Energy Focus, Inc.
Q4 2020 Earnings Call Transcript

Published: 25 Mar 2021

[Operator:]

Greetings, and welcome to Energy Focus Fourth Quarter and Fiscal Year-End 2020 Conference Call. . Please note, this conference is being recorded. I will now turn the conference over to your host Brett Maas with Hayden IR. Thank you. You may begin.

[Brett Maas:]

Thank you, operator, and good morning, everyone. Joining me on the call today is James Tu, Executive Chairman and Chief Executive Officer; and Tod Nestor, President and Chief Financial Officer. Before we begin today's call, I'd like to remind everyone that we'll make certain forward-looking statements. These statements are based upon information that represents the company's current expectations or beliefs. The results realized may differ materially from those stated. For a discussion of these risks that could affect our results, please refer to the discussion under the headings Risk Factors as well as forward-looking statements in our most recent 10-K. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

[James Tu:]

Thank you, Brett. Good morning, everyone, and thank you for joining our full year and fourth quarter 2020 earnings conference call. 2020 was the year filled with both extreme challenges and solid progress at Energy Focus, as the global pandemic swept across the country, and, arguably, still weigh heavily on daily economic activities today, more than a year after the initial breakout. Despite of the and the softness of lighting retrofit activities that impacted our commercial lighting sales, our financial results for the full year, which Tod will go into further details later, illustrate the considerable progress we have made in reigniting top line growth, significantly improving our margins and strengthening of our balance sheet and prudently managing inventory and working capital to position our company for strong growth, as economic life resumes towards normality and our new UV-C disinfection products start to generate notable sales in the coming quarters. On the top line, the strength of our product innovation that resulted in improved competitiveness in the military and maritime space was a significant driver of the more than 32% net sales growth we were able to achieve in 2020, which offset the weakness we experienced in our commercial business ever since March of last year. As we continue to strengthen our military engineering organization and expand our business development efforts, we are confident that we will continue to achieve high level performance and further growth in this segment going forward. In addition, within the federal government but outside of the Navy ecosystem, our military and commercial Buy American products were successfully added to the GSA schedule in December 2020. We have started to receive orders from the GSA channel over the past few months, and we are aggressively building out our sales and marketing infrastructure for this particular market that covers more than 361,000 buildings throughout federal government agencies. On the commercial side, as we mentioned over the past few earnings calls, we witnessed a dramatic slowdown of lighting retrofit activities in 2020.

[Tod Nestor:]

Thank you, James. First, I'd like to summarize our 2020 full year results. Net sales for the full year 2020 were $16.8 million, up 32.5% compared with $12.7 million in 2019. The year-over-year increase in net sales was primarily driven by an increase in military sales, which is partially offset by a decline in commercial sales as a result of fluctuations in the timing, pace and size of commercial projects, including, principally, the impact from the COVID-19 pandemic, the FOS or delay in lighting retrofit projects across the board in the commercial sectors, as James mentioned earlier. From a segment mix perspective, military sales were $11.4 million, representing 67.9% of total net sales compared to $4.8 million or 38% of total net sales for 2019. Sales to commercial customers were $5.4 million in 2020, representing 32.1% of total net sales for the year, down from $7.9 million or 62% of total net sales in 2019. The year-over-year decrease in commercial sales was mainly due to overall softness in the commercial market that began with the onset of the COVID-19 pandemic. Gross profit for 2020 was $5.2 million compared with $2 million in 2019, an increase of 162.7% year-over-year that was driven by an increase in military sales dollars and mix, as well as improved efficiency in our plant operations. As a percentage of revenue, gross profit margin was 30.8% in 2020, compared to 15.5% in 2019, a nearly twofold increase. This increase was primarily due to a more favorable product mix and the margin impact from increased military sales which more than offset unexpected additional manufacturing costs due to supply chain challenges relating primarily to military and maritime products.

[Operator:]

. Our first question is from Amit Dayal with H.C. Wainwright.

[Amit Dayal:]

Just with respect to this disinfection as a service solution, how many robots do we have right now? And can you talk a little bit about the business model in terms of -- you said you may be charging on an hourly basis. I know it's very early, but in terms of just your thoughts on how this could scale up potentially if this picks up for you?

[James Tu:]

Yes, sure. Yes, you are right that it's a little bit early. We're just launching the pilot service. We now have 5 robots that we are basically working on and providing services and training our operating technicians in the Cleveland area. So it's a bit too early to lay out the specifics, but we're excited about it. We are charging around $150 per hour on the services. Obviously, it depends on how much subscriptions, how many times you are using on a monthly basis, and we have a so-called the wheeled car type of methodology towards the usage to encourage recurring uses. We will be sharing more details in the next earnings call about the exact mechanism. So we just want to make announcement that we are in the middle of the piloting services. And as I mentioned, it will be launched officially in the second quarter. So we'll have more details this year. Tod, you want to add anything?

