Good day, ladies and gentlemen, and welcome to the Orion Energy Systems Fiscal 2021 Second Quarter Conference Call. [Operator instructions] As a reminder, today's conference is being recorded. I would now like to turn the conference over to Mr. Bill Jones. Sir, you may begin.

Thank you, and good morning, everyone. Orion CEO, Mike Altschaefl, will open today's call with second quarter highlights and an update on the business outlook. Orion CFO, Bill Hull, will then review some 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, November 5, 2020. 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 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 expected. Such risks include, among others, matters that the Company has described in its press release issued this morning and 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, let me turn the call over to Mike.

Thanks, Bill. Good morning, and thank you for joining today's call. Our call today will follow our normal format with me providing some overview commentary on the quarter and our outlook, followed by Bill's financial review and then opening the call to your questions. Also joining us on our call today is Per Brodin, our Executive Vice President. Per joined Orion last month and will become our new CFO following Bill's retirement after today. He has been working closely with Bill, our finance team and our senior management in order to ensure a smooth leadership transition. While we continue to have some impact from COVID-19-related delays during our fiscal 2021 second quarter, our results improved significantly over the first quarter, which was substantially impacted by COVID-19-related delays. Our Q2 revenue rose to $26.3 million versus $10.8 million in Q1. Our Q2 '21 results were below the record revenue of $48.3 million achieved in the year-ago period, principally due to COVID-19-related impacts. The second quarter benefited from the resumption of LED lighting retrofit activity with customers, particularly including the work that recommenced in early August on a national turnkey retrofit project for our largest customer. Importantly, our operating discipline, new product introductions and product mix enabled Orion to achieve an improved gross profit percentage in the second quarter compared to both the year-ago quarter and the first quarter of this year. In particular, we benefited from proactive cost management efforts and sourcing as well as in managing manufacturing and assembly costs, including higher absorption of our fixed costs. Our second quarter results also benefited from lower operating costs compared to the prior year, including some steps taken in March to contain costs in anticipation of the impact of COVID-19 on our near-term business prospects. Collectively, these factors enabled Orion to return…

Thank you, Mike. Orion's second quarter revenue was $26.3 million as compared to $48.3 million in Q2 of '20 and $10.8 million in Q1 of '21. The year-over-year variance is mainly due to customers delaying projects in response to COVID-19 during the first two quarters of fiscal 2021. The year-ago second quarter was propelled by significant LED retrofit activity for a major national account. After halting work for this customer in March, we were able to resume their projects in early August. Reflecting these factors, Q2 '21 product revenue decreased to $20.3 million from $35.6 million in Q2 of '20, and service revenue declined to $6 million from $12.8 million. Second quarter gross profit percentage improved to 27.6% versus 26.5% in Q2 of '20, primarily due to new product introductions, cost mitigation and procurement and plant costs as well as the manufacturing and component efficiencies in the design of new products. Our gross profit percentage also improved 320 basis points on a sequential basis from 24.4% achieved in Q1 of '21 due to the factors noted above as well as efficiencies achieved on higher revenue. Operating expenses were reduced by 8.8% to $5.4 million in Q2 of '21 compared to $5.9 million in Q2 of '20 due to lower commissions on lower volumes as well as to some cost-containment efforts implemented at the outset of the pandemic. Reflecting lower revenue and some fixed expenses, Orion reported Q2 '21 net income of $1.9 million or $0.06 per diluted share versus net income of $6.7 million or $0.22 per diluted share in Q2 of '20. EBITDA was $2.3 million in Q2 of '21 compared to $7.3 million in Q2 of '20. Our tax loss carryforwards were approximately $75 million for federal tax purposes and $62 million for state tax purposes. That should provide a large shield for Orion's income taxes in coming periods. We ended the second quarter in a solid financial position with net working capital of $27.4 million, including $12.1 million in cash and cash equivalents, compared to working capital of $19.8 million at September 30, 2019. Shareholders' equity improved to $31.2 million at September 30, 2020, from $28.9 million at September 30, 2019. At the close of Q2 '21, Orion had $7.9 million drawn on its revolving credit facility versus $3.8 million outstanding in the prior year period. We believe our cash and expected future cash generation, combined with our borrowing capacity, provide a strong financial base for the Company to continue its growth trajectory. Now before I turn the call back to Mike, I would like to thank those of you on today's call with whom I've had the pleasure to speak with and to meet with during my tenure at Orion. As Mike mentioned earlier, I will be retiring from my role at Orion after today, making this my last conference call with our investors. Mike?

