Orion Energy Systems, Inc. (OESX) Q2 2013 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to Orion Energy Second Quarter 2013 Conference Call. [Operator Instructions] I would now like to turn the call over to Scott Jensen, CFO.

Thank you, Operator. Good afternoon everyone. And thank you for joining us today for the Orion Energy Systems Second Quarter Fiscal 2013 Conference Call. Once again my name is Scott Jensen, Chief Financial Officer of Orion. 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 second quarter and year-to-date periods ended September 30, 2012. 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.

Thank you, Scott, and good evening and thank you all for joining us today. And given that I haven’t had a chance to meet many of you yet, I’d like to start by briefing introducing myself. I hope to meet many of you in the months ahead. Over my last 8 years with Orion, I played a significant role in both sales and business operations. And early in my tenure with Orion, I worked to build our installed base of Fortune 500 companies establishing longstanding relationships with companies like Coca Cola, Anheuser-Busch among many others. More recently I launched and grew Orion Engineered Systems into a meaningful contributor to Orion’s financial results. This division focuses on integrating a number of technologies to help our customers further improve their energy usage. For example, incorporating solar technologies into our product portfolio was one of the direct results of my efforts. With my new role at Orion, I have a great opportunity and the right team in place to move this company on a path to profitable growth. Today I would like to spend my time focusing on a few key areas. First, I will provide a brief overview of our results for the quarter. Second, I will give my thoughts on Orion’s business and review some steps I have already taken to enhance our position in the marketplace. And finally, I will outline my longer-term priorities for which I plan to provide updates around the coming quarters and months ahead. Turning to our results for the fiscal second quarter of 2013, total revenues were $19.4 million versus $33.5 million in the prior year period. For the quarter the decrease in revenues year-over-year was primarily attributed to the unusually high level of solar projects coming together in the second quarter of last year and to a lesser extent to lower revenues from our high-intensity fluorescent lighting system in the second quarter 2013. Total cash order backlog as of September 30, 2012, was $46.7 million compared to a backlog of $50.5 million as of June 30, 2012. For the fiscal second quarter 2013 we reported a loss of $0.46 which included a number of nonrecurring charges that Scott will provide additional detail on in a moment. Clearly these results were very disappointing. However many of the charges we took in the second quarter are not likely to recur and in fact, should create a more solid foundation for us to move forward. Over the last 6 weeks, I have taken a critical look at our business. And let me be clear, structurally the company is not broken. Energy is and will continue to be the lifeblood of all companies. At the same time energy efficiency is a key component to sustainability for these companies. And Orion, which is focused on helping our customers better manage their energy resources, will certainly thrive. At a high level, Orion has a unique product portfolio that is light-years ahead of our competition in terms of innovation. We need to maintain our focus on our core products as we create new products to attract more customers and enter markets we have not historically played in such as hospitality, healthcare and government. Our core fluorescent lighting platform remains extremely viable. Albeit challenged from our customers’ capital spending perspective, we do believe this product still have significant value in the marketplace and continue to view it as our run rate business. But the market for this technology is shifting. Large facility rollouts that contributed to growth of this business are not as readily available as they once were. It has become much more a land battle, and we need to align our sales force to this challenging landscape. In addition, our installed base presents a significant opportunity for us. The diversity of our product portfolio creates multiple ways to increase the energy savings of our customers through other lighting products, such as our outdoor lighting and LED, as well as our energy management controls, light pipes and solar technologies. As a thought leader, we continue to stay ahead of the competition by bringing new products and technologies to the market. For example, our LED products creating new potential trajectory for us. We’re aggressively producing and selling our LED products where applicable while researching it for broader use. We expect to announce some new products in this area early in calendar 2013. And internationally we've also established our footprint in Europe through the sale of our light pipes. And at the end of the day we offer customers a compelling business proposition, and we just need to get our team more focused on selling it. I believe we have significant runway of profitable growth ahead of us. However when I look at the business holistically, our shortfall over the last several years has been our discipline from a sales, product development and financial perspective. In the short term I am committed to refocusing our operations on the activities that will drive improved performance, more revenues and smarter financial investments with the goal of maximizing our shareholders’ value. As such, I have already implemented a number of these changes. First, we will be enhancing and refocusing our sales organization, and the answer to expanding our footprint is not our partner network or our direct sales force, rather it is the combination of both that will be meaningful to our success. And over the past several years, we have built our partner network and I feel very good about that. But today our focus must also include enhancing our direct sales force. In recognition of this we have identified areas where we are deficient and are actively creating a plan to expand our direct sales team, align their compensation plans to our strategic goals and improve our processes to ensure we are effectively using our resources. We expect these efforts to directly result in both improved revenues and margins over the long term. Second, we are streamlining our product development function. While maintaining our commitment to innovation, our efforts to date have been fruitful. Going forward, we plan to adopt a more methodical and focused approach to product development. Our plan is to avoid the trap of continuous development, which in the past has created confusion for our sales team and inconsistent product development. Instead we are focusing on the activities that create the greatest return on our investment matching our R&D efforts with the market opportunities that exist today and in the future. And third, we are focusing on a new attitude of financial discipline throughout the organization. This means eliminating inefficiencies, cutting unnecessary spending, controlling inventories, strengthening our balance sheet and leveraging the significant resources we already have in place to drive long-term growth. More specifically, we've already put into place material and component cost reductions and are currently realigning our expenses on the SG&A side. And Scott will provide more detail on these cost reductions in his remarks. And from a cash perspective, we've also halted our share repurchase program. We are early in the game, but I expect to realize the benefits of these actions immediately with the full impact of our operating performance coming over the next several quarters as these initiatives gain traction. And longer term I'm still in the process of reviewing the business and developing my strategy, but at a high-level my goal is to streamline and focus our business in all aspects. This means outlining a clear strategy for growth and more importantly sticking to it, providing clear benchmarks and milestones to judge the execution of that strategy and reducing the complexity of our financial reporting. All of this will take time, but I plan to provide updates for you in the coming months. And let me conclude by reiterating my confidence in Orion, our product portfolio, our competitive positioning and a strong team that we've built. I truly believe there is a renewed sense of energy and excitement across the organization and a shared vision to drive improved performance. And with that, let me turn the call over to Scott to go through some of the key financial drivers of our quarterly results.

