Orion Energy Systems, Inc.

Good morning, everyone, and welcome to Orion Energy Systems Fiscal 2025 First Quarter Conference Call. At this time, all participants are in a listen-only mode. I will now turn the call over to Bill Jones, Investor Relations, to begin.

Thank you, Alex, and good morning to everyone, and thank you for joining this call. Mike Jenkins, Orion CEO, and Per Brodine, Orion CFO, We'll review the company's Q1 results, its financial position, and its fiscal 2025 outlook in the prepared remarks, and then we will open the call to investor questions. Today's conference call is being recorded, and a replay will be posted in the investor section of Orion's corporate website, orionlighting.com. As a reminder, remarks and answers to questions to follow include statements which are forward-looking for the private Securities Litigation Reform Act of 1995. Forward-looking statements generally include such words as anticipate, believe, expect, project or similar words. Also, any statements describing future targets and goals, company plans or its outlook are also forward-looking. Such forward-looking statements are subject to various risks that could cause actual results to differ materially from current expectations. Risks include, among other factors, matters that Orion has described in its press release issued this morning, as well as in its filings with the SEC. Except as described therein, Orion disclaims any obligation to update or revise forward-looking statements made as of today's date. Reconciliations of certain non-GAAP financial metrics to their closest GAAP measures are also provided in today's press release. Now, I'll turn the call over to Orion CEO, Mr. Mike Jenkins.

Thanks, Bill. Good morning, and thank you all for joining our call today. It's been two months since our year-end call, and the first quarter was in line with expectations. So I'll keep my comments relatively brief and leave more time for questions. Orion's revenue momentum continued with 13% growth in the first quarter, driven principally by strength in our EV charging system installation business. We expect positive momentum to continue across the company in fiscal 25, as reflected in our full-year outlook targeting 10% to 15% revenue growth. The bright spot in Q1 was obviously in our EV charging segment. Recall that fiscal 24 was the first year of Voltrek operations within Orion. Having built out teams' resources, capabilities, and geographic reach last year, Our EV installation platform is well positioned to meet the needs of large customers across the country. We saw the benefits of our EV charging investments in Q1 as revenue grew over 200% to $3.8 million. Our EV charging Q1 performance was positively impacted by the activation of construction contracts to install Level 2 and Level 3 charging stations, for Eversource Energy's EV Make Ready program. We secured over $11 million of contracts for Eversource customers through this program. The projects are slated for completion this fiscal year, contributing to our fiscal 25 growth outlook. In addition, Voltrek has developed a solid pipeline of larger opportunities that now totals over $45 million. Of course, we've got to convert those opportunities into deals but we are very encouraged by our business development momentum. Voltrek has deep expertise and a track record of successful EV charging installations over more than a decade. This experience puts us in a very strong position to compete for large national and regional EV infrastructure projects. There is also significant federal funding being made available to drive the needed infrastructure catch-up to properly support the growing base of electrical vehicles. In LED lighting solutions, we achieved modest growth in Q1-25 and continue to expect LED lighting segment growth in fiscal 25, supported by major account projects as well as demand from ESCO and distribution partners. Q1 included revenue from our Department of Defense LED retrofit project in Europe, which we completed in the quarter. Orion was brought into this project by a global super ESCO that often utilizes Orion as their lighting partner. Our team did an excellent job on this large and complex project, showcasing our superior project execution capabilities with the added hurdle of working overseas. We are hopeful that our performance could lead to other large projects with this partner in the near future. For the balance of 2025, we expect growth in LED lighting to be driven by a rebound in activity from longstanding automotive customers after limited project activity in fiscal 24. We also anticipate strong opportunities in the public sector, growth in logistics and warehousing, and the initiation of projects in the technology, retail, and government sectors that have been in the planning stages for over a year. We also anticipate ongoing LED lighting projects from our largest customer in addition to their utilization of our maintenance services. We are also working to drive continued growth in lighting product sales within our ESCO and electrical contractor distribution channels. These channels have responded well to our expanded line of Triton Pro high bay and Harris exterior fixtures that were specifically developed to meet their needs for high-quality, energy-efficient LED fixtures that are value-priced. We continue to see solid growth in quoting and actual sales of these product lines. We also expect LED lighting demand to benefit from state regulations banning the sale of fluorescent fixtures and their replacement tubes. Seven states, including California, have approved such regulations. which begin to go into effect in calendar 2025, with other states expected to follow suit. As the deadlines draw closer, we are starting to see customers increasing their attention in this area and begin to develop plans for compliance. We have also been successful in using the regulatory timeline to initiate new customer dialogues and expect to see projects related to these bans begin in the second half of our fiscal 25 and accelerate into fiscal 26 and beyond. Turning to our maintenance services segment, as anticipated, maintenance services revenue declined 11% in Q125 to $3.3 million. The top-line performance reflects the impact of three legacy Staylight customers that chose not to renew long-term contracts following our price increases. The price adjustments were required to return the segment to appropriate levels of profitability following a variety of inflationary factors that have impacted the business over the past two years. Importantly, our objective of returning this business to a suitable gross profit is proving successful. Our quarter 125 gross profit percentage increased to a positive 3.8% from a negative 1.4% in the year prior and we anticipate further strengthening as we progress through 2025. Given our outlook and Q125 performance, we have reiterated our fiscal 25 revenue growth target of 10 to 15% or total revenue of between 100 and 104 million. This outlook is based on anticipated robust growth in EV charging station revenue as well as expected revenue growth in LED lighting solutions. We anticipate large national LED lighting projects for customers across a wide range of sectors, including automotive, retail, technology, logistics and distribution, banking, and the public sector. We also anticipate growth in our ESCO and agent channels, driven by an expanded focus on new high-quality, energy-efficient, value-priced LED products. We continue to expect fiscal 25 revenue to be significantly weighted to the second half of the year, as it was in fiscal 24, and subject to the timing of larger projects. We also expect to finish fiscal 25 with positive adjusted EBITDA. Let me now pass the call to our CFO, Per Brodine, to provide more details on our financial performance for Q1.

