Good day, ladies and gentlemen. Welcome to the Orion Energy Systems Fiscal 2022 Third Quarter Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, today's conference is being recorded. I would like to turn the call over to Bill Jones. Sir, you may begin.

Thank you, and good morning. Mike Altschaefl, Orion's CEO and Board Chair will open today's call to provide third quarter highlights to discuss the current business outlook. Orion's CFO, Per Brodin will then review additional items after which we will open the call to questions. An archived replay of this call will be available after today in the Investor Relations section of Orion's corporate website. This call is taking place on Wednesday, February 9, 2022. Remarks that follow and answers to questions include statements that the company believes to be forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements, generally include words such as anticipate, believe, expect, or words of similar import, likewise statements that describe future plans, objectives, or goals are also forward-looking. 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 metrics are also provided in today's press release, which will be available in the Investor Relations section of Orion's corporate website at www.orionlighting.com. With that, let me turn the call over to Mike Altschaefl.

Thanks, Bill. Good morning, and thank you all for joining us today’s call. Last month we announced our expected fiscal '22 third quarter revenue and revise our revenue outlook for the full fiscal year '22. Today's press release provides our actual complete financial results for the third quarter and first nine months of fiscal '22. I'm very proud of how the Orion team has managed through a challenging period, enabling us to achieve solid top and bottomline growth in the first nine months of fiscal '22 versus the same period last year. We continue to expect full year fiscal '22 revenue to increase approximately 11% to about $130 million. Turning to our third quarter results, as anticipated, Orion's Q3 '22 revenue decreased to $30.7 million versus $44.3 million in Q3 '21, which had benefited from a rapid rebound activity following initial COVID-19 disruptions, particularly from our largest customer. As we discussed last month, our current operating performance is being impacted by customer LED lighting project delays due to supply chain disruptions and COVID-19 related impacts to their businesses. Nonetheless, our revenue for the first nine months of fiscal '22 increased to $102.3 million versus $81.3 million a year ago an increase of 25.8%. And we are also able to improve our gross profit percentage in the first nine months of fiscal '22. Despite supply chain and COVID-19 related challenges impacting most companies, our team has been very successful navigating these issues within our own business. This includes proactive supplier management, expanding sourcing for key materials and components and advanced purchasing of certain materials, components and finished goods to enable Orion to meet customer requirements with only limited impacts. Further, we believe Orion is well positioned for an expected rebound in customer activity as business conditions normalize and customers launch delayed…

Thanks, Mike. Orion's third quarter fiscal '22 revenue of $30.7 million compares to $44.3 million in Q3 '21, a period in which we generated significant revenue from our largest customer as we were able to regain momentum on projects that had been postponed due to the original onset of the COVID-19 pandemic. In addition to a $14 million year-over-year decrease in revenue from our largest customer, Q3 '22 revenue was also impacted by LED project delays as our customers responded to supply chain disruptions and new COVID-19 variant impacts to their businesses. However, through the first 9 months of fiscal '22, revenue grew by $21 million to $102.3 million compared to the first 9 months of fiscal '21, which was more affected by COVID-19. Orion's gross profit percentage remained level at 24.9% in Q3 '22 versus Q3 '21, which is notable considering lower revenue and higher component, logistics, labor and other cost pressures. In the current environment, we are focusing product offerings on the most compelling and popular solutions that provide production and margin efficiencies. Through the first 9 months of fiscal '22, our gross profit percentage improved to 28% versus 25.7% in comparable to the prior year period. Our Q3 '22 operating expenses decreased to $6.3 million versus $6.5 million through Q3 '21 due to lower compensation costs in the current year quarter offset somewhat by $200,000 of acquisition-related costs. I'm sorry, operator, are you able to mute that person? Thank you. Q3 '22 net income declined to $1.1 million from $4.3 million in Q3 '21 mainly due to reduced volume in the current year. However, year-to-date net income improved to $7.3 million from $4 million in the first 9 months of fiscal '21, reflecting higher year-to-date business volume and margins. Orion's effective tax rate is 24.9% through the…

[Operator Instructions] And our first question comes from the line of Eric Stine with Craig Hallum.

