Good morning and welcome to the Orion Energy Systems Fiscal 2023 Second Quarter Conference Call. [Operator Instructions] Today’s conference is being recorded. I would now like to turn the call over to Bill Jones of Investor Relations. Sir, you may begin.

Thank you and good morning. Mike Altschaefl, Orion’s CEO will open today’s call with an overview of Orion’s results and strategy. Mike Jenkins, Orion’s COO will then provide more perspective on the business, including sales and operations. Per Brodin, Orion’s CFO will review the company’s Q2 and year to date results, financial position and financial outlook and then we'll open the call to investor questions. An archived replay of this call will be posted to the Investor Relations section of Orion’s website at www.orionlighting.com. Remarks that follow and answers to questions may include statements that may be 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 similar words. Additionally, any statements that describe future plans, objectives, goals and the business outlook are also forward-looking. These forward-looking statements are subject to various risks that could cause actual results to be materially different than currently 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 therein, the company disclaims any obligation to update forward-looking statements that are made as of today’s date. Reconciliations of certain non-GAAP financial metrics to the corresponding GAAP measures are also provided in today’s press release, available at the Investor Relations section of the company’s website. Now, I will turn the call over to Mike Altschaefl.

Thanks, Bill. Good morning and thank you for joining today’s call. This morning, we reported our second quarter results and reiterated our full year revenue outlook. Our second quarter results reflect the impact of some continued customer delays in the initiation of several large LED lighting projects, which has pushed these opportunities into future periods. Almost all of our larger project opportunities remain in place. We did see one customer halt their new projects in response to changes in their near term facility needs. The good news is that we expect most of these projects we have been talking about for a few quarters to commence in our third or fourth fiscal quarters, providing momentum as we head into our next fiscal year. Among these opportunities are significant projects with logistics, industrial, automotive, and public sector customers. Additionally, our pipeline of project opportunities is expanding, driven by a steady increase in new project quoting activity with existing customers and some significant new prospects. While the timing and pace of business activity remains hard to predict, stepping back, we do see strengthening interest in our Orion's mission of delivering high quality, innovative industry leading products in our growing range of services to meet customer goals for energy efficiency, workplace safety, cost reductions, environmental and other business goals. Further, our unique and proven ability to provide turnkey solutions to design, produce, install and maintain increasingly complex LED lighting and controls systems and now EV charging solutions addresses a growing need for organizations with large national or regional footprints with hundreds and sometimes thousands of locations. Last month we, we entered the electric vehicle charging market through the acquisition of breeze [ph], a top tier commercial EV charging solutions provider. We are very excited about this expansion of our portfolio of solutions for…

Fiscal '23 second quarter revenue with $17.6 million versus $36.5 million in Q2 '22 and fiscal 2323. First half revenue was $35.5 million versus 71.6 million last year. Current year periods were impacted by project delays. As we have outlined earlier on the call. Revenue for both the second quarter in year to date periods increased when revenue from our largest customer and the large global online retailer are excluded. Reflecting the strength of our core business, our gross profit percentage improved sequentially to 25.3% in Q2 '23 as compared to 19.8% in fiscal Q1 23, but decline versus our 29.5% performance in Q2 '22 year over year decrease was principally due to lower fixed cost absorption due to lower revenues. Conversely, our expectations for higher revenues in the second half of this fiscal year should have a positive impact on a realized gross profit percentage. The sequential improvement in gross profit Q2 '23 versus Q1 '23 reflected a higher margin revenue mix of projects, ongoing supply chain and cost management efforts, and the benefit of prior price increases offsetting higher input costs. Fiscal Q2 '23 product gross margin would've increased compared to 2022 or if not for the unabsorbed plant costs. Second quarter fiscal '23 operating expenses were $7.4 million versus $5.8 million a year ago, principally due to higher general and administrative expenses related to the January, 2022 acquisition of stay light the year ago benefit from an employee retention payroll tax credit, which reduced operating expenses by $0.8 million and a non-cash equity based compensation charge. Operating expenses increased 200,000 sequentially from Q1 '23 primarily due to integration initiatives in our maintenance services business, plus non-cash equity based compensation costs related to our CEO's retirement. Orion reported a net loss of $2.3 million or $0.08 per share…

[Operator instructions] And our first question coming from the line of Sameer Joshi with H.C. Wainwright. Your line is open.

