Orion Energy Systems, Inc.

Good morning, everyone, and welcome to Orion Energy Systems' fiscal 2025 second quarter conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you'll need to press star 11 on your telephone. You'll then hear an automated message advising that your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I'll now turn the call over to Bill Jones, Investor Relations, to begin.

Thank you, Kathy, and good morning to everyone, and thank you for joining this call. Orion reported its fiscal 2025 second quarter results this morning, and Mike Jenkins, the company's CEO, and Per Brodine, Orion's CFO, will review its Q2 results, financial position, and fiscal 2025 outlook. Following their prepared remarks, 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 that follow include statements which are forward-looking under the Private Securities Litigation Reform Act of 1995. Forward-looking statements typically include words such as anticipate, believe, expect, project, or similar words. Also, any statements describing future objectives and goals, company plans, or its outlook are also forward-looking. These forward-looking statements are subject to various risks that could cause actual results to differ materially from current expectations. Risks include, among other matters, those 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 such forward-looking statements which are made only as of today. Reconciliations of certain non-GAAP financial metrics to their closest GAAP measures are also provided in today's press release. And now, I'll turn the call over to Orion's CEO, Mr. Mike Jenkins.

Thanks, Bill, and thank you all for joining us today. Our Q2 results reflect continued strength in our Voltrek EV charging station business and a rebound in our maintenance services business. However, our LED lighting segment was impacted by customer delays as several projects slipped and are now expected to start in the second half of our fiscal year. Distribution channels, including energy service companies or ESCOs and electrical contractors, were also impacted with some timing delays as well as some softness in new construction markets. Year-over-year comparables for the second quarter were influenced by the completion of a large European retrofit project for a global super ESCO in quarter 1-25, which commenced in quarter 1-24 and benefited the year-ago period but not this quarter. Despite customer delays in the start of new retrofit projects, overall, we are seeing robust quoting activity in our LED lighting project business coming from both new and existing customers. We recently received POs that will start a new and expected multi-year relationship for a products distributor with over 500 locations. Orion will be providing LED lighting products and retrofit turnkey project management services and we anticipate the total program value to be in excess of $10 million. This project will be spread over several years and expected to begin this quarter. The multi-year full program contract is in the final stages, and once complete, we plan to make further announcements. Last month, we secured a five-year, $25 million contract, to supply LED lighting fixtures for new store construction projects for our largest customer, a major national retailer. This contract extends our existing relationship with this customer who expects to increase the number of new stores over the next five years. We are also seeing a nice rebound in automotive OEM activity this year and expect other projects to commence in this sector in coming quarters. Despite some recent slowness in our LED lighting distribution channels, we are encouraged by progress of our value-oriented LED lighting product lines, such as Triton Pro and our new exterior products, which were introduced in quarter two of last year. These products were developed to meet the needs of lighting contractors and ESCOs for projects that are more price-sensitive and do not require the highest levels of lighting efficiency. Building on the success of these new offerings, we are investing in the expansion of our value price Triton Pro offerings, including recent product launches of round high bays or UFOs, strip lights, and troffers. Triton Pro and our new exterior products released in quarter two of last year have generated over $4 million in revenue in fiscal 25 with an open pipeline of over $18 million. We anticipate continued strength and acceleration in this category moving forward, which opens a new era of opportunity for Orion to build our brand and broaden our customer base. We're also building sales opportunities related to the growing number of states that are banning the sale of fluorescent fixtures and replacement tubes. These bans are intended to eliminate the waste and pollution created from the disposal of fluorescent tubes while also conserving energy through accelerating the conversion to more energy efficient LED lighting technologies. Ten states, including California, now have either passed regulations or have proposed legislation for such bans, several of which go into effect beginning of 2025, and many states are expected to follow this trend. We have been in discussions with a number of significant existing and potential customers about their plans for compliance and have identified some meaningful opportunities that we expect to commence in the second half of our fiscal 25. For a list of all state bands, current and proposed, please see our website at orionlighting.com. Turning to our electric vehicle charging station business, we continue to be pleased with our progress in this segment and anticipate continued momentum in the business for the second half of fiscal 25 and the foreseeable future. Voltrek's Quarter 2 performance benefited from construction contracts for Eversource Energy customers pursuant to Eversource's EV Make Ready program. Our Quarter 2 performance also benefited from additional work for Boston Public Schools building on an earlier school