So just to confirm, I know it was a couple of weeks ago when you preannounced. But I mean, just confirming, I guess, one that you still view this as just pushed revenues rather than lost revenues. And then curious, do you have any more visibility? And I know this is not your supply chain, it's your customer supply chain and COVID issues, but do you have any visibility into when those may start up? And I know you had a number of buckets that caused the preannouncement.

Right, right. First of all, yes, Eric, we have not lost any of this business or lost any of these customers. and we expect the business to flow in, in forward quarters as we head into our fiscal 2023. Each one of them is unique of what caused it currently and what the delay might be, but we're quite confident that all of it will come forward for us, so it does not lost business. We've seen some improvements, I'd say, from a customer standpoint on some of the supply chain matters as some things are starting back up but it's mixed across them and each one is an individual situation. And so we're confident they are going to happen, just taking a little longer than what we expected.

Okay. Got it. That's helpful. I am interested in your commentary about picking up business given your ability to respond in 2-week lead times. Just wondering, is that something you're able to quantify? I mean do you view that today as kind of more one-off business? Or do you think that this is actually a business that you're getting now, but can turn into something larger?

Sure. It's hard to absolutely quantify it, but I'll go back to our strategy. As we were looking back about a year ago, even plus, and we saw the supply chain situation coming forward. We've started taking specific actions of having some broader supply chain avenues of increasing our orders of actually taking physical delivery and even in some situations, if you will, prefunding or buying key components for some of our suppliers so they would be able to supply us. And those things have worked out for us. And so as I've said during the call earlier, we are -- we do feel very confident that we have not lost very much business due to our inability to deliver product to our customers. And so I'm proud of our supply chain team and our engineering team for working our way through all of that. We have specific situations where we have been told that we picked up business because others were not able to supply product. And often, and particularly in new construction, some of the lighting comes in towards the end of the project and things can't be held up, and so time lines get very tight. I do think it gives us some opportunity to build new customers because sometimes when these things happen and you get somebody out of a tough situation, you are likely going to be rewarded with more opportunities down the road. So we would expect some of this could end up being some additional repeat business for us going forward. So we try to take advantage of when we can, and we continue to have significant inventory levels on hand to take advantage of these situations as well as service our own customers.

Okay. Got it. Maybe just last question for me. And I know that this goes back a bit, but I guess a couple of years ago, you made some key hires because you didn't feel like you're getting a full look at the opportunity out there. And I know, I mean, a huge market, but any thoughts on where you stand on that? How much of the market do you feel that that you are getting a look at now? And are there any additions that are needed going forward?

We feel very good, and I feel very good about the progress we have made with the buildup on both our sales and marketing teams as a company. And I think part of it is demonstrated by one of the metrics I commented on earlier in that our the revenue 9 months year-to-date, excluding our largest customer, has grown by 33%, and part of that has been our strategy of adding to our sales team and also reinvigorating some of our marketing efforts. Even more specifically, as I mentioned, our 1 market with ESCOs, which has been a strategy of ours is up over 90% year-to-date. So we do think it's having an impact. We continue to build our sales team and look for people that can help us, and we also have increased our investment in our marketing activities to get us additional opportunities for projects. So we think it's having an impact. Some of those things take a little bit of time. But I think we're seeing it already in fiscal '22, and we're optimistic we'll see more of the impact from those initiatives as we head into fiscal '23.

And our next question comes from the line of Amit Dayal with H.C. Wainwright.

My questions are on sort of the margin side of the story and growth on the service side and how that can help you potentially on the margin side. So you're expecting around 10% growth, trying to get to the $500 million target in a few years from now. What role does the service side of the business play in that? And can the service segment grow faster than 10% potentially for you?

Well, I'll start with the service side. And I would first expand a little bit that what we view service today would be 2 different components. One, we have had for our 25-year history, the installation services that we provide to our customers on a turnkey basis as well as other miscellaneous engineering type services for them. And that has been our historical service business, and now we are expanding that with the lighting and electrical maintenance services business. And I think given the numbers that I laid out this morning that in combination with the acquisition we made in our existing customer base and our expected growth that we believe we can build that maintenance business into a plus $20 million business in fiscal '23. And so we feel that's very nice progress of demonstrating the ability to both acquire a situation, but also our own organic growth. So I would say that it's likely the maintenance side of the business could possibly grow faster than 10% going forward. From a margin standpoint, we have consistently commented that we think the margins that can be achieved on the maintenance business would not be dilutive to the margin aspirations we've had as a company. We do generally find that product margins are somewhat stronger than service margins, but we find that the maintenance margins from lighting and electrical maintenance will fit well within that group of those 2. In some respects, they are somewhat symbiotic in that they really do help each other as you go forward.