Thanks. Good morning. Thank you. I'm also fighting a cold sorry. On the [indiscernible] front you mentioned and it is known that there is this $5 billion that is distributed through the states. Whereas world [ph] is focused primarily in the Northeast. Are there plans to expand that team so that they can avail and be -- position themselves to capitalize on all or most states plans that will come through in the first quarter of next year?

Sure. Hi, Sameer, it's Mike Jenkins. To answer your question, yes, we are expanding the team. We're adding resources to it right now. We see a lot of growth opportunity with the current -- under the current platform, in the current location. So we want to continue to drive very strong growth that Kathleen has experienced in the Northeast. In addition to that, we want to leverage the rest of our turnkey resources to help expand this platform on a national basis. And so there are discussions underway right now about exactly how to do that. As I mentioned under my remarks, there is very strong interest from existing customers about how Orion could help in this space moving forward.

Okay. And then just a follow up on that I think in the definitely is announcing the transaction. There was a $4.8 million number during 2021 as a top line number for World Track. Is it tracking similarly for this year and given that the earnouts are in like significant in the $1 million to $2 million to $3 million ranges over the next two, three years, what level of revenues are you expecting from this in the say in fiscal '24 and '25?

Hi Sameer, it's Per. We did disclose on the initial call announcing the Track transaction that their revenues were $4.8 million in 2021, and that we expect between $3 million and $5 million of revenue associated with that business in the second half here of fiscal '23. Given that we recently acquired the entity, we're still in the process of determining what we think the opportunity is specifically for fiscal '24 and hope to be in a position to discuss that in more detail on the February call. But I think as we iterate or as we mentioned on the call a month ago, we see significant opportunity for this business and it's the reason that we went down this path.

Understood. Thanks for that Per. And just one last one from me. Gross margins have improved significantly sequentially and given that the second half revenue is expected to be much higher than the first half revenue, should we expect to return to that 28% to 30% blended gross margins in the next two quarters? Or how you see that?

I think the best way to think about it is, we obviously achieved a 25.3% in the current quarter, and we're doing everything we can to, you know, maintain or improve on that. We expect our revenues to be higher in the third quarter of fiscal '23, which should improve our absorption in managing the costs as carefully as we can. So we would expect to be able to improve on the 25.3% depend -- would expect it to slide to a better amount as those revenues continue to.

Got it. Thanks once again and good luck on the Voltrek execution.

Our next question coming from the line of Eric Stine with Craig-Hallum.

Yeah, good morning. It's Aaron Spychalla for Eric. Thanks for taking the questions. Morning. Maybe first good to see several customers reengaging and confidence in starting projects in the second half and into next fiscal year. Can you just kind of elaborate a little bit more on the confidence there, any gating items that might be required? And then just on the customer that kind of halted, you know, any more color that you can share there magnitude sounds like it obviously wasn't related to you, just more customer specific, but any color would be helpful.

Sure. Great questions there and thank you. I'm going to go and reverse order first on our comments about our global online retailer who pulled back in their project business. We first started talking about that back, I think in January or February, where initially they pulled back because they were at, these were new construction sites and they were having issues on their supply chain of getting equipment and other mechanical and steel for the facilities. And then shortly thereafter, they announced publicly in, in a number of places that they felt they had overbuilt to a certain extent for a period of time and decided to take a timeout from doing these new construction facilities where we were providing the overhead lighting in the pick modules. So it was something, frankly, out of our hands, we had expected a fair amount of that business for us. It was five to 7 million of business last year, and it kind of stopped very quickly. So that's the one project we are mentioning in our comments this morning about a project that is not going forward. On the positive side, we realize we've talked about several really positive projects for a few quarters, and what we're excited about is that we are seeing them coming to conclusion in terms of getting ready to kick off. So one example, we've talked about working hard on a project for a very large logistics company with many facilities across the United States, and we've been doing some modest amount of business with that customer for the last couple of years as they've gone through planning for a much larger project. And we now have a material supply agreement in place with that customer, and we expect to play a very significant role as…

Thanks for the color, Mike. And yeah, I missed kind of that it was a global online retailer, so thanks for filling that in. On that ESCO you did talk about a few of those large opportunities kind of coming later this fiscal year. Can you just kind of talk again about just what's kind of unleashing those and kind of optimism there as we look to, to next year from that business?