Thanks, Mike.

Q125 revenue rose 13% to $19.9 million. The quarter benefited particularly from the activation of EV charging stations construction activity for customers of Eversource Energy. Our lighting segment continued to benefit from the completion of an approximately $9 million Department of Defense retrofit project in Europe. $1.9 million of revenue was recognized for this project in Q125. As expected, maintenance segment revenue declined in Q125 due to three unprofitable legacy staylight contracts that did not renew following planned price increases from Orion. Offsetting this impact somewhat was the three-year preventative lighting maintenance service contract for our largest customer's 2,000 retail locations. Longer term, we see the potential for growth with other current customers on the maintenance side to mitigate some of the lost revenue from the lapsed, unprofitable legacy contracts. Importantly, our actions are turning around the profitability of this business. For the company as a whole, our gross profit percentage, or gross margin, improved 360 basis points to 21.6% in Q125, versus 18% in Q1-24, reflecting the benefit of pricing increases and termination of negative margin contracts in our maintenance segment, improvements in LED lighting product margins, as well as improved fixed cost absorption due to higher revenues. In addition, Q1 had a couple unusual items that negatively impacted margin. First, on the product side, and as part of restructuring the maintenance business, we wrote off approximately 200,000 of inventory that could not be used or salvaged. Second, in services, as we wrapped up the Germany project, the final quarter came in at a lower margin rate than other quarters due to the nature of the work performed. Gross margin on Orion products improved approximately 670 basis points to 33.1% in Q1, from 26.4% in Q1-24. We saw improvements on both manufactured and sourced products, including new product sales, as well as the benefit of improved fixed-cost absorption from higher sales. Reflecting steps taken in the maintenance business and our expectation for the business overall, we expect our blended gross margin rate to remain strong in fiscal 25. Operating expenses declined to $7.7 million in Q125 from $9.6 million in Q124 due to a lower Bull Trek earn-out expense accrual of $329,000 versus Q1 of $24 of $1.1 million. The earn-out reduction is based on our estimate of expected performance relative to the fiscal 25 earn-out target, which is significantly higher than the fiscal 24 target. Other reductions have come from the maintenance business as well as a strong focus on productivity over the past year that has led to cost savings in our base business. We incurred severance costs of $123,000 and structuring costs of $270,000 in Q125 related to the right sizing and realignment of our maintenance segment following the loss of three legacy accounts and expect to record another $150,000 to $200,000 to complete these cost management initiatives. Higher Q1 revenue Improved gross margin and lower operating expenses led to Orion's net loss improving to $3.8 million, or $0.12 per share, in Q125 from $6.6 million, or $0.21 per share, in Q124. Cash used in operations was $3 million in Q125, improvement from $7.3 million in Q124, reflecting improved operating results and lower working capital requirements. Orion also enhanced its liquidity position through the proceeds of a $3.5 million mortgage in Q1 from a new bank facility on our Manitowoc corporate headquarters, which resulted in cash increasing to $5.7 million at the end of the period and $5.2 million at the beginning of the period. Current assets plus current liabilities or net working capital was $17.4 million at the close of Q1-25, up from $16.8 million at March 31, 2024. Brian's financial liquidity was $14 million at June 30, 2024, as compared to $15.3 million at March 31, 2024. Considering our financial liquidity and growth outlook, we believe we are in a good position to fund each of our businesses and our growth goals for fiscal 2025. And with that, operator, would you please begin the Q&A session?

Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, press star 1 to join the queue. And your first question comes from the line of Summer Joshi. Please go ahead.

Hey, good morning, guys. Thanks for taking my call. So EV charging business, I think you mentioned a pipeline of around 45 million. What does this look like? What sector does it come from? And what portion of this is likely to be converted to orders in fiscal 2025 and deliveries against those are expected?

Yeah, good question, Samir. The $45 million pipeline that we have for EV is made up of a wide segment of sectors and verticals. There's certainly some municipal business in there. Private companies are in that as well. Obviously, we reverence the Eversource situation, which is a utility in Massachusetts, and they work with private companies as well. So I would say it's a wide grouping. Also included in that is some cross-selling opportunities with Orion's lighting customers. In terms of how much of that pipeline we think is going to be converted this year, as we've said, our budget for EV, essentially our target is $18 million in revenue plus, and we expect that the pipeline that we have right now will deliver on that.

That's good to hear. Thanks for that. And then just in terms of capacity, are there any supply constraints or any challenges that you're looking at? Or if you are able to convert more than 18 million, do you have enough capacity to, say, deliver 25 or so million?

Yep. Right now we do not have any major supply constraints across the business, and nor do we anticipate any as we move forward.

And then just a clarification on the adjusted EBITDA exiting fiscal 2025. That will be like the fourth quarter positive adjusted EBITDA. Is that the expectation?

The expectation is that for the full fiscal year, based on our revenue outlook, we would expect to be cash flow positive for the year. I'm sorry, just an EBITDA present.

Just an EBITDA, yeah. Good to hear that. And then lastly, on the LED business, what kind of responses or, like, In the seven states, what kind of reception are you receiving? Is there increased activity already that you're seeing and expect to convert some of these orders within this fiscal year?

So I think that the seven states you're referencing are relative to the fluorescent lighting band. And we are engaging in dialogues. I would say that A lot of businesses in those states, unfortunately, aren't even aware that this legislation is in place and that this date is approaching. So we've been talking actively to customers. We've been marketing this so that the awareness is growing. We are engaging in dialogues with key customers who have locations in those states to make sure they're ready for that. And, again, it's really the ban of sale of fixtures and tubes. So it's not that somebody's going to come into facilities and remove anything or anything along those lines, but it is going to prohibit, as their lighting fails, from getting replacement products. And so it's better to approach it as a system change. So we are seeing growing interest there, and we are actively working with some of our larger customers to make sure they're ready. Good to hear.

Thanks for that and good luck. Thanks, Samir. Appreciate it.

Your next question comes from the line of Eric Stein with Craig Howland Capital. Please go ahead.

Morning, guys. This is Luke on for Eric Stein. We've got a couple questions here. First off, how should we think about maintenance services over the next few quarters? Are you seeing opportunities in the pipeline to offset the loss of the three legacy contracts? And if so, when do you think we can start to see some top-line recovery?

