilities and their customers making decisions to retrofits but we're still very encouraged by the opportunity for both of these going forward..

Excellent. Excellent. Last question, if I may. Orion's won some of the -- won business from some of the very largest customers, largest customers in the lighting market, right, the most attractive customers to do business with. And I would assume that it's getting quite a lot of attention from all of the large buyers of fixtures out there.

As you gain traction in the logistics, warehousing, big box retail spaces.

Can you maybe talk a little bit about the SKU's that you might need to add that you might need to produce at Orion that might make you competitive for the next wave of customers? I mean, is it necessary for Orion to maybe diversify its SKU mix at the moment? Is this something that would be organic and maybe upside if it happens, but not material, a, how should we look at that?.

It's a great question, Craig. I think, first, in our historically strong area of High Bay products, so product that can be in 20 to 40, sometimes 60-foot ceilings, but also is often used in the retail environment, particularly big box retail environment, we feel very well positioned with our product line there.

We talk about our next-generation Star Line, which is a linear product for higher ceilings, which has been very well received, very price competitive, and we're seeing great traction with that product.

It is the product that we are using in this specialty retailers' stores, and we expect it to be a big part of the warehousing logistics customers that we have. In addition, we have also introduced products that are what people call a round or UFO type style of light fixture for higher ceilings, there are certain customers that prefer the round look.

And we now have a very robust product line that we've introduced this past year to cover that area. We have also introduced additional outdoor lighting to -- for parking lots, garages, area lighting in areas for parking lots or retail areas. And likewise, we have found that product to be well received.

I think from an expansion standpoint, we certainly want to continue to look at both the UVC side and the air movement product potential out there, the antimicrobial that we talked about. And the other area that we are actively investigating is the horticultural area.

We think the combination of the likely future increase in vertical farming that getting the growing of produce and other products closer to the end user and the consumer is a trend that we think is going to be strong. There's the obvious opportunity in the cannabis market. And so we are exploring an expansion more into the horticultural side.

We've always been strong, in I'll say, the farming, dairy farm, with some enclosed washable product that can be in harsher environments. And so that we think that is another area also. So we're always looking to expand products. We have a very, very extensive SKU portfolio right now, but we will keep our eye open to expand where we need to.

Appreciate the question..

. Next, we have Marc Wiesenberger from be B. Riley Securities..

This is actually Amad jumping in for Marc.

But I wanted to ask, can you talk about the success and progress with your new construction work? And how should we think about the traction in expanding work there? Any medium-term aspirations for how much that business could represent?.

Thank you, am I appreciate you joining us today. While historically, a pretty large percentage of our business has been in the retrofit market, and we continue to believe there is significant market opportunity in retrofit, given the studies that have been done that -- of how many building spaces still need to be converted to LED.

But we have -- our product has always performed well in new construction also. So we do think new construction can play a strong role for us going forward.

Commented a couple of times that the work we've been doing last year, and we expect to do this year and into Fiscal 2022 for a global online retailer has been new construction based with our existing product line of fixtures and/or some specialty designed custom fixtures for those applications.

So we feel confident that our product line is very versatile and can be used in new construction. And so part of it for us is that we need to continue to work at the market channels that get to new construction, which can be somewhat different than going after retrofit.

So that's part of a sales strategy of making sure we are getting an opportunity to look at new construction..

That's helpful.

And then can you talk about the liquidity environment and its potential impact on the ESCO channel?.

Well, the ESCO channel is -- the Energy Service Company channel is one that, again, we have been in that channel for many, many years. And we are seeing it -- it has been somewhat impacted by COVID-19. But again, we're seeing a good strengthening in that market. And again, we feel we have the products, and we understand that market very, very well.

Those ESCO's are buying our product and then installing it for their customers. And they're called energy service companies because they may do some HVAC or other type of energy solutions for their customers. At the end, they are installers usually of product in their customer sites.

And so we understand that very, very well and can support them with very, very good product. From a liquidity standpoint, we do think there is substantial financing available in the marketplace for energy products -- projects, I'm sorry.

And so to the extent we have ESCO's that are working with larger companies that have large projects, we believe there is ample financing available for energy products -- projects where companies want to have things off their balance sheet through leases or other types of energy savings arrangements..

Understood. Last question from me. Can you just talk about the pricing environment? We're hearing and seeing that some commodity prices are starting to increase.

So how quickly and easily will you be able to pass that on to your customers? And how much of an impact will that have on gross margins in this quarter?.

There certainly is some inflation, I believe, coming through the supply chain with respect to certain components and commodities. We are seeing some price increases from our suppliers in the power supply area and somewhat in metal and in some other areas.

And as I mentioned earlier in the call, there is a growing reality of some global semiconductor shortages, which are subcomponents of things that we purchase. So we don't buy semiconductors directly, but the power supplies we purchase will be using semiconductors.

To react to that, we recently announced to our customer base that we would have a, generally across the board, a 6% price increase on our products, and that impact of that will start to roll out in Fiscal 2022. And so it's been announced, it's going into effect over the next few weeks as we kind of work off existing orders.

It doesn't have an immediate impact in that we certainly have projects that have been ongoing that will continue before they turn over to a next phase or get re-proposed at the higher prices. But the other type of business that is coming in, any of the new business would be priced at those new levels.

So we believe that, that price increase, which, as I mentioned in my prepared remarks, we believe, is lower than many of our larger competitors who have announced some pretty significant price increases will remain competitive, but we think that will allow us to keep the margins in the ranges that we have been and what we have talked about going forward..

Thank you, sir. That concludes the Q&A session. I will now turn the call over to Mike Altschaefl for closing remarks..

Thank you, Katrina. I want to thank the Orion team for their hard work and operational excellence that has allowed us to bounce back from the COVID-19 related delays and put us in a great position for a return to higher revenue and profitability going forward.

During this continued period of social distancing, we have participated in several virtual conferences, the most recent of which is recorded and available on our website. We are planning to participate in a virtual ROTH conference in March.

You can also contact our IR team with any questions or to schedule a call with management and the IR contact information is included on today's press release. So thank you all again for joining our call today. We look forward to updating investors on our Fiscal 2021 Q4 call. Have a good day. Thank you..

Today's conference call is now concluded. Thank you for attending this presentation. You may now disconnect your lines. Have a great day..