Thank you, John. Consistent with our prior earnings announcements we’ve provided a fair amount of content within the supplemental information document which was posted to our website earlier this afternoon, covering our second quarter and 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 will address some of the key areas. John has already touched on our revenue and net loss for the quarter. So I'd like to focus my commentary on the nonrecurring charges that were incurred during the period. First, we recorded cost reduction and reorganization-related expenses of $2.1 million or $0.10 per share in the second quarter. These charges included $1.7 million to general and administrative expenses and $400,000 to selling and marketing expenses. Additionally during the second quarter, we recorded a non-cash charge of $5.6 million or roughly $0.27 per share of income tax expense related to a valuation reserve for our deferred tax assets. GAAP accounting prescribes a conservative approach to accounting for deferred tax assets. In evaluating these assets significant consideration in establishing this reserve was given to our accumulative 3-year net loss position and our limited visibility into the future. To be perfectly clear, these tax assets are not lost to us. In the future, as we deliver consistent taxable income over a consecutive period of 6 to 8 quarters, we will reevaluate these tax assets. Until we've reached this level of consistency in operating income, we will not record any income tax expense or income tax benefits in the near term. During the quarter we continued to maintain the recent improvements in our solar gross margins, and looking at our solar project backlog for orders that we expect to be completed during the remainder of fiscal 2013, we expect gross margins from these projects to be in the 22% to 25% range. We ended the second quarter with $13.2 million in cash and cash equivalents. And there were no borrowings outstanding under our revolving credit facility as of September 30, 2012, which has availability of $13.3 million. John spoke earlier about some specific initiatives that we've undertaken to reduce costs and to improve our cash flow. As it relates to our expenses, earlier this week we completed a staff realignment to streamline our operations and to shore up revenue-generating areas of our business. These actions did include some reductions in staff which accounted for approximately 8% of our total headcount and touched all areas of our business. Additionally, we've reduced the number of consultants involved in our business and further reduced discretionary spending. We expect these actions, coupled with the additional steps we've taken since John has assumed the role of Chief Executive Officer, will result in $1.2 million of savings over the remainder of our fiscal year 2013. And in addition, we continue to identify and plan for other cost reductions related to our HIF product costs and other contractual arrangements that will provide additional savings into the future. From a cash flow perspective, we have opportunities to improve our working capital through the reduction of inventories. We are aggressively looking at opportunities to substitute components, reduce inventory purchase commitments and better manage our initial investment into inventories of new products. We have reduced our expectations for capital expenditures in the second half of fiscal 2013, and as John mentioned earlier, we have halted our share repurchase program. Finally, while we continue to believe that there is a place for our Orion throughput finance programs in the marketplace, we believe that we have established solid relationships with existing equipment finance partners and that we do not need to take on additional debt finance to grow this business. We look forward to sharing our progress with you in the future, including the development of benchmarks and milestones that John mentioned earlier, so that you can clearly evaluate the execution of our strategic plan. We are confident that our initiatives in combination with our cost containment efforts will significantly reduce our cash burn while improving our financial strength and creating a more solid foundation from which to grow. This concludes our prepared remarks. I would now like to turn the call over to the operator for the question-and-answer portion of the call.