Thanks. I would also like to thank Bill for his many contributions to Orion over the last five years. Bill has been instrumental in helping to guide Orion back to significant growth and profitability. As mentioned earlier, Per Brodin will succeed Bill as our CFO and is participating on today's call. Per brings substantial financial, public company CFO and leadership experience to Orion. So welcome to Orion, Per.

Thank you, Mike. I just want to say what an honor it is to join Orion at this exciting time, that I've been very impressed with the quality, dedication and camaraderie of the team at all levels. I particularly appreciate the orderly transition that Bill has enabled and the opportunity to work with him over the past few weeks. I will conclude by saying that I look forward to working with and contributing to the Orion executive team and to building solid relationships with our investors. Orion has developed an exciting and substantial market opportunity, and I look forward to updating you about our progress on future calls. And with that, operator, I think we can proceed to the Q&A period.

[Operator Instructions]. Our first question comes from the line of Craig Irwin from ROTH Capital Partners.

Congratulations on the strong earnings this quarter, impressive results. So it looks like gross margins were the biggest variance versus my model. You guys are clearly getting traction there, and it's going all the way to the bottom line. Can you talk maybe a little bit more about the material sourcing and some of the other items that you called out in your prepared remarks? Will we see these continue to rise with improving utilization over the next few quarters? How should we think about potential for continued leverage on the gross margin side?

Sure. Great question, Craig. Thank you. I'll cover it somewhat, and Bill may have some things to add with maybe a little bit more detail. But we really were pleased with the increase in gross margins this quarter. I'm not going to say we were surprised, but we were pleased. And it's a variety of factors. One, certainly some additional volume going through our manufacturing facility helps when we are absorbing more of our fixed costs. And to answer part of your second question, going forward with what we expect for revenue in quarter three and quarter four with a significant amount of that revenue going through our manufacturing operations, we do see additional leverage opportunities for margin caused by higher volumes. We also, as a company, have a long history of always looking hard at our product and making sure we're doing whatever we can from a supply chain standpoint, cost reductions, efficiencies in our facilities. And we saw some of those improvements during this quarter, which helped the margin. And we also have introduced some products over the last six months that we think are well designed, very efficient and efficient for our customers from an installation standpoint as well as energy standpoint, and they've got really great margins to them because of the way we've been able to design the product. So it really was several factors coming together that helped boost the margin. And lastly, I would say, we continue to see a path to getting back to those 30%-plus margins that we have experienced in the past when we had higher-volume quarters. Bill, anything you'd like to add?

No. I think that really does cover it well. I think just the one that I would add, Craig, is a lot of times when we take on a project, we have a road map of how we're going to take costs out of the time. So we might start out with a margin that we want to work up, right? And so we'll have a road map, whether it's all -- it's really all the things Mike mentioned. We just have a time line to get there, and we hit those.

Great. So my next question is about the buildup of the $40 million-plus that you gave us for the December and March fiscal quarters. That's really great visibility. I mean, you guys are going to be excited to have revenue visibility like that at this point. Your press release, what -- just a little over two weeks ago, about the major home improvement retailer is clearly helpful for us to see how this comes together. But can you maybe discuss discrete items in there from a proportionate standpoint, how we build that up to a $41 million number? And what should we be watching to see if there's potential upside to that number?