bus pilot project. We are seeing a growing array of both public and private sector organizations that are developing strategies and plans for implementing EV charging programs to support the expanding population of EV or electric vehicles across the U.S. We believe Voltrek, with its national reach and pioneering leadership in the EV charging station business, is well positioned to meet the needs of large customers nationwide. Importantly, we are also beginning to realize some of the cross-selling synergies we had envisioned when we acquired Voltrak, with EV projects being sourced within our LED lighting customer base, as well as lighting projects being developed with EV charging customers. Voltrak's overall pipeline of project opportunities remain steady at $45 to $50 million. Meaningful federal stimulus has been appropriated to support EV infrastructure, including $5 billion designated for the National Electric Vehicle Infrastructure Act, or NEVI, program, along with other federal funding vehicles, which include the Charging and Fueling Infrastructure Grant Program, which provides an additional $2.5 billion over five years. This program is targeted at states, municipalities, and other local entities to help accelerate charging infrastructure. While there remains a spectrum of opinions about the near-term rate of increase in future market penetration of electric vehicles, we see broad-based interest from public and private entities for charging infrastructure. We are in the charging infrastructure business, and whether EV sales achieve the high or low end of the range, vast infrastructure is required to be put in place throughout the U.S. over the next decade. Turning to our maintenance services business, I am happy to report that this business delivered a better than expected revenue performance in quarter two. Second quarter performance also benefited from pricing discipline, which returned the maintenance business to solid gross margin profitability from a negative margin in the year-ago period. This performance was particularly notable because it was accomplished despite the impact of our strategic decision to not seek the renewal of several legacy contracts from our Staylight acquisition, which had become unprofitable due to inflationary impacts. Entering fiscal 25, we had expected maintenance segment revenue to decrease $4 to $5 million, principally due to the non-renewal of these unprofitable contracts. Given our recent progress in developing additional maintenance revenue from existing customers, We now expect our fiscal 25 decline to be lower than this range. Importantly, our pricing discipline has enabled us to return this business to profitability with a 2300 basis point improvement. We expect our margin rate to improve further and normalize in quarter three. With our smaller but more profitable go forward maintenance business, we executed a restructuring of costs by reducing staffing and related items. and vacated a leased facility, resulting in roughly $300,000 in restructuring and severance costs in quarter two. Moving forward, our plan is to selectively build this business with customers that offers the greatest potential synergies with our lighting and EV segments. From a macro perspective, we are encouraged by factors that we believe provide tailwinds for Orion over the next five years. Number one, energy prices. While they move up and down, we see more energy needs moving forward than capacity increases that will result in increased focus on energy conservation, such as LED lighting. Number two, climate and ESG. While politicized in some circles, we see many companies, especially public entities, continue with their sea-level commitments to reduce carbon. Orion's industry-leading LED lights reduce CO2 energy consumption by up to 60% versus fluorescent lighting, and will help our customers achieve these goals. Number three, transportation electrification. Passenger and commercial electrification is a generational change, and what is required to enable full potential is charging infrastructure, and this is where Orion plays. Number four, state-led fluorescent lighting bands. This is a very exciting and never-before-seen accelerator for the LED lighting industry, which will play out over the next five years. And lastly, BAA and BABA. Orion is uniquely positioned to capitalize on the increasing focus of Buy American initiatives at the federal and state levels due to our domestic manufacturing capabilities. We also see the potential for decreasing interest rates to act as a catalyst to accelerate customers' LED and EV charging projects. While the Fed's recent 50 basis point cut in the federal funds rate was a welcome reversal, we expect it will take time before their planned easing of rates becomes a more meaningful factor in our customers' decision making, particularly with those customers who are now waiting on further rate reductions. Certainly, a lower rate environment further enhances the business case for our suite of solutions. We remain excited about our long-term prospects and our revenue growth outlook for fiscal 25 and moving into next year. Our confidence is based on our competitive strength of our diversified platform of product and services that we have developed to help our customers meet their business, environmental, and sustainability goals. As we previewed last week, we have revised our fiscal 25 revenue growth outlook to an increase of approximately 10% over fiscal 24 from our prior outlook of 10% to 15% growth. As we have outlined, this revision is principally due to the delay of certain LED lighting projects into the second half of fiscal 25, and as a result, we currently expect the balance of our revenue to be weighted more towards our fiscal 25 fourth quarter, and we expect to generate positive adjusted EBITDA in the second half of fiscal 25 and neutral for the full year. Let me now turn to Per Brodine, our CFO, for some further details and perspective on our financial performance.

