Good day, ladies and gentlemen, and welcome to the Orion Energy Systems Fiscal 2022 First 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. Mike Altschaefl, Orion's CEO and Board Chair will open today's call with an overview and to discuss the current 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 the call will be available later today in the Investor Relations section of Orion's corporate website. The call is taking place on Wednesday, August 4, 2021. Remarks to follow and answers to questions, include statements that the company believes a forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally include words such as anticipate, believe, 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 various 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 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, which are made as of today's date. Reconciliations of certain non-GAAP financial metrics to the corresponding GAAP measures are provided in today's press release, which is also available in the Investor Relations section of Orion's website at www orionlighting.com. With that, let me turn the call over to Mike. Mike?

Thanks, Bill. Good morning, and thank you for joining us on today's call. I will keep my prepared remarks relatively brief today as we took some time in our June year-end release and comments to provide a more detailed overview of our strategy, market positioning and outlook, and you can access those materials on our Investor page. As we expected, Orion is off to a good start in fiscal '22 with a solid first quarter. We achieved Q1 22 revenue of $35.1 million as we continue to benefit from more normalized market conditions and a solid demand from major national accounts. Our performance compares to a year ago revenue of $10.8 million, which was substantially impacted by the onset of the COVID-19 pandemic and the related delays of projects by our customers. A particular note in the quarter was our success in achieving an improved gross profit percentage of 29.1% compared to 24.4% in the year ago period and also a sequential improvement from our Q4, 21 gross profit percentage of 26%. Our performance also reflects the benefits of having a talented, experienced and nimble management team that has navigated a range of business and economic cycles, which allows us to successfully deal with the current business challenges. In addition, we have a major advantage over many of our competitors by being primarily a U.S. based manufacturer during a period of extreme worldwide logistics challenges. While there is some impact to us as we import certain components and finished products, we believe that we are in a better position than most of our competitors. This is a competitive advantage for us. And as industry delivery lead times extend, we have the opportunity to outperform our competitors. Turning to our product development success. Yesterday, we announced that several Orion products were…

Thanks, Mike. Orion's first quarter fiscal '22 revenue increased $24.3 million to $35.1 million, principally due to strong business activity from 2 of our large national customer accounts. This compares to sales levels last year that were significantly impacted by COVID 19 related disruptions that delayed many customer projects. More importantly, we remain on a strong sequential sales track that keeps us on a path to achieve our revenue target for the year. Orion's gross margin improved to 29.1% in the first quarter, which benefited from product mix, but also demonstrates our ability to absorb our overhead costs when we are operating with steady sales at these levels. This performance is also the result of a strong effort on behalf of our team to manage through a challenging supply chain environment. Combined with these factors more than offset any increases in material and component prices we have experienced. Our Q1 22 performance also began to reflect the price increases that were implemented during the first quarter to help offset some component, raw material, logistics, labor and other cost increases. We believe our pricing moves were either below or in line with actions enacted by industry peers. Going forward, however, we do expect our gross margin percentage to fluctuate somewhat from quarter-to-quarter due to changes in our revenue mix, the timing of larger projects and other factors, some of which are out of our control. However, we do feel our first quarter margin performance is indicative of the progress we have made and the potential in the business going forward. Further, we continue to pursue a range of initiatives to maintain or drive further margin improvements. In the current environment, we are working to focus our product offering on the most compelling and profitable solutions, which also have the potential for…

. Your first question line of Eric Stine with Craig-Hallum.

Can we just drill down into the $500 million goal? And I know that's 5 years out. But maybe first, just starting on the organic side. I mean, based on the pipeline based on the optimism that you're starting to see in terms of reengagement with other customers and large national rollouts. I mean how do you see the linearity of that? I mean, is that something where you expect growth kind of on a year-to-year basis? Or how should we think about that?

We just feel strongly that given the pipeline we are building, given the factors in the industry, given what we believe is a massive market opportunity yet to convert to LED in the commercial, industrial space, and in particular, in the submarket of High Bay, low bay and linear, that we see the market being around from government studies, $20 billion today, growing to over $80 billion in 2035 that we just feel confident with what we've done, we can continue to grow. So, we view the 10% as a way of getting there over 5 years, and we would look at it as being a goal of being linear. However, I would say that because we have a history of at times, winning some large outsized projects, one could see some bumps from year-to-year where you go larger one year and smaller than next year, perhaps. But overall, we expect to grow at least 10% a year each year over the next 5 years.

