Legend Power Systems Inc. (LPS) Earnings Call Transcript & Summary

Good morning. My name is Jacqueline, and I will be your conference operator today. At this time, I would like to welcome everyone to the Legend Power Systems Fiscal 2019 Financial Results Release and Conference Call. [Operator Instructions] Thank you. Mr. Vanry, you may begin your conference.

Thanks, Jacqueline. Welcome to the Legend Power Systems Fiscal 2019 Investor Call. I'm Steve Vanry, Legend's Chief Financial Officer. We're pleased to have you join us on the call today to discuss our corporate progress and financial results for the 2019 fiscal year ending September 30, 2019. However, before we talk about results, I'd like to remind everyone that certain statements in this call may be forward-looking in nature. These include statements involving known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied in our forward-looking statements. For caveats about forward-looking statements and risk factors, please see our management's discussion and analysis for the year ended September 30, 2019, which can be found on our company profile at sedar.com. I will now pass the call over to Legend's CEO, Randy Buchamer, for an overview of our third quarter. Randy?

Thank you, Steve. I want to thank everybody for attending the Legend Power Systems 2019 fiscal Q4 and year-end discussion. We're very pleased to have you. I'll officially just want to reintroduce Steve Vanry, our CFO; and also Mike Cioce, who is our VP of Sales and Marketing. And although Steve will be talking a lot about the financial aspects, Mike Cioce will be talking a lot about our transitions and transformational year that we've had. So fiscal 2019 was a transitional and transformational year for the company. It was transitional in that we performed a lot of tremendous work that is helping us to build the business in 2020 and beyond. A big part of the transition was identifying all the different parties involved in the decision-making process and modifying our strategies for moving into new markets. We've spent, as a group, a lot of time clarifying our standing with these different stakeholders, demonstrating our new value proposition, and improving our credibility as a company that not only could provide energy-saving solutions, but move into power management arena, too. We were transformational during the year. We had strong operations and innovations that were based upon customer feedback of problems and -- which were challenges for the customer, opportunities for us across North America. We made 3 significant changes that I think are going to really affect the company as we go forward. I think leading off that was really having Mike Cioce as our VP, Sales and Marketing. He is our first VP of Sales and Marketing to join the organization. He will give you the detail on the extent of sales and marketing updates since he joined the company in 2019. But Mike led a very expansive transformation in our sales process, upgrading and assessing our sales talent, our value proposition, our positioning from a product focus to more of a solution focus and a lot of tremendous work done there. Also, with people, you have to have a product. And I think during 2019, we made some very good additions, and some that just jump out are we added additional high-end engineering talent. We have 3 now senior ex-Schneider engineers, leading a project with developing SmartGATE solution, and their expertise and their ability to develop new solutions for the SmartGATE platform has been very, very strong. We announced late 2019 calendar the introduction of the Insights, a meeting -- metering, sorry, data solution analytics product and a huge improvement for our offerings and how we sell, to whom we sell and that changes the profile of our sales team. And that really is a significant change for us to not sell a product, but actually put a solution in to identify opportunities to help improve building environments. And this market platform, which will be released in the next -- the quarter, at least the medium- and smaller-sized system, is transformational for the organization. It just totally allows us to go into an organization and be seen as a solution seller as opposed to a product seller. Currently, with the product we've had, we were an economic or savings play. But as the offering of SmartGATE continues to grow, we very much position ourself as power management solutions. And Mike will talk about that and expand on the changes. But I just want to stress how profound the 2019 improvements are, making Legend an exciting organization. And I think it's really -- we're right at that stage now where we've always had wanted to be, where we've got the balance sheet, the people and a lot of work done in the marketplace to build a successful organization. So a very exciting time for the company, and Mike will give you some more information about that. But at this time, we'll just let Steve run through the financials.