Thank you, Mike. Q2 25 revenue was $19.4 million versus $20.6 million in Q2 24, principally reflecting the delay of some anticipated LED lighting projects in the recent period, which we now expect to start later this fiscal year. Additionally, the year-over-year lighting segment revenue comparison was impacted by a large DoD retrofit project in Europe that benefited the year-ago results but was completed in the first quarter of the current fiscal year. In contrast, our EV charging station segment revenue grew 40% to 4.7 million in Q2-25 from 3.4 million in Q2-24. The Q2-25 performance benefited from construction contracts for customers of Eversource Energy's EV Make Ready program, as well as follow-on orders from a large Boston Public Schools pilot school bus project. Our maintenance services segment also grew to $3.8 million in Q2-25 versus $3.6 million in Q2-24 as new opportunities more than offset the impact of the last legacy daylight lighting contracts. Looking at the first six months of fiscal 25, Revenue rose 2.8% to $39.3 million from $38.2 million in the prior year period, also driven by EV segment growth. Overall, our gross profit percentage, or gross margin, increased 90 basis points to 23.1% in Q2 2025 versus 22.2% in Q2 2024, driven principally by maintenance segment profitability improvements as a result of Orion's pricing discipline. Gross margin on Orion's maintenance services improved 2300 basis points compared to the prior year quarter. Reflecting the turnaround in the maintenance segment margins and our overall growth outlook, we expect Orion's blended gross margin to remain strong in the remainder of fiscal 25. Operating expenses declined to 7.7 million in Q2 25 from $8.7 million in Q2-24, principally due to fixed costs and other compensation-related reductions, and the $500,000 reduction in the Boltrek earn-out expense accrual versus Q2-24. Q2-25 included $300,000 of combined severance and restructuring expense in the maintenance segment, reflecting actions to right-size this business following the roll-off of unprofitable legacy accounts. In total, we have incurred severance and restructuring costs of $700,000 in the first six months of fiscal 25. We believe our maintenance services restructuring activity is now substantially complete. I do want to highlight that outside of our actions in the maintenance business, we have continued to pursue other efficiency and productivity improvements that have contributed to margin and cost benefits in our LED manufacturing and corporate overhead. The improvement in gross profit percentage and lower operating expenses led to Orion's Q2 25 net loss improvement to 3.6 million or 11 cents per share from 4.4 million or 14 cents per share in Q2 24. Cash used in operations was 2.5 million through the first six months ended September 30, 2024. though Orion generated positive cash flow from operations in Q2-25. The year-to-date use of cash is primarily due to our net loss adjusted for non-cash expenses and working capital requirements. Orion paid down $1 million on its revolving credit facility in Q2-25 and cash increased to $5.4 million at September 30 versus $5.2 million at year-end which includes the benefit of proceeds from a bank mortgage facility secured in Q125. Also effective October 30th, we extended the maturity of our revolving credit facility with Bank of America from December 2025 to June 2027. Current assets less current liabilities or net working capital was 13.1 million at the close of Q225 versus 16.8 million at March 31st, 2024. Ryan's financial liquidity was 13.1 million in September 30, 2024, as compared to 15.3 million at March 31, 2024. Considering our growth outlook and financial liquidity, we believe we are in good position to fund our business and growth goals for fiscal 2025. Before I turn the call over to the operator, I want to announce that we have two remaining investor conferences this calendar year, and we welcome your participation. We will participate in the Virtual Investor Summit on Thursday, November 21st. In addition, we plan to present in person at Singular Research's 19th Annual Best of the Uncovered Conference in San Francisco on Thursday, December 12th. Details for these events will be announced separately and posted to our investor relations page. And with that, let's please start the Q&A session.

Thank you. At this time, we'll conduct the question and answer session. As a reminder, to ask a question, you'll need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we... compile that Q&A roster. Our first question comes from the line of Eric Stein with Craig Callum Capital Group. Your line is now open.

Hi, Mike. Hi, Farah. Hey, Eric. Hi. Good morning. So maybe, so you talked about the 10% year-over-year revenue growth expectation. Can you just talk through a little bit how you see that playing out between the various segments? I mean, obviously, EV charging up. I think you tempered your expectation for maintenance. Is this something where you expect, even with the project pushouts, that LED, that the lighting is flat, up, down? How should we think about that?

Yeah, we do expect our LED lighting business to push to recover in the second half of the year and accelerate, especially into our quarter four. We do expect our EV business to maintain a similar pace or even slightly above as we head into the second half. And from a maintenance standpoint, we've been very pleased with the revenue recovery that we've seen post restructuring and essentially exiting those several unprofitable contracts. And so we do think that the maintenance business now will come in slightly under the range that we announced as we went into the year of being down $4 to $5 million. Obviously, though, a much more profitable business in contributing to our bottom line.