And then I guess doing the math, I mean, obviously, to get there and using that growth rate organically. I mean, a lot of this is acquisition as well. I mean when you think about that, maybe what's your view? Is that something where it's a number of smaller tuck ins? Or I mean, do you think that there's a part of this business that you could have a more sizable acquisition that adds to the platform?

Yes. I think when you look at the mathematics of what we have laid out and go through it, if you grow where we expect to be this current fiscal 2022 and grow that over 10% over a 5-year period, you get roughly to half of our goal, which would mean that we have a goal of making acquisitions over the 5-year period that can add roughly $250 million of revenues for our company. And -- but that also means you're perhaps buying some of those companies early on, and they grow to be a component of that $250 million within the 5-year period. Our strategy is open on this. We certainly have some areas of our business that we think could be accelerated by finding some nice tuck-in acquisitions for us. And we have seen a very nice robust pipeline at this point in time of things that we are looking at, which encourages us -- our premise that there are some companies out there that could help us grow and at the same time, we don't want to rule out that something somewhat larger than what's defined as a tuck-in could come along that we'd say it makes really good sense for our company and for our shareholders to do something larger. The good thing, in my opinion, is that we have the financial resources, certainly to do tuck-in acquisitions and probably something larger if we wanted to, between our unused capacity right now and other leverage aspects that we could do, Eric. So, tuck-ins probably make the most sense, but we're not going to rule out something larger if it makes a lot of sense for the company.

And maybe last one for me. Just on the maintenance services, and great to hear that you're starting to do work for your big national account. I mean, I guess, sticking with that longer-term goal, I mean, do you kind of have a percentage in mind of how much of that would be maintenance services if you look out 5 years?

Well, I think when you go back to our premise of moving into maintenance services, it was a combination of customers asking us to help in this area, feeling like there was some lack of service going on for them. Number2, we have said previously, we see one of the reasons to add value to this company is to have more predictable recurring revenue streams, which do come usually with maintenance services. And we have a great customer base and existing support system to go after this type of business. We have not, at this point, gotten far enough where we're going to say what the goal is for that maintenance services business over the 5-year period, other than that, we think it's going to be a significant part of our business over the long term. And I think it was you get further through fiscal '22 and head into fiscal '23 and the existing relationships we're now starting and landing some additional situations, I think, later in the year or next year, we'll be able to give a little more visibility what we think this can grow into. But so far, we are encouraged by what we are seeing and the acceptance we have and getting some things going with our largest customer right now is a great way to start for us. So, thank you, Eric.

Next question from the line of Amit Dayal with H.C. Wainwright.

With these air flow offerings, are we getting any traction with those products sort of grown kind of resurging a little bit? Any wins or any contribution from those products in the current quarter or in your guidance for the fiscal year?

We're still very encouraged by the PureMotion products that we rolled out over the last few months. And as a refresher, we have 3 different products in that product family on a PureMotion, which is used to circulate air in a room, a second one of PureMotion light, which has the air movement capabilities as well as a light fixture built into it. And then pure motion UVC, which has the air movement plus an enclosed sealed UVC chamber that is able to kill viruses and bacteria as the air is flowing through the units. So, we think we've got a great product. We think we're at a competitive price point as we've done our work. And our conversations externally have been very positive. It takes time for a product like this to have people understand it and test it and look at the testing for it. So, we are not at the point of reporting any significant revenues at this point, Amit, but we continue to be very encouraged by the conversations we're having. Most recently, we've had some increased discussions with several universities around the country. We do see academia being an area where this could make sense in school systems and perhaps other situations like that. So, it's early on. We're still very optimistic about it and still feel it's going to be a great product for us.

Okay. I guess my other question was around the maintenance side of things. This is still an early effort. I was wondering if there is any meaningful maintenance revenues in this fiscal year? Or should we think about it more as a long-term development for your base?

Well, I think this is our first full fiscal year of the maintenance services. And as I've mentioned that in my prepared remarks that we were very pleased to launch some additional maintenance services with our larger national account. And we see that growing over time, and we have made progress with some of our other customers on maintenance services also. We would say that when we laid out our sales goals for fiscal 2022 of $150 million to $155 million. We were anticipating some getting our maintenance services business going. So, we see what we have won so far as being part of what we were expecting and achieving those levels. And I think we're going to have a better feel for it as we get through further through the fiscal year, perhaps give a little more insight on where we see it going in the future. But the encouraging part is for some of these larger accounts, there are pretty substantial revenues that they do spend on maintenance services. So, if we are successful in landing some contracts, it could end up being meaningful for us. So, we're, again, highly encouraged by it, but it still takes a little bit of time to develop. We decided to build this internally. At this time, we have the team in place and the systems in place, and we are performing services, but it's also an area where I could see us perhaps making a tuck-in acquisition to help us accelerate the growth in this area going forward.