And if I may just add a little bit to that, Amit. If you look at our service margin in the current quarter from a year-over-year basis were up over 200 basis points year-over-year. And year-to-date, we're up about 150 basis points just on the service margin line. So I think that speaks to our continued diligence on trying to improve those margins and would expect to try to achieve that as we move forward.

I also -- 1 last quick comment to Amit is that very pleased with the 28% gross profit percentage on a year-to-date basis, particularly in this inflationary period. So it really has told us that our early actions with respect to managing our supply chain efficiencies, operational efficiencies and price increases has helped us maintain our margins during a tough inflation year for many industries.

Yes. That's kind of where I was going next, Mike. I was just trying to see what the future gross margin opportunities are. I know this year could be a little bit variance coming into play depending on how some of the supply chain issues play out. But once these get normalized, do we see a little bit of a step improvement in the margin profile for the company?

Well, I think in the past, we have commented that we felt the range of margins for us in a normalized period should be between 25% and 30% in that we would think more midterm, we should be able to move beyond 30% with our gross margins. And given that our current 9-month year-to-date is 28%, and there's been some quarters where the revenues are -- it's not a really even year for us, which is not uncommon for a project-based business. We're very pleased with hitting the 28%, particularly with the inflationary pressures that we have seen and been able to manage our way through. So I would stay with where we are at, that we think near term being in those mid- to high 20% range is certainly achievable for us, and we think longer term to be up above 30% is realistic.

And our next question comes from the line of Alex Rygiel with B. Riley.

I know it's a little early, obviously, to talk about fiscal year '23, but maybe you could just kind of shed some light on some of my thoughts or assumptions. So incrementally, you're targeting 10-plus percent organic growth. So that would be, call it, $13 million or so. Incrementally, you'll probably get another $6 million, $7 million from the Stay-Lite acquisition's contribution for a full year. So that gets you to sort of $20 million which takes your full year kind of revenue number to $150 million for fiscal 2023. I'm not asking you confirm that or anything, but what are some of the -- is there any upside to that number from pushouts in 2022?

I appreciate the question. Thank you very much. And I think I understand the way you're looking at it and we truly wish we were at a point where we could give more broader outlook going into fiscal '23, and we just continue to feel that there are a number of moving pieces going on of all the things we've been talking about, so I won't repeat them, but that we just think it's more prudent to wait until we have a better handle on it to have that discussed. I think the way you're looking at it from a base standpoint makes some sense. We do think there's some upside. I think there's upside in that the projects that have -- are likely pushing forward is somewhat there. I would put a little bit of caution on that, in that, as I mentioned on the call back in January, because a company has to move a capital project from their x year to the following year, it doesn't necessarily mean they're going to double up on their capital projects, but there could be something in between there to give you some upside. But I also feel most of my upside view that I see is that just we are seeing the activity level, the request for quotations, our proposal activity metrics have been strong. And we think that as supply chains continue to normalize, our comments have been, we saw it kind of well into '23 -- I'm sorry, well in the calendar '22. And so we're kind of charging a way through that. Hopefully, by midyear, it's a little bit more normalized. And hopefully, for our customers, they solve some of their issues that you could see some upside, too. So we're very optimistic about the future. I just unfortunately would say that the visibility and predictability right now is a bit challenging.

Understood. And then as it relates to M&A, can you maybe address the status of your M&A backlog and then talk a little bit about sort of total capital allocation towards M&A in calendar year 2022?

