Orion Energy Systems, Inc. (OESX) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Orion Energy Systems Voltrek acquisition call. [Operator Instructions] Today's conference is being recorded. I would now like to turn the call over to Per Brodin, Orion's CFO. Please, sir, you may begin.

Thank you, Jonathan. Good afternoon, and thank you for joining us for today's call to discuss Orion Energy Systems' entry into the electric vehicle charging market. I will be joined by Mike Altschaefl, our CEO; and Mike Jenkins, Orion O. We will walk you through the details of the transaction, the rationale behind the transaction and then we will open the call to your questions. A replay of today's call will be posted to the Investor Relations section of Orion's website. Presentation, we will walk through will be visible on your screens or you can access directly on our website. We will refer to slide numbers as we present Slide 2. Remarks that follow and answers to questions, including statements that may be forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally include words such as anticipate, believe, expect or similar words. Additionally, any statements that describe future plans, objectives or goals are also considered forward-looking. These statements are subject to various risks that could cause actual results to be materially different than currently expected. Such risks include, among other things, matters that the company has described in its press release issued this morning and its filings with the SEC. Except as described therein, the company disclaims any obligation to update forward-looking statements that are made as of today's date. Slide 3. Today's acquisition was made with a purchase price of $6 million, which is consisted of $5 million of cash and $1 million of Orion stock at closing. Future available consideration may be paid based on the performance of the acquired company. We expect gross margin and adjusted EBITDA margins to be in line with our historical performance and improve as the business grows. We also expect the transaction to be accretive from an EPS standpoint. And now I'll turn the call over to Mike Altschaefl.

Thanks, Per. We're very excited to visit with you today and explain our rationale and our overall eagerness to enter into this market with our acquisition of Voltrek Consistent with our vision of customers for life, we identified the ability for Orion to enter the EV charging installation space, and we view it as being very complementary to our core LED lighting installation and maintenance business. We actually started several quarters ago, researching the EV market and researching companies that were participants in the market and all of this work solidly confirmed for us that this is a great opportunity and a natural fit for Orion. So during the process, we were very fortunate to identify Voltrek. Kathleen Connors, the owner started the business about 13 years ago, and she is a recognized pioneer and expert in the industry, and she will continue as President of Voltrek, which will be a business unit within Orion. She's very passionate about the business and very knowledgeable about the industry, and we look forward to her driving this business and growth for us as we move forward together as a company. Moving to Slide 4. We believe we are in the early stages of a massive market, and we also believe there's going to be continued significant public sector support to grow the incredible infrastructure needs that are needed for EV charging. If you move to Slide 5, part of our background in research is looking at where just the automotive OEMs are at this point in time. So we've summarized where the various OEMs are with respect to their decisions on the EV charging marketplace. And as you can tell, there are some very aggressive goals to convert their product offerings to EVs. In addition, when you think beyond that into the dealerships, the infrastructure needed for the dealerships to both deliver new vehicle, the service vehicles, the infrastructure for EV charging is going to be significantly needed for the overall car manufacturing industry. Moving to Slide 6. We continue to believe that our strategy should be and has been driven by what our customers need. We've had a lot of customers ask us about our intentions to perhaps help them in the EV marketplace, in the charging part of the EV market space, and we've been listening to them over the last year plus. We believe, overall, it's a very high-growth market, and it's very highly complementary to our existing business in what we do very, very well. So we see an opportunity for tremendous growth. We also see the opportunity for a broad range of both state and federal programs to support the EV charging industry. And Voltrek is very knowledgeable about these programs. and has, we believe, a jump start on the market of understanding them and participating, particularly on the public sector side of the EV charging industry. Many of our customer prospects have some level of need in this area, and we've been talking with them over the last year of understanding how we can help them as we go forward. We also saw tremendous synergies between Orion's core values and the existing solutions and expertise and the EV charging opportunity. We are very proud of our ability to provide high service turnkey solutions and exceptional customer service and technical expertise, and we saw that same capability in Voltrek. We also felt that we needed a proven hardware solution in a very experienced technical team in order to make progress in this industry. And again, we felt we had that with a partnership with Voltrek going forward. The business relationships on the existing product and software supply side that Voltrek has developed over the years, particularly with charge point as well as ABB were also very important to us because we can be aligned with some key suppliers to this industry to leverage that growth going forward. And finally, we also see some opportunities for recurring revenue streams on the software side of the business for EV charging stations as well as a natural fit to our growth and entree into the maintenance market over a year ago and the ability to provide maintenance services on a nationwide basis to the EV charging industry. So with that, I'm going to turn it over to Mike Jenkins for some additional commentary on the transaction.

