Earnings Call Transcript - FLUX Q4 2022

Operator, Operator

Greetings, and welcome to the Flux Power Holdings Fourth Quarter and Fiscal Year 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I'd now like to hand the call over to Peter Geantil, Director of Product Development and Marketing. Peter?

Peter Geantil, Director of Product Development and Marketing

Thank you. Hello, everyone. Your host today are Ron Dutt, our Chief Executive Officer; and Chuck Scheiwe, our Chief Financial Officer. They will be presenting results of operations for our fourth quarter and fiscal year 2022, which ended June 30, 2022. A press release detailing these results crossed the wires this afternoon at 4:01 PM Eastern Time and is available in the Investor Relations section of our company's website at fluxpower.com. Before we begin the formal presentation, I would like to remind everyone that the statements made on the call and webcast may include predictions, estimates or other information that might be considered forward-looking. While these forward-looking statements represent our current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this presentation. Please keep in mind that we are not obligating ourselves to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. Throughout today's discussion, we'll attempt to present some important factors relating to our business that may affect our predictions. You should also review our most recent Form 10-K and Form 10-Q for a more complete discussion of these factors and other risks, particularly under the heading Risk Factors. At this time, I will now turn the call over to Flux Power Chief Executive Officer, Ron Dutt.

Ron Dutt, CEO

Thank you, Peter, and good afternoon, everyone. I am pleased to welcome you to today's fourth quarter and fiscal year 2022 financial results conference call. Our fourth quarter reflected our trend of strong revenue growth from customer demand for our lithium-ion battery packs in the addition of new customers, along with product improvements. Revenue increased 61% to $42.3 million in fiscal year '22 compared to revenue of $26.3 million in the prior fiscal year '21. In the fourth quarter of fiscal year '22, revenues were $15.2 million, up 83% from $8.3 million in the prior year, marking our 16th consecutive quarter of year-over-year revenue growth. In the fourth quarter, we received $11.6 million in customer purchase orders from existing Fortune 500 and new customers. To highlight a few of our successes, we received multiple orders for ground support equipment battery packs from an existing large global airline customer who had moved beyond the pandemic constraint on air travel that we all experienced. Furthermore, we began receiving initial orders from new customers acquired during the fiscal year. For the fourth quarter, our customer order backlog decreased to $35 million as of June 30, 2022, helped by improvement in sourcing actions to mitigate part shortages, which bodes well for increased confidence in future supplier performance. Our strategic initiatives include accelerating backlog conversion of orders to shipments and increasing inventory turns, which are also driving lower working capital needs. These initiatives are increasing gross margins that will lead towards profitability. To that end, shipments increased to $15.2 million as of June 30, 2022, compared to $8.3 million as of June 30, 2021, and $13.3 million as of March 31, 2022. New orders in fiscal year '22 increased 83% to $65 million compared to $35.5 million in the prior fiscal year '21. This increase was driven by strong customer demand, reflecting not only order flow from our relationships with our installed base but new customer acquisitions. In March, we introduced three new products at the annual MODEX 2022 Material Handling Trade Show. First, the L36 lithium-ion battery pack, a 36-volt model for the popular 3-wheel forklifts. Secondly, the C48 lithium-ion pack designed for automated guided vehicles and autonomous mobile robots. Lastly, the S24 lithium-ion battery pack that provides twice the capacity or 210 amp-hours for the high-volume Walkie Pallet Jacks. We were pleased to see that global supply chain disruptions improved during the fourth quarter. While we continue to pursue strategic supply chain and profitability improvement initiatives. With lithium cell production expanding in the U.S., we believe onshoring in the future could serve as a potential alternative to reduce reliance on offshore sourcing. Throughout 2022, we have taken aggressive efforts to mitigate supply chain issues. We launched a project to bring in-house assembly of cell modules using automated modular assembly. We also leveraged increased pack sales volumes to resource steel and board components to low-cost regions into high-volume suppliers. During the year, in response to shipping cost increases, we found more competitive carriers to reduce shipping costs and utilized lower-cost steel suppliers that meet required specifications. We