Thanks, Randy. Revenue for the fourth quarter and 12 months of fiscal 2019, although a disappointment, was not unexpected. However, the significant changes made to our reworked sales processes, sales team and marketing efforts initiated earlier in 2019 has grown our sales pipeline significantly. During fiscal 2019, the company recognized revenue from the sale of 23 SmartGATE platforms sold and installation revenue associated with the commissioning of 23 SmartGATEs. Gross margin in the fourth quarter of fiscal 2019 was negative 20%, down from positive 20 -- 16% in the fourth quarter of fiscal 2018. Gross margin for fiscal 2019 and 2018 were similar at 42% and 45%, respectively, and those are in line with our long-term averages. The significantly lower gross margin experienced in the fourth quarter of 2019 was due primarily to a disproportionate amount of production overhead costs realized in the quarter on lower-than-forecasted throughput during the year. The lower gross margin realized in the fourth quarter of 2018 was primarily the result of year-end adjustments to cost of goods sold relating to inventory valuation amounts and a proportionately higher amount of low-margin installation revenue recorded in those quarters. We anticipate gross margins in fiscal 2020 to be in line with our realized long-term averages. Legend remains financially healthy with a working capital position of approximately $7.9 million as at September 30, an amount which we estimate allows us to complete product feature sets under development and see the sales team close prospective sales cycles from opportunities within our growing pipeline while utilizing our new Insight-led value proposition. We have already made the investments required to realize the potential of our sales pipeline and do not anticipate significant additional capital or operating expenditures in this regard. Legend is positioned to navigate fiscal 2020 as we push to execute on our growth strategy in Canada and the U.S. Thank you. And now over to Legend's Vice President of Sales and Marketing, Mike Cioce.