[Tod Nestor:]

I'll just add on the pricing front, when we determined that level of pricing, we did extensive benchmarking and other analysis to make sure that we felt we had a very good value. And $150 is the highest price a customer would pay. If they bought more units, they get a lower price per hour.

[Amit Dayal:]

Understood. And then it looks like going into 2021, we have a lot of drivers for the commercial segment in terms of products and renewed sort of sales force reorganization, et cetera. If the commercial business picks up for you in 2021, what kind of impact on the margins should we expect from this?

[James Tu:]

I'll take a step and obviously Tod can add . We always target over 30% gross margins. In some product lines, traditional lens and fixtures product lines, the margins could be lower. And it also depends on -- there could be onetime transaction that will have lower margins. But overall, we are looking to achieve 30% plus margins in our commercial business line. We definitely should have that in focus line and the -- and most likely all the UVCD products. And I think that's consistent with what we have been talking about targeting over 30% margin on the commercial line. Tod, do you want anything to add on that?

[Tod Nestor:]

I'll just say that given our current volumes, as we increase volume, that rate will be more consistent quarter-to-quarter because the mix will not impact it as much. But we do have a strategy of targeting the kind of margins, both from a dollar basis, which is our primary driver, as well as considering percentage margins and how we price these. So we do intend to stick in those ranges that we've mentioned before. And James just reminded everybody else.

[Amit Dayal:]

Okay. And with respect to the EnFocus product, it looks like this is a bigger part of the commercial efforts in 2021. Has -- did EnFocus contribute anything in the fourth quarter? Or you weren't really in a position to market and sell this because of COVID-related reasons in that quarter?

[James Tu:]

Yes. The EnFocus is really insignificant yet at this point. And the reason is that as you are aware of the EnFocus system, it targets the commercial facilities. And all the budgets, basically are not only new retrofit budgets, but also existing retrofit projects were being delayed. So we haven't seen EnFocus being actually sold into the market in new projects yet. What we are seeing is a lot of interest in taking EnFocus into new projects once the projects start to happen again. We mentioned about a win that we had with a state government facilities that will start installing EnFocus in the second half of the year -- of this year. And that was one of the -- so not rare, but not so often situations where the budget continues to move forward without any impact, without any short-term impact. So our hope is that, again, economy started to come back to more normal pace, we can start seeing EnFocus being specified into the new projects. We are also obviously going to be, as you mentioned, we're expanding our sales organization. So there are going to be additional channels where we could sell EnFocus to the nontraditional project oriented, ESCO oriented opportunities. And we will talk more about that when that transpires. The other thing I would add is that, obviously, in total, so you're correct that it's a major investment for us in engineering for the commercial space. We envision that EnFocus being the -- basically the control hub going forward to provide room based lighting controls. And we're adding functionality to it. And we will also have other residential type of applications based on EnFocus later this year. So we're looking to expand this product portfolio further throughout the year.

[Tod Nestor:]

Right. James, could I add one item to that? We're also -- EnFocus will be part of the above product that James mentioned earlier, our UVCD troffer. So with that, as those begin to seed the market, we will also see growth in the EnFocus platform.

[Operator:]

. Our next question is from Bill Hardy, Private Investor.

[Unidentified Analyst:]

My question is in regard to EnFocus. In the August conference call, you mentioned that you were going to provide a programmable capability for the EnFocus stations, both from an individual station and from a system-wide station. Could you comment on where we stand on that because I think it's a very significant thing to add to that product line?

[James Tu:]

Yes. Bill, you're talking about -- I'm presume, you're talking about more additional control capabilities for EnFocus?

[Unidentified Analyst:]

Yes.

[James Tu:]

Yes. So yes, so as you are aware of the current generation -- the first generation of EnFocus product has the ability to -- it is flicker-fee, dimmable, tunable, all controlled from the switch. In the next generation, we are adding circadian lighting, which is autonomous circadian lighting as well as occupancy sensing. So we're obviously expanding the capabilities of EnFocus switch. And obviously, the application is almost limitless. Once you have established the connection between the switch, which is the control center and the lamps, the rest is really adding the capabilities to the switch. And I think the appeal for EnFocus is only going to get better, get stronger because of the increasing set of security concerns for wireless communications. And so yes, so we are moving towards that direction, for sure.

[Unidentified Analyst:]

Yes. So that means that rather than manually operating the switch, you'll be able to program it, so that will go on and off at particular times, right?