Got it. And you did just touch on this, but maybe a little more on it. And maybe you said it in the prepared remarks and I missed it, but is this something we should think about results being more skewed to 4Q versus 3Q in light of what you just said? Absolutely. Yep. Okay. Yeah, we do expect a stronger Q4. Got it. And then, I mean, I can appreciate, and I know that these are all really customer-directed project push-outs, but is there any way that, you know, you internally are looking at this and saying, you know, how can we better anticipate this in our outlook or, you know, just in the overall business going forward because, you know, I mean, this is a – it's been kind of a frequent issue you've had with some of your customers.

Yeah, it is a – it's a very challenging thing, Eric. I mean, obviously, we talk about that quite a bit. It's difficult to anticipate when individual customers may push things out because it's related to other projects that they may have as a company, et cetera. The best thing that we can do as a company, because we don't necessarily control that, is to continue to build our pipeline so that we have more projects and more contingency around that. So when those things do occur, we have enough other pipeline that can overcome it. That's really our focus, and as I referenced in my remarks, we're pleased to see the growth in our pipeline with some very exciting new projects in the works.

Okay, thank you.

Thank you.

Are you there?

Oh, yes. Excuse me. Our next question comes to the line of Amit Dial with HC Wainwright. Your line is now open.

Thank you. Good morning, everyone. At the macro level, guys, you know, with respect to, you know, the election results. Any impact or exposure to, you know, the discussed sort of tariff changes that may be implemented?

Yeah, I mean, that's an interesting point. If there were to be further tariffs that were put in place against, you know, China or really across the board, any import situation, certainly we do get a number of as the entire industry does, components from abroad. At the same time, you know, being a domestic manufacturer, we have a lot of our content which comes from local and domestic sources as well. So, you know, if that would be put in place, I would say that in general should be favorable for Orion, particularly in the lighting business relative to our competitors.

Understood. And then along those lines, right, I mean, you know, we've seen a lot of manufacturing build-out happening here in the U.S. How are you positioned to, you know, participate in some of those opportunities? It looks like from the commentary that you may already be involved in at least bidding on some of this onshoring-related infrastructure build-out. Can you give us any clarity on, you know, what from there is in the pipeline, you know, that you are trying to participate in?

I'm going to repeat the question back to make sure I have it correctly, Amit. So basically it's about some of the onshoring investments in terms of new capacity and buildings and those types of things as a result of onshoring.

Manufacturing buildings that are coming up, warehouses that are coming up, you know, to support all of this onshoring activity. Just want to understand, you know, if you're already participating in some of that or are you... Are they going to participate in that?

Yeah. Okay. I understand now. Thank you. Absolutely, we do. New builds is a significant part of our distribution business and really our focus there, and that's still a project business through our distribution channel. That market in general for new builds has been a little soft for everyone due to cost of capital reasons and those types of things. So the onshoring is a counter to some of those trends from cost of capital. But we are very active in that space. And as I referenced in my remarks, Triton Pro, which is our new product line launched last year, is doing quite well and is very well positioned for that new build market as well as retrofits.

Understood. Yeah, that's all I had, guys. I'll take my other questions offline. Thank you so much.

Thank you, Alan.

Thank you. As a reminder, to ask a question, you'll need to press star 1-1 on your telephone, and then you'll hear an automated message advising that your hand is raised. Your next question comes from the line of Bill DeZellum with Titan Capital Management. Your line is now open, Bill.

Thank you. Good morning. A group of questions here. Let me start, if I may, with the restructuring that you did. Would you please walk through in a bit more detail what it was that you did?

Good morning, Bill. I'd say that there were a couple primary components within the maintenance division as part of the lapse of the contracts, you know, that did not achieve the kind of pricing levels that we had hoped. We scaled back on the level of our self-performed technician force. So, you know, that would have been within COGS that we took out personnel that were self-performing within our maintenance division. Then there were some also supporting people that also supported those contracts, which were also component of COGS, so that's what that severance related to. There were some G&A costs also taken out, the largest of which was the lease facility that they operated out of, which the $300,000 charge that we incurred in Q2, about half of that was a lease breakage fee to get out of that lease facility.

Great, thank you. And then you had, oh, I'm sorry, Bear, go ahead.

Yeah, I was going to clarify one thing. For the Q2 costs of $300,000, all those costs would have been, I'll say, charged to G&A, just if you're considering that from what line those hit.

Great, thank you. And then relative to the comments that you expect a larger weighting of LED in the second half, does that imply that the EV charging is going to be more challenged either because projects are finishing or for some other reason?

Hi, Bill. It's Mike. No, that was not what I meant to imply at all. What my comments were meant to say is that we plan to see LED lights grow in the second half. The EV business, we were up 40% in the quarter. We continue to see that level of growth plus in the second half of the year. So LED will continue to be our strongest growth component, but we do expect lighting to grow significantly in the second half as well.