Thanks, Steve. It's a pleasure to talk with you all again today and give you an update on our sales efforts. While fiscal 2019 revenue was lower than anticipated, there are a lot of exciting things happening for Legend Power. And as the owner of sales and marketing, I want to share with you what we are doing and why I'm both very positive and excited about the direction and future of Legend Power Systems. When I joined the company early in 2019, we had a lot of work in front of us. Our product offering was expanding. Primary market, Canadian education, was experiencing funding retraction. We were struggling to gain momentum in the more complex verticals and geographic markets. Our pipeline was inadequate and our sales process and approach needed work. We have made progress on many fronts, and we are taking significant steps and seeing substantial improvements. By now, you've heard that we've added product capabilities, grown our pipeline, made changes to our sales process, added additional sellers to the team. We have made substantial progress on the key success metrics, like a 46% decrease on our time to win and dramatic increases in our pipeline's size and effectiveness. While the revenue is lower than expected, we are seeing positive progress in key sectors that show we are moving in the right direction. Educational spending in Canada is slowly returning by tapping into other non-energy efficiency budgets. The multi-residential segment has increased 400% in year-over-year sales. Commercial real estate segment has realized a 15x increase in year-over-year sales. This is a key indicator as commercial real estate is a critical vertical and is vital to our success as the segment represents a massive market for Legend Power. As you may be aware, during the fourth quarter of 2019, we launched our SmartGATE Insights portion of the platform as a stand-alone. This new offering gives us the ability to identify as well as to quantify the risk and waste from the grid across the entire organization before having to make a significant capital commitment. You may also be aware that we announced several capability additions to SmartGATE, such as full voltage regulation, voltage boosting, phase balancing, making us an energy efficiency power quality solution. We are not moving away from our heritage of energy efficiency, we are simply expanding it. We need to underscore and emphasize the impact that all of these additions can have on the success of Legend Power. While we are making strides in many areas, we evaluated the transformation and quickly became apparent that a change in sales strategy is needed for our customers and for Legend Power. Let me set the stage by briefly summarizing our value proposition and walk you through the changes. Power quality on the grid is on the decline and lower power quality wreaks havoc on systems, like elevators, HVAC, life and safety systems, control systems and more. Specifically, lower power quality reduces the uptime and lifetime of major systems. These systems are critical to the productivity and satisfaction of the people using buildings. They are also a major expense for building owners and operators. Furthermore, lower power quality wastes energy. We refer to these 7 items simply as risk and waste. This risk and waste typically ranges from $0.60 to $0.80 per square foot for commercial buildings. When core systems malfunction, they disrupt the people using buildings, and we know those unhappy customers are less likely to spend more money. When these systems malfunction, someone has to repair, service or replace them, which obviously costs the owners and operators money. Additionally, new or more sophisticated systems are more susceptible to malfunctions because of lower power quality. Until now, building owners and operators had very few solutions to address these conditions. These solutions are not viable due to the expense and size of them. Besides, they increase energy consumption, not reduce it because they were designed to fix power quality, not save energy. Now Legend Power SmartGATE platform enters the market and completely changes the game. Similar to how a firewall protects your data systems from the dangers of the Internet, the SmartGATE protects your building systems from the dangers of the electric grid. We designed SmartGATE's stand-alone Insights to identify and quantify the conditions that wreak havoc on buildings, allowing companies to find, prioritize and minimize the risk and waste associated with energy, and thereby, build a path to minimize the risk and waste using SmartGATE. Simply put, if you have a $1 million chiller or elevator system that you hope to get 20 years of life, we can show you why typically you will most only get 15 years from it. If your maintenance spends are increasing every year, we can show you that, that is most likely because your equipment is failing 2x more frequently than it should because of the quality of the power coming into your building. In addition, we quantified energy savings that can be achieved by fixing the power quality. All of these are the power of Insights as a stand-alone. When we combine the new power of SmartGATE Insights with SmartGATE's ability to extract the natural risk and waste from the grid and automatically improving incoming power to the optimal level the systems need, it is truly an industry-changing moment. At this point in the story is where the old way of selling didn't align with the new value we offer. The old way of selling would assess a building or 2 at a time. And with the valuations, approvals, design, build, install, commission and verified time lines running 12 to 18 months, it would take a significant amount of time to address these issues holistically for our customers. This approach was not very attractive to customers and is reflected on our revenue performance. We designed a new way of selling to be better for our customers and for Legend Power Systems. With the stand-alone SmartGATE Insights, we can now cost effectively quantify the risk and waste caused by their power supply and the long-term impact it has on the overall business, not one building at a time. They can find the risk and waste across their entire business by looking at all buildings. Business -- and prioritize the removal of it. For most of our customers, the risk and waste can easily hit tens of millions of dollars annually. This is how EPRI and the Department of Energy estimate the scope of the problem to be approaching $100 billion annually. The core of the transformation is to shift to an enterprise data-driven sale for the portfolio of buildings with far-reaching organizational-wide benefits rather than a one-at-a-time simple energy efficiency approach. Again, we are not moving away from our heritage of energy efficiency, we're expanding it. In our previous go-to-market strategy, we would evaluate a few buildings, but once deployed, again, taking 12 to 18 months to get it up and running and begin the sales process on system #2 or possibly system #3 simultaneously. In some cases, it can take 3 to 5 years to get more than 10 installs and meaningful results for our customers and for Legend. The new strategy encourages the customer to simultaneously assess a minimum of 20 services or more for these conditions that create risk and waste in the organization and then quantifies the potential impact. The visibility this creates is good for them because they can quantify the risk and waste for their entire organization and prioritize which areas provide the highest impact. Additionally, we will be recommending a 12- to 24-month deployment schedule for 10 or more units to obtain the maximum impact. This is our big differentiator. Not only can we find the conditions, but we can also quantify the impact to the business and actually remediate the root cause to improve business performance overall. In the same amount of time we would previously sell 1 unit, we can confidently present 10 or more units with quantifiable impact. The new sales approach provides a much faster path to meaningful results for our customers and Legend at the same time. This new go-to-market strategy is right for our customers, for our company, for our shareholders. We can confidently say that this will enable more sales faster as well as uncover more potential revenue faster than ever before. With an addressable market well into the tens, if not hundreds of billions of dollars, this new go-to-market strategy will allow us to realize this faster than ever. When we combine our new go-to-market strategy with our product enhancements, our growth in commercial real estate, building momentum in the U.S., our acceptance in the U.S. public sector and ESCO markets, the future of Legend Power has never been more exciting. And that's why I'm personally positive and excited about the future of Legend Power. Back to you, Randy.

Thank you, Mike. There's lots of exciting stuff going on for sure. Appreciate everything you're doing. And thank you for your update, Steve, and all your contributions during 2019. Operator, we would be pleased to take any questions.