[James Tu:]

Yes. Yes, you basically have the ability to turn to autonomous control because based on the circadian researches, throughout the day, there will be these different light levels and color temperatures that will optimize human comfort and productivity and performance. We -- in the next generation, we are building that capability into the switch. So if -- you can obviously override the light level or the color temperature anytime manually. But if you choose to do autonomous, you have the ability to actually have that circadian lighting throughout the day, 24-hour period, which is -- I think it's going to be a great application for residential uses, which is why we are scheduled to launch in the second half of the year.

[Unidentified Analyst:]

Right. One more question in regard to the UV-C products. You had indicated in the third quarter conference call that you were going to provide about 100 of the small stand-alone units to various customers. And I'm just wondering what the feedback was from that? And did that happen?

[James Tu:]

Yes. As I mentioned in the earlier talk we have made additional improvements on the products, and we're even more excited now with the product. So the products are now being going through production engineering, and we are scheduled to start selling them in the June time frame. We will be providing these samples before that. And so we'll see how the responses are. But in the past few months, we have taken our prototype of products. That's probably the you're talking about. We have provided -- we demo those products to many customers. And that's why we said that the feedback has been really good. The unique capabilities for the products, which I won't go into details here, but in the summary, is to be able to intercept the virus in real time, and disinfectant effectively, which is what most purifiers do not provide. And so -- and we have technologies that are built in that can generate pretty strong airflow while still keeping the unit safe for human use. Those are the improvements that we made over the past few months. And we believe that there's a certain amount of demand. Again, it's a new market. So we don't know how big that demand is. We -- anecdotal evidence has shown based on our discussions and demos with our customers and their customers, I think demand will be substantial, but it's too early to tell.

[Operator:]

And our next question is from Ethan Star , Private Investor.

[Unidentified Analyst:]

You mentioned, I believe, new national distribution partners that will take products to new verticals. And I'm hoping you could please expand on that.

[James Tu:]

Yes, we are not ready to talk about it yet. I think once that's ready to go, we will be announcing that. Yes. Unfortunately, we can't talk about it right now yet.

[Unidentified Analyst:]

That's fine. I understand. And I'm wondering, to what extent are you aiming at new construction versus retrofits? Retrofit seemed to get a lot more discussion during the conference call.

[James Tu:]

Oh, yes, absolutely. The company has traditionally been a retrofit-focused company because of lens-based solutions. We -- you made a very good point and a very good question that the new construction actually hasn't been as attracted by the COVID as the retrofit just because the new construction bucket usually has been approved and ready to go. And I think the new stimulus plan is going to continue to increase the demand for new construction lighting products. For the retrofit, it's a totally different story where you don't have to upgrade your lighting when people are not even there, and you don't know when they're going to come back. So -- and that's why we have been confronting over the past year or so. We are planning to launch our whole fixture line, that is also lens based. We're very excited about that we're going to new construction market. And the reason why I'm very excited about that is twofold, one is that it will be based on our lens-based solutions, which make those fixtures very sustainable compared with the integrated fixtures that you have to really throw out of the mechanical parts, if the lights don't work anymore or it becomes very technologically lagging. So it's on the sustainability standpoint, that's -- we believe that's the most sustainable lighting fixtures in the market. And the second thing, obviously, is that it's basically coupling the troffers with our existing lens to provide a different line of products that now the architects and designers could specify, instead of specifying lens and troffers, they could just specify that whole fixture line. And it doesn't take a lot of time for us to launch this product line. It will be launched in the second quarter. So that will take us to the new construction market. Obviously, that takes time to develop the whole segment. It's a new segment for us. On the other hand, one of the most important thing when the business was slow over the first 6 months for the commercial side is for us is to expand our agency network. Now we have more than 20 agency -- lighting agencies across the country. And these agencies have a substantial amount of business in new construction. So we're hoping that this new product line to address their needs there as well.

[Unidentified Analyst:]

Okay. Great. And I'm wondering, you mentioned these lighting agencies, I believe. And I'm wondering -- I'm not really aware of those, but I wondered to what extent do you focus your marketing efforts on architectural firms?

[James Tu:]

Very little. Like I said, at this point, before we launch the floor for fixture line, very little. We have been focusing mostly on retrofit. And as I mentioned, once we have the fixture line, we will be turning our marketing focus to the -- I mean, essentially driving into a whole new market there with the existing agency and that's the beauty of it. We don't have to create another channel for it.

[Operator:]

We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

[James Tu:]

Thank you very much for your participation today in our earnings call, and we look forward to talking to you again in the next quarterly earnings call. Have a great day.

[Operator:]

This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.