Sure. Yeah. We've really, as we talked about on prior calls, we see a lot of growth opportunity through our ESCO channel and partners. We've put a fair amount of resources and work into building those partnerships and really exploring growth opportunities. We've got some excellent partners who are bringing forth some very significant opportunities and a number of different verticals for us right now. I think that the pipeline for ESCO is probably as significant as it's been in, in a maybe ever but quite some time. And a number of these really are, we're looking at a strategic partners that they can then help us get into new verticals that quite frankly, we haven't been in before. So I think it's a, a real win-win kind of partnership.

All right, good. Thanks for taking the questions. I'll turn it over.

[Operator instructions] And our next question coming from the line of Alex Rygiel with B. Riley Securities,

Thank you. Could you give us an update on the pure motion products in any details as it related to the first project that was started last quarter?

Sure. We continue to work diligently on that product or the pure motion, in particular, the pure motion product that has the UVC application in it, which can deactivate kill viruses and, and, and mold and mildew. Alex, it's been a slower process than we expected. We continue to have some very nice opportunities of size that we are working with people on. And those have continued, we've talked about those in the past, and they're continuing. And we also see potential for the, let's call it the base product, which is the air movement product, which is available, to put into a ceiling trougher type product that helps move air and circulate air within a particular room, which can have some very significant energy savings with respect to the HVAC systems. So we continue to believe we have very strong product. We have had a significant investment in marketing activities during the year, and we're so optimistic that we're going to land a couple of nice size projects in the future on, on that product, but it has gone a little slower than expected.

And then on tech, did you acquire any backlog and how does that backlog compare to maybe a year ago to help us to sort of understand what the revenue growth rate of that business can be over the next year or two?

I think I'd start and then we're just going back over the numbers that we talked about earlier of, $4.8 million during calendar 21 for their business, and now we now expect to have revenue of three to $5 million in the second half of our fiscal year. So obviously roughly doubling in size from a year ago of where they have been, so very nice growth that they've had. Yes, they had backlog as we acquired business and very nice activity and so we are able to hit the ground running and why we feel there will be nice significant revenues during the second half of the fiscal year. There is a lot of planning that goes into place for EV charging solution projects. And so it's similar to our other business where there are site visits and engineering work that's done and approval processes. And then the supply chain for EV also has some challenges to it. So things, do kind of build up from a backlog standpoint. So we feel good about the backlog they have, and as Mike mentioned earlier, we're making significant investments to expand that business across the United States.

Thank you very much.

Thank you. One moment for our next question and our next question coming from the line of Bill Dezellem - Tieton Capital.

Thank you and congratulations on having customers reengaging with you. But I'd actually like to dive into that in, in a bit more detail. Why do you sense that they are reengaging now given the economic uncertainty? That actually seems counter to what I would've otherwise anticipated. I'd love to hear insights and comment slate.

Hey, Bill, I'm going to have to ask you just repeat it one more time. You're coming through very low on volume, so if you could please ask the question one more time.

Yeah, no problem. Can you hear me better now?

Very much. Thank you so much.

You're welcome. So congratulations on customers reengaging with you. But the timing to, to me is a surprise and it seems with the increased economic uncertainty that, that that would lead to less re-engagement. And yet you've talked about having more re-engagement. So the question is, why, why do you think they're reengaging now?

Yeah, that's an excellent question and my view on it is that while we use the words reengage, I also think it's closely linked with, we have seen the decision making process for larger projects move a little bit more slowly than in the past. And we've commented on this previously. So part of the reason why we think we're seeing and speaking positively about the second half of the year and going into next year is that these projects that have moved slowly through the customer approval process, we can see are getting very close to the end. And the reason we think they're going to continue is that most of them have very significant savings related to them from an energy standpoint. We often comment that most projects have 50% or greater energy cost reductions. And so we have seen in the past that even if the economy might slow down, it provides an opportunity for companies to reduce expenses going forward. So certainly we will and remain cautious about the economy as everybody is at this point. Haven't seen it slow down the project activity that has been going through the process with our larger customers.