Understood. And from an M&A perspective, is it a little early to assume maybe that something could happen for you guys? Is it something maybe further out in fiscal '23 maybe?

It's always hard to predict where things are going to come together on an acquisition. We are encouraged by the pipeline that we have developed so far in the process that we are undertaking to find possible acquisition or partner opportunities and begin conversations with people, and some of those conversations have started. As we mentioned on our last earnings call in June, we have had certain conversations and at times have entered into or issued draft IOIs or letters of intent, nothing of which has been executed at this point in time. So, we're thinking about this more perhaps still being an impact for fiscal 2022 and certainly in fiscal 2023.

Our next question the line of Craig Irwin with ROTH Capital Partners.

So, the revenue earned but not bill a line on the cash flow this quarter was interesting, $1.886 million. Can you maybe clarify for us what that was in the quarter that contributed here? And obviously, it would have been nice to have that in the quarter. But can you maybe talk about the milestones necessary to recognize that revenue and profit from an accounting standpoint over the next quarters or years.

Yes. I'll take that, Craig. We generally have a couple primary different methods of revenue recognition. One is on what mostly known as percentage of completion. And you take it based on those percentage of milestones, if you will, and some is substantial completion. So that is a little bit -- obviously, closer to the end. So, I'd say that revenue earned but not billed is, has been recognized as revenue, but just not build the 10 timing for being able to build that is generally not a long tail. So, I wouldn't think of that as something that there's a long tail of expected weight in order to get that to bill it and then collect it on a normal course basis.

Okay. So as a clarification, the revenue has already been recognized, and I assume the gross profit, the cash collection is in the future, at least the billing for cash collection is in the future. Is that correct?

Right. We have not hit the hurdle to bill it in this and have not billed and won't collect it until sometime after we bill it, correct.

My second question is about 10% customers in the quarter. So usually, your 10-Q is a couple of days after your earnings call. Can you clarify for us how many 10% customers you had in the quarter? And you've made different disclosures about those customers in the past. I don't know exactly what you're planning for your 2, but can you give us something that approximates what you're going to put in your filing for the revenue contribution from these customers?

Certainly. We have our large customer that we will show having contributed 51% of the revenue during the quarter and another customer that contributes approximately 14% for the quarter.

So, 51% and 14%, that's very nice. Then I guess to ask this in an appropriate fashion is tricky, right? So, I'm going to make an effort, right? You guys a year ago plus, I guess, I learned, had made tremendous progress with a customer that does about $150 million a year in lighting fixtures repurchases, plus controls, et cetera, right, on top. And our conversations recently with others in the market have informed us that there have been several companies to go in there, try and have a very difficult time. So, it's not just the market leader that's been having a hard time in there, but they've been dissatisfied with them. And I think Orion was the third company that they tried or at least that's what I was told. You guys have a history of executing for one of their very largest customers, I guess, maybe we know who that is, right? What could you say your experience serving customers that overlap helps -- helps inform, Orion, on the challenges of serving this incredibly demanding customer? And can you maybe express for us the confidence you have in execution with this customer over the next number of quarters?