Thanks, Mike. Moving on to Slide 7. First, when we started our journey, and we identified EV space is something we want to move into. We really identified and pursued several potential different paths and talk to numerous partners to enter into this market. Voltrek offered the best opportunity for Orion to jump-start our position in the market particularly given the alignment of each organization's for mission, business model, culture and many cross-selling opportunities that exist between the 2 companies. Voltrek itself is a leader in the Northeast in charging solutions and really operates with a turnkey model. They are a value-added reseller of equipment and are based in Lawrence, Massachusetts. They were founded in 2010, and were really one of the early companies in this space. Moving to Slide 8. Voltrek has solutions that cover the full range of commercial EV charging applications. They do not participate in the residential applications, but really focus on commercial and industrial. Those market segments include workplace, public spaces, the very quickly growing area of fleet and multi-dwelling unit buildings. Moving to Slide 9. Voltrek has an impressive list of customers, both public and private with a small group enclosed above. Orion customers in retail, industrial, higher education and commercial segments as well as our public sector are all eager to deploy EV charging stations as a way to enhance our customer, visitor and employee experience and to support their overall environmental and sustainability goals. Moving on to Slide 10. We have a shared belief in the importance of providing turnkey solutions. Voltrek walks their customers through the entire process today from everything from the early stages of planning and site assessment through engineering and design and equipment recommendations through installation and commissioning and then followed by ongoing support and maintenance, all delivered with a single point of accountability and contact, very similar to the turnkey business model that Orion operates with national accounts. Moving on to Slide 11. Voltrek is a premier value-added reseller of EV charging solutions from ChargePoint. ChargePoint is not only the largest equipment provider to Voltrek but also a strategic supplier and has a full range of equipment from Level 2 through the DC fast charging equipment. Moving to Slide 12. A bit more on charge point. They are the market leader for the commercial level 2 chargers and over half of the Fortune 500 companies are working with them in some capacity. ChargePoint is a rapidly growing publicly traded company with a market capital of $5 billion, and their software offers superior flexibility to end users and is tied to their top-rated free application. Moving to Slide 13. Another key supplier to Voltrek and now Orion is ABB. ABB also offers a full range of products from Level 2 through DC fast charge and is another fast-growing supplier to Voltrek. Moving to Slide 14. Voltrek has 4 primary revenue streams: equipment, projects, service and renewals. And Recurring revenue streams are in the area of service and renewals. We believe all of these revenue streams have significant growth opportunities as a result of this acquisition and for the relationship with Orion to greatly accelerate sales in all areas. In summary, we believe this is a very positive transaction for Orion's shareholders and stakeholders. It allows us to add a fast-growing business in a massive market. With that overview of the transaction, it's time to open up for questions. Operator, let's open the call for Q&A, please.

[Operator Instructions] Our first question comes from the line of Eric Stine from Craig-Hallum.

So wondering, I know you gave the 2021 revenue number for Voltrek. Wondering if you could give the 2022 year-to-date and maybe some of the trends that you are seeing in this fiscal year?

I don't think we're going to comment on what their year-to-date performance is and that will not be included in our financial statements. But as we look forward, essentially for the full second half, we expect the revenue to be somewhere in the $3 million to $5 million range, subject to the caveats about supply chain and those typical factors that could come into play.

Got it. And then obviously, your customers certainly had some input or helped get you down this path or to at least realize that this is the right path. As you think about those conversations, I mean, any thoughts on how you think you can accelerate things or what maybe the pipeline is when you look at your national accounts, whether it's a year out, 3 years out, 5 years out?

Sure. Absolutely. Well, first of all, Voltrek has been growing quickly, and we saw the company being at a tremendous inflection point and benefiting from linking up with us to provide additional resources to grow even faster. From a customer standpoint, we see significant opportunities for cross-selling, Eric. As we said, we've had a number of conversations with customers over the past period of time and feel like many of them in different verticals are exploring how they want to provide EV charging stations for either for their customers or their facilities. So I think as we get moving and get our sales force wrapped up and knowledgeable on the product and the technology and the sales support we have from the Voltrek team, we really feel that we can accelerate the growth. So for us, it wasn't so much about where the revenues are today for Voltrek where we think they can be down the road together with the synergies we can bring back and forth from a sales standpoint. But we would expect to grow this into a significant business over the next 3 to 5 years.

Got it. And then maybe last one for me. I know part of your $500 million revenue go out 5 years out, part of that is inorganic, I mean, is it fair, I mean, I would think there is maybe more to do in EV charging, but also curious kind of what maybe your next priority would be, obviously, I mean, a big priority is growing this business. but you've talked about in the past, solar, energy storage and some other areas. Just some thoughts there would be great.