[Operator Instructions] Your first question comes from [ Jeff Cowell ], private investor.

A question, Randy, regarding your quarterly capacity to produce SmartGATEs. Can you comment on that, please?

Well, there's 2 components, I guess, really to answer the question. The Insight product where you'll see a significant volume in the next quarter and going forward, we just ramped up. That product just introduced, but it's a scalable product, produced in our Vancouver location now. Mark Petersen is away on holidays, but when I last spoke to him a couple of weeks ago about it, I said that if we get an order for 50 or 100 and need to deliver in a week, he said, don't worry about it. It's done. So there's no concern from his regard on the Insights. On the SmartGATE solutions, we're in a bit of a transformation from the old platform to the new. We can deliver the old platform. We've got existing built inventory ready to go to make sure that we clear up that inventory and don't get caught with dated inventories, make the transition. And the SmartGATE solution is not a deliverable product until the next quarter, towards the end of the next quarter. Hopefully, that answers the question. But we don't believe that we have current concerns about delivering product. We see significant demand, and we're planning to make sure we can deliver the product for that.

Yes. So my understanding is that you're using the Smart Insights (sic) [ SmartGATE Insights ] to illustrate to the customer the value proposition. And I don't know specifically how much time. I think you mentioned in the MD&A, maybe a couple of quarters, maybe to see significant signs as you're starting to get uptick on that. But what happens if you get -- you have a large deployment of Insights and you get a very quick uptick. Are you going to be able to satisfy the SmartGATEs -- are you going to be able to produce enough SmartGATEs to satisfy the demand that's been illustrated through the Smart Insight (sic) [ SmartGATE Insights ] platform?

Yes. I think my first answer is, I'm looking forward to that problem. We're really anticipating that we're going to grow the sales. So all joking aside, that's a really nice change. We're quite comfortable with it. I mean again, the Insight product can be produced to the forecast that we're expecting. We don't have any concerns there. I think when you're introducing a new product with the SmartGATE platform, there's always a beta trial a little bit, you will pilot for the 2 systems, and then you get into what I call a production-ready system. So the dates we're talking about are production-ready system. And there's really 3 components to it. You have the working capital for the inventory. You have to have the people to put it together and you have to have the orders. So we continually balance it. At this point, we don't have, as a leadership team, a concern that we cannot deliver against order. And fourthly is we also will take the existing units that are in the field today or may go in, in the next quarter or so. Those are fully field upgradable to new SmartGATE platform. So it gives us 2 things. If we were in your example to have a flood of orders and perhaps couldn't deliver, we would have the ability to put in the older system, get the energy savings, run it for 30, 60, 90 days, and then add the additional capabilities to SmartGATE platform and field address them. Also, you should understand in our business, when we do sell a system, someone -- it's not like an iPhone where they buy it at the store and take it home that night. We have to shut down the building for a period of time. And that gets all scheduled out between their customers and things like that. So I think we can get over this transition as far as all the demand that it puts on the organization. And the last component is really, if we need additional people for production and make that scalable from that perspective, we're on top of that, too.

Okay. Last question for me, Randy. Given that the quarter, Q1 is already in the books, could you perhaps talk about how many units of the Smart Insights (sic) [ SmartGATE Insights ] that you've already deployed?

Well, again, the system was released late 2019, so all that would be subsequent events into the next quarter. I can tell you that we have about 35 units in the field. They're generally in the education field. Some of those were the predecessor unit to the full Insights that we are delivering now. And that's probably as far as I can go. But we do have our quarter -- Q1 for 2020 coming up another month or so. And I will say, you'll see some good progress, and we'll be able to detail some good progress in that arena.

[Operator Instructions] Your next question comes from Horst Hueniken from Hueniken Asset Management.

I want to follow up on the comment by Mike about the large orders, in other words, 10-plus units sold over 12 to 24 months. I'm tying that in with the disclosure that management anticipates contributions will begin in earnest in the second half of this year. What I'm trying to reconcile is if some of those larger orders might come through in the second half or really are a next year event given the 12- to 24-month cycle that Mike referenced.