Sure. Well, first of all, we were pleased to be able to give a little more visibility to the next two quarters. As you probably remember, it's a little bit unusual for us to do that this early. Normally, we've been kind of doing quarter-by-quarter so far this fiscal year given the situation. And frankly, the front end, I just didn't need to repeat that we see the biggest risk being COVID-19 impacts, either internally or with our customers, but the project line activity and the scheduled projects we have going on right now give us the confidence of hitting the numbers that we've just talked about. And I think also we demonstrated by exceeding our Q2 number that we had said we would be at least $25 million and getting over $26 million. So I think that we've kind of laid out the numbers starting back in June to be more specific about our largest customers so that people could track that, know where we're at and how many sites that we do have. And I think with the press release today, you can understand the dollar amount we expect from that project during our second half. The remainder, the buildup of it, Craig, is a combination of some of the things I've mentioned today. We are kicking off much more significantly the project for the specialty retailer. Our -- the project we've announced earlier this year of a VA Hospital in Las Vegas is kicking off this quarter. We usually expect automotive business to be strong during Q3 and probably Q4, so it's really a variety of things. And then some of the newer relationships kicking in. And finally, through some of the distribution side of our business and our relationship with electrical contractors and ESCOs, we see that picking up also and particularly with some of the new product we've introduced. So it's kind of across the board. And just want to restate what I said today and in the press release, we really are seeing the strongest business activity that we have seen in a very long time of request for proposals and bidding on projects and kicking things off. So it's all been very encouraging. So that's why we feel confident about the next two quarters.

Great. And then last question, if I may, before I hop back in the queue. Can you maybe talk a little bit about your peak level of weekly installations, looking backwards, roughly how many facilities were you doing a week or a quarter? And then there's chatter out there in Wisconsin that you guys have hired a couple of dozen people into the lighting services business over the last few months. It sort of seems like that might add capacity for bigger peak. How should we look at potential weekly installs or potential installation capacity and the ability to execute on a demand surge, if that does materialize?

Sure. Great question. So let me start kind of on the sites standpoint. We've mentioned in the past, I'll start again with our large retail customer, that we have times have done sites 20 to 25 to 30 sites per week and we're able to maintain that type of ramp for an extended period of time. And so we are at those kind of peaks at times this fall, and we'll probably be there at some point now through the completion of that project. Certainly, there are certain times during the holidays that we are asked not to be on-site as much given the retail nature of their business. Secondly, got to look a little bit differently at the specialty retailer as we talked about last quarter, and we purposefully provided the information as to the 390 sites and somewhere around $8 million of revenue, so people could understand the magnitude of each site. It's different than our other very large project but still very important to us. And so far, the project is going very well. And there, we might even see larger quantities of sites done on a weekly basis because the projects will typically only last one or two days to be able to retrofit the footprints of those sites. So, to kind of put those together, we could have situations where we might, at times, be in -- we could be in 50 sites a week between just those two large customers, perhaps more, along with all of our -- rest of our business. So our activity, both internally from a sourcing, manufacturing, assembly operation. But as importantly, we've had -- you mentioned some numbers. We've had to ramp up significantly for our field people that oversee the installations, oversee the other activity is going on in the field. So it's been a lot of fun. It's always great to build things back up and get larger. And so that's the reason for a number of the hires we've had both internally in assembly as well as from an execution standpoint in the field.

We have another question from the line of Sameer Joshi from H.C. Wainwright.

So my first question is sort of a follow-up on what Craig was asking about. In terms of resource allocation, because you have visibility because of these large accounts, should we expect working capital and operating expenses improvements over the next few quarters over and above what you already have?

Well, let me answer it this way, so -- if I got that. So as you could see, last quarter, we ramped up working capital to get to the $26 million. Basically, it's receivables and inventory, things that are going to turn pretty quick and going to turn into cash fairly quick. So I think we're at pretty good levels right now. The receivables will grow at the forecast we put out there for revenue. As far as operating expenses, I would say take a look at last year when we can -- we ran those kind of levels. I think that should be a good proxy for about where we'll be.

Okay. Because one of the reasons for the question was that you have implemented, in light of COVID, certain cost reductions which may be possible to make permanent. And that -- and so we were expecting to see some improvements on the cost level there.