Sure. I -- as we were working on our acquisition strategy and our research, it became very clear to us as we had bounced around and looked at all of the areas you talked about for us, number 1 was EV charging. So we're really happy to have a great company join us to drive that piece of things. It's not going to stop our exploration for other alternatives. As we said in the past, we're going to be smart about acquisitions and do them in a way that we think will help build the company, but also do them in a financially reasonable and sustainable manner. So I would say that we still think down the road, exploration into solar could make sense because of the number of rooftops that many of our customers have. And often when you start to think about solar, energy storage seems to come in to play a lot with that. And we've also talked in the past about horticultural market, which we still think has a lot of potential down the road. So we put some of those sort of towards the top of what we're looking at, but we also need to be prudent and digest what we have right now and make sure that we integrate and do things in a prudent manner.

[Operator Instructions] And our next question comes from the line of Amit Dayal from H.C. Wainright.

So Mike, just in terms of -- congrats on the deal, by the way. In terms of growing this type of a business, service-oriented, deployment-oriented, can you talk about what your needs are from a personnel point of view, resources point of view? It looks like these guys are in the Northeast right now, if you want to go national, how you're going to manage that execution.

Amit, this is Mike Jenkins. I'll take that question. We're fortunate that Voltrek has a great team in place today. And certainly, as you highlight, as we scale the business and expand it nationally, we will need additional resources. We also have a team that manages our turnkey business that's located down in Jacksonville. Florida, they manage projects and some very substantial complicated projects today on the lighting side. We do think that there's an opportunity to quickly leverage some of those very talented people on our team to help scale this business. And then certainly, as we move forward, we'll be at looking to add additional resources in project management, predominantly capabilities to the team.

Understood. And do you have potential leads just from the existing Orion client base that could -- you could convert into customers for this offering?

Yes, absolutely. This is a very frequent conversation that we're having with customers these days. As Mike indicated previously in terms of both the maintenance area and EV as we've gone down to build platforms in these spaces, they are really the direct result of customer conversations and the priorities that a lot of our customers have today. So this is a very timely area of need for our customer base and 1 that we think we can effectively cross-sell into.

Understood. Just maybe last one. Any color on sort of margins in this business, what they are today and how you could maybe improve them in the future as you scale?

We think that they're both at the gross margin and adjusted EBITDA margin line, fairly comparable with what our historical performance has been. And we think as we move forward and grow this business, we think that there is room for expansion similar to what we see for the Orion business moving forward.

And our next question comes from the line of Bill Dezellem, Tieton Capital.

I'd actually like to follow up on that last question. You referenced in your opening remarks that Voltrek's margins would expand as revenues grew. So are we hearing you correctly that their margins today are a bit higher than yours because your margins are depressed. And I think you said that they are similar to your historic margins, and then that they would grow in the future. And if I -- if we did hear all that correctly, then at how much additional revenue growth do you need before you see their margins expand?

Bill, I think that you're correct in that I used the word historical margins to put in context that they're certainly performing at a level above what we would be at certainly from an EBITDA standpoint over the last quarter or 2. And so we expect them to continue to perform at those historical levels that we've seen prior to the current year and even the second half of last year. And then I think as they grow scale, we would see incremental expansion along the way we would not expect to be a dip. We'll continue to grow the business and see continual expansion of their margin.

And so that margin expansion basically will go hand-in-hand with revenue growth from this current level? You don't need a certain amount of time to pass and revenues to grow a certain amount prior to margins expanding.

We do not see a need for there to be time to elapse sort of hit a certain revenue level for that to happen. That all comes with the caveat of things could interrupt that. But our current expectation is that we could be able to achieve margin expansion from this time moving forward.

Very helpful, Per. and then relative to geographic expansion, -- are you -- you talked a little bit about it, but are you inclined to expand Voltrek geographically or nationally, or would it actually be more effective to make an acquisition or acquisitions in other geographic regions. How do you think about that buy versus build on geographic expansion?

The way we think about it right now, Bill, is that first, we were influenced and thankful for the geographic footprints that Voltrek has right now, which is heavily in the Northeast. But the concentration of EV opportunities in the Northeast along the East Coast is huge, but in some respects, there's a tremendous amount of business to go after here. But secondly, when we think about expansion, and it is about turnkey installation, First, we have been doing that on a nationwide basis for Orion for 25 years, and we do that primarily through some contractors, which is the same thing that Voltrek does. We think once we and our teams working together on how to manage the installation process that can be taken nationally very simply by working with some existing subcontractors that we use on the lighting installation side. So we don't see any reason not to go on a nationwide basis with this because the cost to do that is really just the relationship with the subcontractors. From a supplier standpoint, we don't have any geographic restrictions, so we can go across the country looking from a product standpoint. So I think they continue to build the East Coast, which is very strong. and then grow out from there. And then on the other side, the maintenance side of our business, which we already are building out on a nationwide basis, that will be a natural fit to leverage into the EV charging station business, and we currently self-perform in 15 states and the ability to take that further with the contractors and building out our own process. So lot about demand creation, and we think that we're going to have opportunities across the U.S. for services that Voltrek does.