Yes. Thanks for that question. Let me clarify. When we're saying that we're going to schedule the deployments over a 12- to 24-month period. That means, for example, if they're going to purchase 10, 15, 20 units, we're going to give them an option to have a 1-year implementation schedule, which means that over the coming 12 months, they will be installing those units or a option of a 24-month deployment schedule. So it's -- there will be installations during that first year. It's not like the installations are only going to occur between months 12 and 24. They're going to be occurring between months 0 and 24.

Okay. Maybe I can pose the question slightly differently. What gives you the confidence to say that you anticipate contributions to begin in earnest in the second half of the year that you're hearing? What are you seeing that leads you to say that? Maybe just give us some color.

Sure. If we look at some of the conversations that we're having now, where we have several large SmartGATE Insights deployments that are actively being proposed and negotiated, as a result of those, the sense of urgency from the leadership that we're talking to is dramatically different than in the past. In the past, within energy efficiency, it falls into a long-term strategy. But when we're looking at the overarching business impact that includes energy efficiency as well as other business impacts, especially on the risk side, there is a greater sense of urgency from the executives that we're interacting with. It's very compelling to be able to find it. It's more compelling to find it and quantify it. And it's incredibly compelling to find it, quantify it and remediate it. And that's where we're seeing a lot of uptick on the sense of urgency from the executives that we're interacting with.

I believe, of course, in a different way just to put it on is that the difference is it's getting better gas mileage in your car versus a flat tire. One is all aggressive, the energy consumption. But when I got a flat tire, I got to deal with it. So the Insights, the whole process and design was to identify challenges in their environment. So the executives a lot of times, don't know what the cause of the problems are. They just know the end result, but it's to create urgency. So we believe and what we're seeing is a higher level of contact in the organization and a higher level of urgency and the identification of challenges that they have.

Okay. That's very clear. One additional question. You referenced in your disclosure 3 additional highly prospective regions that have been identified for putting in a sales and marketing team over in New York and Seattle. Would it make sense to delay -- personally, I'd be curious if you're able to disclose those cities might be. But also, might it be -- just to set our expectation, I would imagine you're going to hold off from those areas until sales pick up, so that your balance sheet remains strong enough to continue without raising your capital. Can you comment on that, please?

Well, I think it's a fair comment, is that we'll make the decision based on the inflow of business. And we -- as you know, we've spoken a few times, I'm sensitive to letting the public vis-à-vis potential competition will never know about what our next steps are as far as geographical regions, et cetera. So I wouldn't want to comment on where those would be at the moment. But I think what we'll see is, for sure, one looks at the opportunities, and if we have a major customer that's an existing customer, hence, they want us to be in 2 different regions, and they want to put 20, 30, 40 systems into stores or a building that they have, that would be a different situation than just opening up a new area and starting from square one. Also, I think you'll see and some of the talent that we'll disclose in the next quarterly update and changes in the sales team, we have brought in people that are far more familiar and experienced in the ESCO or reseller channels, which opens up opportunities for us where we don't have a lot of infrastructure except to support business. And in fact, we will just be a support group, 2 people that are reselling the product. And we've seen a tremendous interest in the product and working with us. And I think you'll see in subsequent quarters some partnerships come to play that will change the way Legend looks at different geographical regions.

There are no further questions. I'll turn the call back over to the presenters for closing remarks.

Well, thank you. I appreciate everybody. It's a little change for us to have a morning call as opposed to early afternoon and afternoon if you're east. So we appreciate the people did get up and participate in the call. One thing I wanted to do as CEO, let you know that the group is really excited about what we're doing, our new positioning, the value proposition, the sales process, the SmartGATE platform solutions that we have. This is really, really exciting stuff. And what's needed that we're trading a new game and a new process for our marketplace. And I think as we get identified for that and deliver tangible results, we're going to see the organization grow very quickly. I really, really feel good about it. I know that the leadership team is very excited with what we're doing. We're focused on ensuring that Legend Power makes the transition to a problem-solving, power management solution provider and not just a product provider as we were before. We thank you for your continued support. We look forward to discussing FY 2020 Q1 results and progress with you soon and in the interim. On behalf of all the Legend team, thank you for your support. And everyone, have a great legendary day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.