Okay, great. That's helpful. And then I'm going to ask one question that maybe is a bit unfair, but I'd love your perspective. As you think about these lighting projects that were delayed, why were they not forecasted? And I recognize almost inherently in the question a delay would imply not forecastable. But I guess I'm going to toss that out and try to understand your perspective, please.

Sure. You know, I'll give you an example. You know, we were working with a large technology company. The projects had been in the works for several years. And, you know, they had given us indications as to what their schedule was and when these projects would start. And so we try and be as conservative as we can. And so we take a portion of that. But obviously, we have to recognize when customers say the projects are going to be active. So we want it to be realistic but conservative at the same time. And the reality was that due to some of the internal workings of that company, they were pushed off as a project. And so those are things which are difficult for us to forecast exactly when we can initiate with a company because obviously this is one of several CapEx projects they have in the works and has to tie in with, you know, the rest of the company's financial performance and those types of things. So we certainly do our best and try and be conservative but realistic at the same time. And that was the nature of it. That's an example.

All right. Thank you.

Thank you.

Thank you. Our next question comes from the line of Gauchi Suri. Your line is now open with Singular Research. Thank you.

Good morning. Can you hear me?

Yes, we can. Good morning, Gauchi.

Oh, thank you. Good morning. Just on the project delays, going back to, is that a broader market trend or is that particularly sector-focused affecting those projects and how will that cadence for the revenue when those delays do come back? Is that primarily a fiscal 25 event or is that a flow through into fiscal 26 as well?

Yeah, so these delays that we've experienced, you know, there's been a variety of individual circumstances. You know, I think there certainly has been some level of macro uncertainty, you know, now that we've gotten through the elections and those types of things and we see interest rates falling. As I referenced earlier in my comments, we are incredibly excited about the quoting activity that's going on right now. And I should reference that we had a very strong October in terms of orders. In fact, the strongest month of the year. from an order standpoint and on or above kind of what our projections would be to realize our current annual projection. So these delays that occurred, they occurred for a variety of reasons. Some of them will activate in quarter three, some will activate in quarter four, and then some of them will carry over into fiscal 26.

Okay. Okay. And on the EV pipeline, I think you guys mentioned it and updated it to $45 to $50 million. I know last quarter you mentioned you had a target of around $18 million for the year, and the highlight would be $11 million for the Eversource contract. I just wanted to get, of that $18 million, is there potential for exceeding that target on the Eversource contract? How much of that $11 million has been used? recognized as revenue to date?

Sure. On the Eversource contract, less than half of it has been realized in the first semester of the year. And then relative to the overall target for EV, we said our budget was 18 and that we thought we could exceed that. And that's still our projection is that we will exceed the 18 million.

Okay. On the Triton Pro product line, I think you gave it some color. What was the feedback that you received from customers? And I know you probably was part of that, was taking some market share. What are the numbers compared to your expectations?

The numbers are strong, as I indicated. You know, $4 million year-to-date over an $18 million pipeline. for that product line. So I would say we're exceeding our expectations and we believe we will for this year. Customer feedback across the board is when we launched this product line, we believe that we were missing a band of the market from a project standpoint. We certainly see that, that there are opportunities that we could not get had we not had this offering. And so some of those customers We end up selling Triton Pro 2, which is great. We're happy to do that. Others, ultimately, that's a starting point and we can trade up to higher performing products that are, you know, Ryan's offering. So overall, very happy with Triton Pro.

Okay, awesome. And on the DoD project in Europe, I think if I understand you correctly, that has no further impact on the numbers. And I think you've mentioned that there was a $10 million project that might commence soon. When will that start impacting the revenue line?

So you are correct on the DOD project that we referenced that we did in Germany last year. There was no revenue in the quarter for that. And relative to this new opportunity, yes, we do expect, we have received BOs. We expect that to start doing, performing work for them yet this quarter. And again, that is a turnkey lighting project. We're providing both light products as well as turnkey management services for this client. We are in the final stages of working through an extended multi-year contract for the entire project, which we expect to be completed shortly. And once that's done, we will make further announcements.

Awesome. Thank you, guys. Congratulations, and thank you for taking my questions.

Thank you, Gauchi.

This concludes our Q&A session. I'll now turn the call back to Mike Jenkins for concluding remarks.

Thank you all for joining us today. We look forward to updating investors as we progress through the balance of fiscal 25. and hope to see or speak with you at upcoming investor conferences. Please contact our investor relations team for details of upcoming events with any questions regarding today's call or to schedule a meeting. Their contact information is in today's press release. Thanks again.

Thank you. This concludes today's conference call.