That's helpful, thank you. And then relative to pricing, would you talk a bit about how much you believe that you still need to raise prices further and, and to what degree you are finding willingness or tolerance by your customers for you to raise prices?

Yeah, so this is Mike Jenkins. We, as you're aware probably we've talked about on prior calls, we have done a fair amount of price adjustments as we've seen inflation you know, move up over the last 18 months to 24 months. I would say that in general in our industry, we're not seeing nearly the same rate of inflation in terms of costs. Transport costs are starting to decline from ocean freight, lead times are also getting better, those types of things. So the inflation kind of curve that we saw before has definitely flattened and we're obviously very vigilant on, on, on looking at it and making any price adjustments that we need. But it is moderating to a large degree now, we feel like we've kept up with it thus far.

Okay, That is helpful. And then finally your service margin, gross margin increased. What something in the neighborhood of 800 and or 50 basis points versus the first quarter, is that increased service gross margin, a function of having stay light in the mix and some of their expertise? Or is there something else going on? So maybe a bit of why, why such success with gross with gross service, gross margin increasing sequentially.

Hey, Bill, it's Per. I guess I'd say that the margin within service can fluctuate a fair amount. I'd say it's not -- I wouldn't attribute it to the expertise that, you know, stay light brought to the table with their base business. That service margin just as a reminder to everyone includes installation services. So it is not just maintenance services and that's where Mix, I would say, could be one of the bigger impacts on that rate from a quarter to quarter basis.

Great. Thank you all for the perspective.

Thanks Bill.

Next question coming from the line of Jeffrey Campbell with the Alliance Global.

Thank you. I just wanted to ask you a question with regard to the kind, the structure of the BRE business. Is this primarily an EPC business? Are you actually going out and procuring real estate or leasing real estate to develop these facilities? And is there going to, do you envision any change in the way the business works now versus what you see for it as you expand into different parts of the country? Thanks.

Sure. This is Mike Jenkins. The business itself is a design and installation business. We go out and guide our customers through the process and then manage in a turnkey fashion, the installation. We also do sell some of the products to other channels and to other partners as well. But we do not enter into the management of the real estate or leasing products or any of those kind of structures which are available today. As far as the future, those things are really not in our current thinking, but always, we'll be looking at how the industry evolves over time. I also would add, highlight what we've talked about in the past That, we are -- we have the ability with Voltrek to use multiple suppliers for hardware. So we want to be in the business of providing the product for these EV charging solution projects. And we already have access to both charge point and EV from a supply very strong supplier relationship, but we also have others that can supply product. So our goal is to have the ability to bring various products, solutions to the customers, have the turnkey solution, like we've done that awry and Voltrek done in the past of the installation. Then obtain the ongoing maintenance service contracts and also have ability for additional recurring revenues when there might be other kind of subscription revenues with respect to certain products being sold. So that's kind of the business model that we see. We currently, as Mike said, don't see ourselves being an EPC of owning the actual stations.

Okay, great. I appreciate that call.

Thank you. One moment please for our next question. And our next question coming from the line of Andrew Shapiro with Lawndale Capital.

Hi, good morning. A few questions. If you could your acquisition of the service business, I guess it was three, maybe a three quarters maybe a year ago now on a prior call I had asked about your thoughts on its expansion to different geographies and you thought that that might be via acquisitions maybe more than organic growth. Then the Voltrek acquisition occurred and I didn't know if the types of business that VRE is and the service business and service and maintenance business that you kind of acquired to expand what synergies, if any, they exist and if they are achieving some of that geographic expansion since VREs so strong in the northeast.