Sure. A couple of comments I'd make on that, Craig. We have -- early on, going back a number of quarters, talked about the fact that we are encouraged by landing ability to start to do work for a very significant even global logistics and warehousing company. And then some quarters later, we announced that we had a second somewhat similar company that we thought we would start doing business with. And my hunch is, you're probably referring to the first one, which we've talked about in the past. First of all, we expect all of our customers to be demanding, and that doesn't bother us whatsoever. And it actually having competition on some of these very large customers where they're doing perhaps multiple sites across the country is probably going to happen as opposed to where, let's take maybe a big box retailer that decides they want everything absolutely the same all the way through their facilities. We actually relish having that competition with some of our large competitors because, frankly, we have found on the whole that over time, we believe we can outperform them, particularly from a service standpoint and overall relationship. And over time, we can capture a larger percentage of that business. The first opportunity that we have and customer that we do have, which you and I have talked about in the past, has developed somewhat more slowly than we originally anticipated. We have been pretty consistent of commenting that for both of these large opportunities because their business model is multiple, multiple facilities across the North America that we would be interested in. They end up awarding that business facility by facility. So, while we may have a master agreement with those entities with respect to service and product. Each one ends up being an individual project that they look to, and they may decide to have multiple people look at those situations. We're happy competing in that situation. So, your pricing is all laid out, and you prove yourself based on performance and frankly, lead times and having things happen. The second relationship that we have is developing a little bit very well. So -- and as I mentioned, the first one is a little bit slower. Why has it been slower? We think it's been a combination of coal it just slowed some of these things down. Those entities have -- their customers are leasing these facilities. And so, in midterm lease, they may not want to do things. And it takes some time to develop. We're extremely optimistic about both of those relationships over time. We relish the competition, and we have found over time where we can go head-to-head, and they compare us afterwards that we will come out on top, and we will work very hard to do that. So great question. I appreciate your question.

So then historically, Orion has executed impeccably when the people that are doing the implementations that these customers are direct employees, not just the project managers, but when you sent several employees to these key customer sites. Can you maybe comment for us whether or not bulking up the services business and the longer-term vision there is something that is additive to the capacity to serve some of these potentially very demanding customers and something that maybe helps differentiate the capabilities at Orion?

No. I think it does. I think that's -- it's an excellent question because as we add additional volume and more customers and at our maintenance services business, it requires us to further build out our relationships with companies that are helping us perform some of these services. As we've said in the past, for our installation services, we have our own employees who are doing the upfront work, the audits, the engineering work, the design of the fixture. And we also have our own people who are on-site with full responsibility to oversee the installation services and the commissioning of the control systems into the billing management systems. But we often use third-party electrical contractors to actually do the physical installation because we find it to be efficient. And there is capacity in the industry at roses to ramp up very quickly when we have big projects. So, some of those contractors are the same contractors that we will partner with to provide maintenance services, so allows us to bulk up, allows us to add additional supervisory people and construction managers and auditors. And over time, we probably will increase some of our self-performing capabilities where we may do the installations ourselves. We've done some of that already, but it's been rather small. But as we have the ability to keep people have the right density in areas to have self-performing teams, we will do that. So yes, there are synergies between our turnkey services and our maintenance services businesses to leverage some of the fixed costs and add to our fixed cost to become a bigger player in the industry.

. Your next question line of Alex Rygiel from B. Riley.

Mike, your gross margins in the fiscal first quarter were excellent. How should we think about gross margins through the remainder of the year? And you mentioned the impact from mix being a positive influence. How should we think about mix in the latter part of the year?

I guess, Alex, this is Per. I'll take that, and if Mike wants to add anything after me, certainly can. I think what I tried to convey in my comments, certainly, we would think that our rate will fluctuate somewhat from quarter-to-quarter, largely based on mix, and that's both from a product standpoint within, I'll say, a quarter as well as between product and service. So, I think we saw a nice improvement during the quarter in both -- in both product and service. And -- but we also would think that 29.1% was obviously a strong improvement compared to our historical levels. And it will likely mix out somewhat less than that, but that, ultimately, as we've said before, I'd say, longer term, our goal is to get it up into the 30% range. So, I'd say it's -- we're not probably at the point where we're going to hit that long-term goal, but would hope to be up toward the 29% range as we move forward, but there will likely be some quarters we're not at that level.

And sticking to this point, you mentioned you took a price increase in the first quarter. I suspect it did not or maybe it did fully offset the rise in raw material and labor costs. But how do you think that price cost mix will play out in sort of 2Q?

Well, there's a lot of -- I'm sorry, go ahead, per.

I was just going to say, I think there's a couple of things -- a couple of ways to think about it. One of them is we did put in the price increase early in the quarter. The -- one of the big dynamics of that is some of our large customers are subject to contracts with prices that extend through the term of that contract. So, the thought is that as we renew contracts, we'll be able to -- that's the point at which we'll be able to get the price increases into the new contracts. So, some of the traction that we gained, we think, will be enhanced. As we move forward and renew contracts, negotiate new contracts. And then you will have to monitor the overall situation as we move forward to and continue to just monitor both, I'll say, any of the price dynamics within the supply chain.

Okay. And then lastly, you reiterated your full year 2022 revenue guidance. How does your confidence level compared to a few months ago? You more or less confident on this? And what are some of the variables that could help you to exceed or possibly unfortunately miss that guidance?