[Operator Instructions] The first question is from Phillip Shen of Roth Capital Partners.

Matt for Phil. Just a couple higher level questions for you. I just want to start with you, John. You talked about shareholder value in your prepared remarks. Just wanted to see if you’ve got a little more color on how you plan on aligning incentives throughout the organization to focus on shareholder value, maybe take a few key examples.

Sure, thank you. In terms of aligning the incentives, I guess that would fall into a couple of different categories. Certainly part of shareholder value of giving a good return on the investment would involve 2 parts. Obviously on a sales perspective, we need to have a more robust compensation plan for our sales organization that will drive quarter-over-quarter performance and at the same time recognize the top achievers, the high-performance people, and to the extent that there are low performers take swift action to correct that. On the other side is I think a little more mechanical in that to reduce costs, which will also drive profits, is to just have spending controls, having the -- share the culture of cost containments, sharing the overall just vision of where we’re going of bringing shareholder value, people within the organization in the plants all need to be focused on that. So I think the incentives are a little more driven on the revenue side and just better controls and better discipline on the cost side. Also in addition to that, good training. We historically have had some more centralized organization, and I think training people at all levels in the organization what shareholder value is and what it means to them and how they can impact it. I think that's a key part of it.

Then as far as your sales strategy, so much of your business has sort of leveraged to the capital spending environment. Are you guys examining ways to drive sales without relying so much on customer capital budgeting?

Yes, I think we are looking at some new product developments that are not as reliant on large capital expenditures but products that could be sold in smaller environments which could be more of an expense item. I think financing can also be a method to address the CapEx issue, although it's not perfect for everybody. I think if we have new markets, which I'm anticipating through some new products that we’re working on, that that will provide us a more balanced opportunity when capital spending is limited to go with more expense-related replacement items.

The next question is from Shawn Severson of JMP Securities.

Just trying to get an idea of obviously some of the issues internally going on at the company. But how are you feeling about kind of broader macro environment and customer response deferrals, just a sense of how the business climate is for you guys especially any changes over the last month or 2?

I guess also in regards to having the election behind us, I think that at least gives our customers whether they -- depending on which direction they fall on that election, it does provide at least a 4-year window as to what they can expect. And with that, while President Obama is very friendly to energy efficiency and renewable energy, until business in general and particularly small business gains a real foothold and the broader economic conditions improve, I think that, that’s the other side of that coin. So in general I am very optimistic. I think with streamlining our business operations with our great products that we offer, with more discipline within the organization on selling those products, staying focused on the products that are sellable, we put a lot more discipline in our product development cycle so that our people are just much more concentrated on selling the things that we’ve got in the warehouse, selling the things that we’re already building. And even in spite of some headwinds on the economy, there’s still a tremendous opportunity out there. We’re very well-positioned in the marketplace relative to the markets we serve, with the customers that we have, we’ve just continued to build the product.

Have you see many -- I guess in the last few weeks toward the quarter end, I’ve talked with companies, things definitely weakened towards the end of the quarter and then the first part of the fourth from a fundamental basis. And so it kind of sounds like you guys are seeing some similar movement in terms of business and demand; is that fair to say or not?

Actually, Shawn, this is Scott. Not necessarily seeing that. Typically this is the time of the year where we are busier as a capital goods provider. I would say that we were busier toward the end of the prior quarter. And then we don't comment intra-quarter, obviously. But I think right now what we’re seeing is really what we would've expected and anticipated heading into this quarter.

And then just in terms of the information you need to kind of take some of the steps that you want at the company, do you feel that all the IT and the knowledge is there to execute on this or are the things you need to do in terms of gathering more information to make the changes that you feel are necessary at the company?

Absolutely. We are in a good position for that. Some of it is just pulling it all together. But we hold all the information and we have good access to it. So it’s really a matter of getting it in the right dashboard, getting it in the right format to distribute it throughout the leadership team, throughout management and down to the floor where the impact can be made.

At this time, I would like to turn the call back over to management for closing remarks.

Well, thank you. This is a great opportunity that we have ahead of us. I truly appreciate all of your support and just generally want to thank everybody for their time today.

Ladies and gentlemen, this concludes today’s program. You may now disconnect. Good day.