Sure. High level, yes, we see synergies between both of these acquisitions, both with each of those companies as well as with our existing Orion business. So to kind of go back and talk through a little bit, we felt a strong opportunity to enter the maintenance business and right at you know, Jan, at the beginning of this calendar year, we is when we close the acquisition of Sea Light. And Sea Light has a nationwide footprint of being able to deliver maintenance services for lighting and miscellaneous electrical services as well as having 15 states where they can actually self-perform those services. Generally in the upper Midwest out to the East Coast and the southeast a little bit. We plan to expand our ability to provide those maintenance services through additional self-performing, but also great partnerships with other service providers and continue to have that nationwide network. Mike mentioned earlier today we have our first larger, new opportunity for that maintenance business with a entity that has a number of locations in the southwest, primarily in the west. So our feeling today is that while initially we had thought maybe we would do additional acquisitions on the maintenance side of the business, as we did our additional research and felt that EV charging solutions was a great place for us to move to we turned our m and a attention towards that area. And it's also factor that we think we probably can organically grow the existing maintenance business currently as opposed to look at multiple acquisitions at this point in time, we think the bolt track acquisition was the right move and the synergies between them is that the maintenance services that are needed for lighting maintenance, we think our synergistic with the maintenance services needed for the EV charging solution projects. So over time we could see having our, our technicians who are providing the services in the field service, both the lighting customers as well as the EV charging stations. And as you build additional density in different areas of the country, it becomes, you know, very positive business model, have our own people doing that work. And then finally, I would simply say, I'm sorry, go ahead.

No, no, go ahead. I, I have a follow up anyway. Go on.

Yeah, so I think now we've made these two acquisitions during the calendar year, it's time for us to make sure we integrate those very confidently and smartly and then we'll, continue to sit back and say, how do we move forward to grow those both businesses, both organically and through additional acquisitions.

Okay. That's good because I was a little concerned about getting another service maintenance acquisition and just trying to integrate so many things when you guys are trying to need to execute on the business at hand. Now with respect to Voltrek, which is primarily in the northeast, what is the, I guess the timing and the plans for rolling out its business model and its business services beyond its geographic strength? Is that going to be organic? How does that, how do you envision that occurring and or is that going to be something after that will wait until after integration and then they'll need to be an acquisition?

Yeah, this is Mike Jenkins. I think we, we've already started with some customer engagements outside of that core area. We feel like we can leverage some of the resources and partnerships that we already have today on the turnkey side of our business to do some of the execution for that model outside of its core area. But it's going to be largely an organic build for us.

Okay. And then last but not least can you can you quantify and describe the timing for which you will or have already recognized the acquisition costs? I would assume either in the SG&A or potentially broken out as a separate line item for the recent Voltrek acquisition, which doesn't start generating, I guess revenues and cash generation for the company until this current quarter ended, I guess December.

Sure, I'll take that. Did see in the P&L in today's press release, some acquisition related costs that were recognized in the most recent quarter. In the second quarter, that was the tune of about $300,000. There was some acquisition related costs associated with that for both TRE and still a little bit for stay light. As we move forward there will be, I'll say some transaction related costs that still come through here in the third quarter and then there will be some integration related costs that will come through. The more significant component that I want to make sure everyone understands and we mentioned on the call announcing the Voltrek transaction, is that the earn out payments that are associated with the transaction for Voltrek will be recognized through the P&L. So there's a earn out opportunity for fiscal year '23, fiscal '24 and fiscal '25. Those costs from a gap standpoint will come through the p and l as we assess that they're being earned. And then they would be paid in a, in the subsequent period after we've finalized the measurement of the progress against those earnouts. So you're not…

Yeah. Is the earnout metric than revenue based or will it be hopefully more cash flow emphasized?

It's EBITDA based.

Okay. Excellent. Thank you.

Thank you. And that concludes the Q&A session, I will now turn the call back over to Mr. Mike Altschaefl for any closing remarks.

Thank you, operator. As some of you may know, this is my final earnings call as Mike Jenkins will become our next CEO after our quarterly board meeting on Thursday, I will continue to serve Orion as a Director. I'm confident that Mike has an excellent combination of experience, leadership capabilities and proven business success to lead Orion to a bright future. I would also like to thank the entire Orion team for the privilege of working with you, all of you as CEO over the past five and a half years. I'm very proud of the talent and commitment of the team that has allowed us to put the business on an exciting path for the future. I'm truly grateful to have had the opportunity to lead Orion. I would also like to thank our investors and other stakeholders, including our customers, partners, and suppliers who have believed in and supported Orion over the years. So thanks everybody for joining today's call and the team looks forward to talking with you after our next quarter. Thanks a lot.

Today's conference call is now concluded. Thank you for your participation. You may not disconnect.