I'd say we are either the same or somewhat elevated and our confidence now that we're a few more months down the road since we first laid out that as a goal and target for fiscal 2022. And the reason is we see more visibility to the larger projects that we have. We have more of a feel for some of the activity that's taking place and the pipeline that's building, the timing that could come through. We're also encouraged by the U.S. government is kind of back in the mix a little bit more than they had been during the heavy part of the pandemic, and so we see some opportunities on that side. And our automotive business, it looks like it could be robust for the future of fiscal '22 also. So, it's a number of factors that we feel as confident and probably a little more confident than we did back in June. What can happen? There still is concern about COVID. It had -- we probably felt less concerned about COVID in June than we do here in August, given what we've seen with respect to the delta variant out there. We have continued to have been able to run our facilities full out to keep with our customers. But one could see if things do get out of hand or something else comes up, could customers restrict access to facilities, et cetera, but so far, we are not seeing that. And could there be supply chain issues? We said in our prepared remarks that so far, we've had only minimal impact to our customers from a supply chain standpoint, but it is a challenging environment right now that we think we're working through very well and are confident we can work our way through it. And then lastly, every now and then other things happen at a customer, when you have a larger project going on. We had a certain situation this quarter where we had a customer needed us just to slow down for a couple of weeks because something on their end caused them to want to do that. And so, you're going to have some of those movements between quarters that for us can be somewhat significant, but it's as part of our project-based business. But overall, we still feel confident about fiscal 2022.

And your next final question comes from the line of George Gaspar with Investor.

Okay. I'd like to have you reiterate if you've said this already or give us a comparison here on the backlog that you had at the end of your quarter versus the previous quarter's backlog at the end of that quarter versus a year ago. Can you give us those numbers specifically?

Sure. Our backlog at the end of the most recent quarter at June is $12.2 million. The backlog in -- at the end of the fourth quarter of fiscal '21 was $15.5 million. And the backlog in the prior year, at the end of Q1 was $15.9 million.

$15.9 million. Okay. All right.

And what I would just kind of quickly add, George, if I could, is -- we've said this a few times in the past, we certainly monitor backlog, and it tells us something. But we've also found for some of our larger accounts we do not put something into backlog until we either have a purchase order or a contractual relationship where we know we're going to ship something and so, we might enter into business where it just isn't there yet. So, it's indicative of something, but it doesn't -- it's not probably as indicative as it may have been in the past and what's going to happen the next quarter as it moves around? Just kind of throw that out for your consideration.

And then a question on your component cost structure, you made some reference to prices going up. Can you highlight a little bit as to where that -- the most impact is coming for you in terms of price increases on product?

Sure. Okay it's -- absolutely. It's been somewhat spread out. I mean we have seen on the electronics side, which would be both our -- the LED boards that we buy for our fixtures and the power supplies that we purchase, that there has been some inflationary pressure on those 2 electronics. We have seen metal have some price inflation during the year, which is one of the next larger raw material components to our fixtures. Resin prices have gone up due partially back to last winter when there were the massive storm in Texas, which messed up some refineries for a while. And then when you look at logistics and transportation, we -- while we source what we can internal to the U.S., we do purchase certain raw material components and some finished goods from Asia, and the cost for international transportation has gone up dramatically over the last year as has some of the domestic transportation. And then lastly, we've had some labor inflation. If the market for labor is challenging. We've been able to stay staffed where we want to be, but we also want to be competitive and pay our people a fair wage. And so, we've had some inflationary pressure on labor. Our goal has been between negotiating with suppliers of -- and having ability to buy certain things and being proactive and working through things that we've been able to manage that and offset it with certain price increases where we think we're being competitive, and we'll keep doing that in the future. Thank you very much for your questions, George.

This concludes the Q&A session. I will now turn the call over to Mike Altschaefl for closing remarks.

Thank you, Rachel, and thanks again to everyone who joined us today for your interest in Orion. We are going to be participating in the H.C. Wainwright Investor conference in New York in September, which will be our first in person conference since the pandemic, and we also expect to participate in the Craig-Hallum Alpha Select conference in November. In recent months, we have participated in several other virtual conferences, all of which are recorded and available on our website. You may also contact our IR team with any questions or to schedule a call with management, and their contact information is included in today's press release. Thanks again for your time today, and we look forward to updating investors on our fiscal '22 Q2 call. Thank you, and have a great day.

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