Yes. I think we've said it a few times now that we took the actions we felt that were necessary at the end of March because at that time, everyone thinks back at that point, no one knew how long or deep the situation would be caused by COVID-19. And we were -- have been expectedly or unexpectedly pleased with the more rapid turnaround in our business prospects, which I think somewhat ties into the great verticals that we are in and our customer is doing very, very well. I don't think, Sameer, one should look at saying that those cost reductions, any significant portion is going to be permanent because as we ramp back up volume, a lot of it is activity based. And so we've had to understandably ramp back our people to cover that. So could there be some because whenever you kind of have to cut back, you might add a little more slowly coming back up, you maybe see some benefit from that over time. But I don't think that one should look at those as being significant permanent reductions in costs.

Understood. And then just one more. We talked about the layering of revenues for the next two quarters, at least. By my calculation, it seems that the global logistics company, which you are getting revenue on a project-by-project basis, there's not much visibility there. It's around $4 million -- $4 million to $5 million per quarter. Is that the assumption then your buildup of that $41 million?

Well, we said earlier we were pleased to be able to provide a little bit more visibility for everybody on the next two quarters given what we have in the pipeline, what we expect to have happened. I think on the new relationship with the very sizable global logistics company is one that is still developing. And as we've mentioned a couple of times, it's going to be different than our very large customer in the retail industry and our specialty retailer where it's a set project, number of locations, and you kind of spell it all out for people. This is going to be project by project, and we are seeing it ramp up. It's been successful so far, and we still think it's going to have a substantial impact on revenues going forward. And it's harder for us to predict. So when we lay out our expectation of at least $40 million in the next two quarters, we take that into account when we're trying to look at it. So I think it's one that's going to be a little bit more on hindsight, frankly, of saying how much we generate from that relationship. But what I can tell people is that it is going well so far in the facilities we've been given the opportunity to work in, and we still see a lot of potential there.

We do have another question from the line of Eric Stine from Craig-Hallum.

Yes. It's Aaron Spychalla on for Eric. Congrats on the quarter. And Bill, congrats on the retirement as well.

First question for me. Can you just kind of talk a little bit more about the funnel on the national account side, the size of that, how it's been trending, the impact of the recent sales hires there? And then just how you feel -- are you getting a better look at a lot of the opportunities that are in the market? And then maybe anything on just where you're at from a penetration standpoint, kind of more broadly as you look at a lot of these accounts.

Sure. We feel very good about our position right now of being asked and invited to the table for larger national account opportunities, but I think it's -- we think it's a combination of the fact that we have worked with large national accounts for 20 years. So there's been a lot of them out there in the past. But more recently, the significant success we've had in the last few years with some larger accounts also provide some great demonstration of our capabilities out there. Number two, as we did a little over a year ago, we added some very experienced sales executive talent to our organization, and that takes some time to pay off as they reengage with some of their prior relationships and contacts and get through budget cycles where companies are at. I would probably say that some of that was somewhat slowed down by COVID-19 back -- obviously, starting in May when things kind of got changed a bit from a sales cycle standpoint. But we are seeing contribution from the additional people that we brought onboard from a sales standpoint and continue to see extremely good production and success with our sales executives who have been with us for a long time. So it's a great mixture. So what we do feel that the activity we're seeing and the project size we're seeing is growing and the magnitude of them, so we're feeling much better about the fact that we're getting invited to the table more frequently. From a penetration standpoint, this market is so big. We really -- I've said a number of times, I really don't talk about market share, either internally or externally. The market is so big. We just have to perform extremely well, take care of our customers extremely well, and there is plenty of business out there for us to grow substantially in the future. And we continue to believe that there is substantial amount of retrofit activity that still needs to take place across North America migrating to LED and the new construction market where we are playing a bigger and bigger role, also looks very favorable for us. And I would just add there that because we have chosen some verticals like logistics, cold storage, distribution centers, big-box retail, fortunately, those verticals are doing very, very well. So a combination of our expertise in those areas and the fact that they are busy, and therefore, they're spending money on expansions is very helpful to us.