We have said in terms of guidance for the year that we expect that business to contract $4 million to $5 million. That's offset by some growth. on our other business that we've talked about with our largest customer, as well as some additional opportunities. In terms of the pipeline, we do have some additional opportunities that are in the pipeline, and we would expect to see any of those potentially come through in the second half of the year.

Got it. Thank you. And just one more follow-up here on the EV charging segment. So we've obviously seen a lot of growth there in the past year. we were wondering how much of that growth can be attributed to business with Voltrex existing customers at the time of the acquisition versus new customers introduced from cross-selling synergies with your LED and maintenance business or just new customers in general?

Yeah, I would say that the cross-selling piece is a growing area. It's still, you know, not the majority, but we have a very significant pipeline, which we expect as we continue to move forward to grow that business. The customers that we have, our legacy customers through the Voltrek acquisition are, for the most part, growing. And we've added new customers just through that team's efforts on top of that, as well as working with key suppliers and others. on opportunities. That may not have come through cross-selling per se, but those are also new opportunities which have been created in the business. So it's a combination of legacy customers growing, new customers that were coming from the EV team that they're sourcing, and a growing base of cross-selling.

And maybe just for a little more context, just since the acquisition of Voltrek, They have done business in 29 states as far away as Hawaii, so it is no longer just a northeast-centric business. That certainly is where a lot of their business occurs, but that breadth has certainly expanded over the last 18 to 24 months.

Thank you. That's it for me. Excellent.

Your next question comes from the line of Chris Sakai with Singular Research. Please go ahead.

Yes, hi. Good morning. Good morning, Chris. Could you elaborate on the assumptions underlying the 10 to 15% top line growth guidance for fiscal 2025? Specifically, what factors are expected to drive the difference between the lower and upper ends of this range?

Well, we have different – we always go through and look at projects and customers in our pipeline, what is committed to hit, what is likely to hit, et cetera, and make sure that we feel like we've got an adequate amount of contingency built in. when we talk about those projects and forecasts. So we have a lot of things that I referenced in my comments, larger projects in the technology space, government space, et cetera, which are anticipated to start in the second half of the year. And so clearly that's built into our guidance along with other activities. The EV business, as we've mentioned, will grow approximately at least 50% this year. from a base of 12 last year to 18-plus this year. So that's all built into the guidance, along with the $4 million to $5 million of contraction on the maintenance side.

Okay, thanks. And then considering the import tariffs on Chinese electric vehicles and recent results and commentary from companies like Tesla and GM, are you observing any hesitancy from clients regarding the EV opportunity?

No, not at this time. You know, it's a question we get asked quite a bit. I think there's clearly some, you know, EVs in general are in the news a lot. We get asked a lot about the political situation and the upcoming elections and what we see is how that potentially could impact it. I mean, we really see that EVs are a growing part of our transportation system. What's key for them to be successful where they're at today and growing in the future is infrastructure. And a lot of these projects have been funded, and the money has already been appropriated from the federal level to the states. So we really don't see any impact on the infrastructure. Regardless of whether EVs, the rate of change slows to some degree or accelerates, I think the need for infrastructure is significant and will be a continuing driver over the next, you know, let's say five to seven years.

Okay, thanks. And lastly, regarding the price negotiations with legacy maintenance customers, Is this issue now resolved, or is there more to address?

So we've basically addressed all the issues that we had in the maintenance business. As referenced in Per's comments, in addition to the top line and the customer situation, we have taken some restructuring actions to right-size that business to make sure that we have the right cost structure in place moving forward as well.

Okay, great. Thanks for the answers. Thank you.

Your next question comes from the line of Bill Dusselin with Tatton Capital Market. Monishman, please go ahead.

Thank you. A group of questions. First of all, you referenced in the release the success that you're having with the value products on the lighting side. When you look at the market, what is the split between value and I don't know if premium is the categorization for the other part of the market, but how does the industry look?

Hi, Bill. Yeah, that's a good question. Clearly, you know, like in all industries, when you get into kind of a good, better, best situation, the further you go up the pyramid and The further up in pricing, the smaller the pyramid in terms of addressable market. Really, the strategy for us getting into this was we did recognize that we were missing a larger potential volume piece that we were currently operating in. And so we launched the Triton Pro particularly to help our ESCO partners and our distribution and agent partners access that market. We're very... comfortable that in terms of our progress, we're seeing increased sales and significantly increased quoting from that. I do believe that most of that has been additive to the business at this point, so we feel pretty good about that. I can't give you a precise answer as to how much more significant that band is, but it is larger from a market size standpoint, we believe, than the one that we've traditionally operated in. and is opening up some new avenues for additive sales.