Sure. We some time ago, started a very formal process using some outside assistance to identify potential companies to have conversations with. And we have found it to be very productive for us. We have talked with a large number of companies and have identified a much larger universe to think through. And our focus, as we've commented in the past, has been to think about several categories. One, we knew we wanted to grow our maintenance business as it has started out to give a jump start and add more resources and capabilities and experience in customers. And so we've taken that first step. But we could certainly see additional opportunities in that area as we've identified prospects. We also are really intrigued in the area of opportunities in EV charging stations, battery storage and solar. And so we continue to look at possible those areas for us to think about technology has been of interest to us from a control standpoint and other type of technology applications and the products. So it kind of rounds out everything, but those are things that we're looking at very key. I feel that the progress we've made on our pipeline would hopefully allow us to do additional transactions certainly during fiscal '23, perhaps calendar '22. From a capital allocation standpoint, it's a tough one to answer because we're looking at very small companies that are very intriguing to us, and we're talking at times with some companies that are quite large. And so the whole capital structure is a difficult one to answer today, but we feel good about, obviously, the cash we have on hand. We are substantially debt-free right now, which provides some debt opportunity for consideration. And in the right situation, perhaps our stock also from a currency standpoint. So we feel we have the financial wherewithal to do many things. But the size range has been all the way from looking at some things that are tuck-in to things that could be transformative for us if we think it is a good opportunity and a high value for our shareholders to do something larger.

And our next question comes from the line of Andrew Shapiro with Lawndale Capital Management.

I have a question following up on the Craig-Hallum analyst questions. I just need a clarification. To what extent was this quarter's shortfall from your expectations, the result of delays by the customer, which sounds like most of it is, but I don't know if it is all of it versus the any supply chain delays that you experienced on your own?

We feel and have concluded that most of the shortfall, I will call it, for fiscal '22 of our move to telling you we feel we're going to be in the $130 million range is caused by our customers' supply chain and/or COVID challenges. So we feel most of it has been external. We feel that internally, we have lost very little business this fiscal year of not being able to supply product to people.

Okay. And of the instances when it's, we'll call it, COVID caused versus supply chain, on those instances and those are all deferrals? Or is your definition of COVID cause some customers have had financial challenges that they've decided to cancel or scale back their capital expenditures?

It has been more of the first. So we think it's more deferrals. An example might be we've had situations where we were working in hospital systems and due to the flare up of the last round of Omicron. They may have said we need to slow down the project or delay the project for a few months to let things settle down, if you will. So when we say COVID impacts, those types of things, it's usually access to facilities, either where we are providing product or we are providing both product and installation services.

[Operator Instructions] And our next question comes from the line of Bill Dezellem with Tieton Capital Management.

Mike, would you please expand on comments that you made in your opening remarks relative to some early signs that the supply chain might be improving slightly.

Sure. It's just -- there are just subtle different things that we are seeing. We're seeing from a supply chain standpoint, sometimes the time frame that it takes to get product to our facilities is starting to come down somewhat. Some of the costs related to transportation have moderated somewhat in certain areas and just other types of things that we see where the difficulty of getting the components and the supplies that we need have moderated to a certain extent. And so we are assuming that also has some impact on the -- our customers and potential customers where things just seem to be getting somewhat better. I still think we have a period of time overall for things to get a little bit more normalized. And -- but we're seeing things improve somewhat.

And then a balance sheet question. The accounts receivable dropped from, gosh, nearly $24 million last quarter down to the $12 million or so this quarter. Is that primarily a function of your largest customer revenue slowing down? And therefore, basically, their outstanding bills have have been paid and are reduced? Or is there something more going on there?

No, I think, Bill, it's a reflection of the level of our business volume based on collections relative to the terms that we have on the related revenues, nothing else unusual going on.

And I'm showing no further questions at this time. And I would like to turn the conference back over to Mike Altschaefl for any further remarks.

Thank you very much, Michelle. I do want to apologize for some of the noise background we had earlier in the call. It was coming from outside the speaker group, but we worked our way through it. So thanks for your patience. I also want to thank everyone who joined us for today and join us today and for your interest in Orion. We have, over the past fiscal year, participated in a number of virtual conferences and all of those have been recorded and are available in the IR section of our website and also feel free to contact our IR team if you’d like to have a meeting with management or have additional questions and their information is in the release today. So thanks again for your time, and we look forward to updating you in June with our fiscal ‘22 fourth quarter call. Thanks, everybody, and have a great day.

Today's conference call has now concluded. Thank you. You may disconnect.