All right. And then you talked about just the strength that you're seeing, RFP activities and things like that. You also mentioned kind of ROI and payback period. Can you just provide a little bit more color on -- and again, I know it varies by project. But just kind of where those are from a high level and how they've kind of trended over the last few years as we've seen costs come down?

Yes. So generally, when a company migrates from fluorescent technology to LED technology, they are going to see about a 50% energy reduction, just apples-to-apples. When you then combine that with control technology, which is often being employed for dimming capabilities or occupancy so that the lights go off and no one is there, et cetera, that 50% can go up even more significantly. So I would say broadly on projects that we are working on, we see paybacks in the one- to four-year period. I've mentioned previously on our very large customer, our retail big-box retailer, that the paybacks there have been underneath two years in most situations. And so they are very, very fast. And so that's why we believe, as companies have capital available and with the movement towards additional green initiatives, carbon footprint reductions that our projects tend to be towards the top of the list of being funded because of the quick payback as well as meeting other objectives of a company from energy reduction, et cetera. So it's still very strong. And as you can imagine, if somebody is not already at fluorescent technology, if they're at pre-fluorescent technologies, the numbers almost double again and become very, very enticing. We also see that there's plenty of capital out there for companies that want to finance these activities. And so we really don't see capital as being that constraining. It's more when the companies have the projects, when they're ready to move on the projects, the capital is there or can be found and the paybacks are very strong.

Sure. Okay. And then last question for me. You talked a little bit about the product initiatives and kind of the launch of those. Just any update on the UV products and the other products around kind of COVID and viruses and things like that?

Sure. I'll just start on the UV side front. We are making progress on the UV front. And the primary product that we are working on, which we talked about the last couple of quarters, is that UV that is being installed along with an air movement product that will be part of a suspended ceiling or trough or type project products. So in your commercial office environment, hospital environment, school environment, that can both move air in a room but also that air is being treated with UV as it's going through. So we are working on that. We're getting close. Testing is continuing. We're working on this with one of our partners that we've worked with from a manufacturing standpoint, and we expect to be working with them, having this product in the market. We expect during our fourth quarter of fiscal '21. So we think that's going to be very interesting, and we are working on other aspects of UV lighting that could come into play. We continue to have the technology in the violet light area, which we've had for years, which is a technology in the 405 spectrum of light, and that allows you to attack bacteria through its usage. So we've seen increased activity in that area for that product, and so we're still encouraged there. And then the other things we mentioned previously about moving towards additional high-margin niche products. We continue to investigate some things in the horticultural side and other areas. So in particular, we see some UV coming out probably first quarter -- I'm sorry, fourth quarter of fiscal '21, along with some other products.

[Operator instructions] We do have another question from the line of Marc Wiesenberger from B. Riley Securities.

Congrats, Bill, on the upcoming retirement. You guys have talked about work for this national global logistics company coming on a project-by-project basis. I'm wondering what type of lead times do you -- have you had, do you expect to have for the upcoming work? Maybe if you could talk about their facilities. Are they uniform in terms of kind of size and job specifications? And how would you say they compare in terms of the size relative to facilities at your largest national customer right now?

Sure. Thanks. It's -- their facilities, they have a very large number of facilities across North America, and the size range is quite significant. They might -- I'm going to broadly say it might range from 50,000 square feet up to 1 million square feet-plus. So they're going to be very, quite different. And therefore, the lead time, as you asked about, can also vary. Some of the projects might move very quickly if they're smaller and the tenant -- or there's a turnover of a tenant and they want to upgrade to LED. It could be a project that comes together and might be implemented in four or five weeks, could go very quickly. And generally, a much larger facility takes a little more planning, a little more activity that goes into being ready to move forward in that project, which could take a longer period of time, but perhaps a couple of months. So what we kind of keep, so we see it as being a lot of opportunity because there are so many facilities that they have and many, many that still have to be converted over to LED technology. As I've said a few times, what gets a little challenging in trying to provide visibility to people is that we're spec'd in to work with these projects, and it's kind of worked on a -- at the pace of when they want to do them. So we still think it's going to grow significantly over the next couple of years and will last for a longer period of time given all the conversions they need to do. I will just say compared to your earlier comment, so we kind of talked through last time a large retail box customer's footprints are, I'll call it, around 125,000 square feet. So these -- many of these are going to be probably larger than that from a project size standpoint themselves.