That's helpful. Thank you. And when you look at the Triton products, what do you see as your competitive differentiation or advantage versus the competing products that are already out there?

Yeah, great question. When we built the Triton Pro line, That basically is incorporating a lot of the features and benefits that people expect from Orion. That doesn't mean it's the same product as the Harris, which is a signature product, but in terms of relative to our competition, things like temperature ratings, efficiency, warranty, et cetera, are all at the upper end, which is where Orion plays. Whatever Price tier, essentially, we're in. We want to be at the upper end of that in terms of quality, features, reliability, et cetera. So we feel like relative to that new set of competitors and that new set of competitive landscape that we are differentiating.

Great. Thank you. And I'm going to switch gears entirely here. You mentioned in your opening remarks that you are hopeful that you have more business coming from the ESCO sector. that was involved with the German military base. Is that additional business that you were hopeful for, is it another base or something entirely different? And would you please characterize how you see that unfolding, please?

Sure. Yeah, that is a super ESCO that we've worked for historically. We've done a number of installations and retrofit projects, both domestically and now this large one abroad. We have other opportunities in our pipeline with this SuperASCO and are hopeful, optimistic that some of those will convert this year.

And those other opportunities fall into what type of facility characteristics?

Right. So some of those are – a number of those – are DOD kind of bases or facilities.

Great. Thank you. And then... Sorry, Bill. I just wanted to clarify. DOD is Department of Defense, just to clarify. Great. Thank you. And domestic or outside the U.S.?

Both. We're working on domestic as well as some international opportunities. Great. Thank you.

And then one additional question. You talked about the EV or Voltrek business at $18 million of revenue this year. You have $11 million from the Eversource contract that you anticipate to complete this year. That means you only need $7 million from your $45 million of pipeline that you referenced. That seems very doable, if not potentially quite conservative. Can you provide some... additional perspective behind that and if we're getting over, you know, ahead of our skis here or whether there is some conservatism?

Yeah, I think certainly that, yeah, there's There's a significant pipeline out there. You're right in terms of generally the math and how it works to get to the 18. We feel good about reaching the 18 level and think there could be some upside from there. But, again, the year is early, and we'll see how these projects unfold, and it's nice to see a growing pipeline.

And then one – thank you for that. And then one additional, I guess, question tied to that. is as you've pointed out in the release, there's $7.5 billion of government funding for charging stations. $45 million is not even a rounding error in that. So are you seeing just the number of opportunities exploding or about ready to explode? that you will potentially have in your pipeline. How are you thinking about that?

Yeah, a lot of that government funding is for the NEVI, which is the single largest piece of it, the NEVI, which is the National Electric Vehicle Infrastructure, which came out of the Infrastructure Act. The way government money tends to flow, at least federal money, is, number one, slow. And number two, it goes from the Fed to the states. Then the states have to go through their process to disperse the monies. And that whole kind of timeframe, we're just starting to see some of that funding hit states moving forward. I think this calendar year – second half in particular, and accelerated into next calendar year as well. So we are participating in quoting some opportunities to gain access to those funds, but it's just really starting right now.

Great. Thank you. Appreciate the time. Thanks, Bill.

This concludes the Q&A session. I'll now turn the conference back to Mr. Jenkins for the closing remarks.

Thank you all again for joining us today. We look forward to updating investors when we report our Q2 results and as we progress through fiscal 25. We also hope to speak with you at an upcoming investor event, including the Sedoti Virtual Conference on Thursday, August 15th, the H.C. Wainwright Global Investment Conference in New York, September 9th through the 11th, and the LD Micro Main Event in Los Angeles, October 29th through the 30th. Please contact your conference rep to request a meeting. You may also contact our investor relations team with any questions concerning today's call or to schedule a call with management. Contact information is in today's press release. Thanks again and have a great day.

Thank you. This concludes today's conference call. You may now disconnect.