That's great to hear. As you're having kind of new and renewed discussions with your customers and the resurgence of COVID kind of potentially coming back, how are you and your customers potentially going to handle things differently than earlier in the year?

Sure. Some of the types of protocols we're doing, and I'll maybe talk both internally in our assembly operations as well as from a customer standpoint. Fortunately, we were very early to move towards base coverings in our facilities, which we think has had a very positive impact for us. We certainly have done all of the other types of things that one should be doing. We are very cognizant and educate and coach our people on the symptoms of having people stay home if they are exhibiting different symptoms for anyone entering our facilities. We have temperature checks and again checking symptoms within our assembly operations. We have spread things out to provide the ability for physical distancing, put out physical barriers where we can, doing everything we can to try to minimize the risk and reduce the risk. For our members. Likewise, externally, when working with customers, we first have to follow whatever protocols they have. But certainly, if our company's protocols are more stringent, we follow them. So again, face coverings, avoiding close contact, having physical distancing as much as possible, being aware of symptoms. So fortunately, for us, as we ramp back up heavily starting in August, it's gone relatively smoothly. Like many companies we're dealing with one-off situations frequently and working with our members to be careful for everybody. But we've had no significant work stoppages in the field so far. And that's why we've said a couple of times today, we caution everybody that, that is something we are watching because it could cause us to slow down if there is an activity externally. Now the good thing for us is, as it was asked by question earlier today, we might be in 40, 50, 60 sites per week. So it spreads out our risks somewhat in that many, many sites which continue to move forward. So we're continuing to increase our protocols and our compliance with those, we think, has had a positive result for us so far.

Got it. And one final one for me. In your discussions when you're looking to win new business, can you talk about the fact that your products are manufactured in the U.S.? And how is that potentially impacting customer decisions, if at all?

Sure. In certain situations, it's absolutely a very positive situation. One, there might be requirements for things to be Buy America Act compliant. And so certainly, that has to happen by manufacturing. Number two, we think there continues to be a growing sentiment of many companies in the U.S. that if they can buy American-made product, they would like to do that. The third one is our risk from a supply chain standpoint is somewhat modified and mitigated by having our manufacturing facilities here in the U.S. of not having additional transportation concerns and time line concerns with the product. Also, I would say that part of our commitment to our customers and part of why we are successful is we usually can deliver product very quickly, often faster than most of our competitors. So generally, on standard-type product, we can deliver it to the customer in 10 to 15 business days, which is typically much faster than many of our competitors. And then secondly, I think just having the ability to control the supply chain a little bit has been helpful to us. So from a customer standpoint, we see it as a positive. There are situations where customers are more interested in making sure that they have other attributes for a product that we might find better from having a sourced-type product, and we'll do that where it makes sense for the customer and for our company. But we -- overall, we still think having the U.S.-based manufacturing operation helps us. Then secondly, to your question is, the second key component for us always has been our capabilities to provide project-related services to handle installation, to handle control features, to provide a front-end to back-end solution for customers, we continue to see as our largest differentiation to our competitors and why we continue to win and hold on the businesses, having that broader ability to provide services to customers.

That concludes the Q&A session. I will now turn the call over to Mr. Mike Altschaefl for closing remarks. Sir?

Great. Thank you, Annie. Again, 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 delays and put us in a great position for a return to higher revenue and profitability going forward. Orion has regained its momentum. During the period of social distancing, we have participated in several virtual conferences, the most recent of which is recorded and available on our website. Our next event is Craig-Hallum's Alpha Select Conference on Tuesday, November 17. Please join us at events or contact our IR team with any questions or to schedule a call with management. The contact information is included on today's press release. So thanks again for joining today, and we really appreciate your time to listen in for the call. And I look forward to updating everybody on our fiscal 2021 Q3 call. Stay safe, and have a good day. Thank you.

Ladies and gentlemen, this conference call is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.