have introduced new product designs based on a new modular platform for our battery packs to address customer needs. Some of the improvements included higher capacities for extra-long and demanding shifts, easier servicing, lower total cost of ownership, and other features to solve a variety of existing performance challenges in customer operations. At the same time, our new designs provided margin enhancement, part commonality, and improved serviceability. We are now producing and moving the first few models of our new platform through UL Listing and forklift OEM approvals, which is part of our certification process and requirements for our packs to be sold with the new forklifts. Inventory decreased to $16.3 million at June 30, 2022, as shipments increased to $15.2 million. In fact, our inventory turns during the quarter increased from 2.6x to 3.4x. While supply chain issues are still challenging, our strategic supply chain and profitability improvement initiatives have shown positive results. Improved production processes, including implementing lean manufacturing, have resulted in increased efficiency, leading to improved inventory turns. We expect to see a continued sequential reduction in our rate of cash burn and improved gross margins. This will be aided by design cost reductions to lower material costs and assembly. We recently implemented a $5 million credit facility on March 11 that included $4 million of signed committed credit availability. We believe this credit facility, along with our working capital line with Silicon Valley Bank of $8 million, of which $2 million is currently unused, will provide availability for our ongoing needs. Finally, we are seeing an improvement in supply chain issues from an internal standpoint due to our intense focus on manufacturing processes, procurement, and cost efficiencies achieved so far as we execute our top priority of reaching cash flow breakeven and profitability. Our current and potential pipeline of customers continues to expand with a full product line that caters to large fleets who seek a relationship partner to provide battery packs on an ongoing basis. These customers represent a diverse base across multiple segments, all of whom are seeking lower-cost and higher-performance lithium battery packs. Approximately 90% of our forecasted revenue for fiscal year 2023 is now identified and reflects shipments we've already made and a letter of intent we've received, along with customer input to order packs for their scheduling with their new forklift purchases. Our experience has been that orders from our customers are needed for their new forklift orders, which often precede battery orders. We have taken actions to restore our gross margin improvement path. Our gross margin improved substantially to 20% in the fourth quarter of fiscal 2022 from 14.6% in the third quarter of 2022, reflecting recent progress in restoring our gross margin trajectory which had been impacted by the supply chain disruption. Our improvement initiatives include price increases on new orders, the utilization of alternate vendors, and lower-cost suppliers. New product designs aim to lower costs, reduce part count and complexity, and improve the serviceability of packs, all of which are part of our plan to accelerate gross margin improvement. Part of our supply chain strategy has been insourcing new suppliers for key components. To that end, we have sourced a new supplier for electronics, a supplier in Mexico for harnesses, and an offshore Asian steel supplier. We continue to qualify alternate suppliers for critical resources, including electronics, sales, contractors, and fuses in response to the ongoing supply chain disruption, and to provide a margin of safety to ensure we deliver our packs on time. As supply chain disruptions have improved, customer backlog in the fourth quarter declined to $35 million from a record of $38.6 million as of March 31, 2022, due to improvements in sourcing actions to mitigate part shortages. Our part shortages have declined by 50% over the past 2 months. Additionally, production process improvements and better supply chain management contributed to this positive trend. During the quarter, inventory decreased to $16.3 million from $20.9 million at March 31 due to more efficient purchasing processes. Inventory turns have continued to improve, increasing from 2.6x to 3.4x during the quarter, reflecting our supply chain and production improvements. We are targeting continued improvements in inventory turns in the quarters ahead. Looking beyond reaching profitability and building our success in the material handling industry, we are also focused on broadening our reach into related verticals, including warehouse robotics. With our operational strategy, which includes 6 assembly lines, we are well positioned to continue to leverage our capabilities as the adoption of lithium energy solutions continues to accelerate, including demand from numerous related verticals. On the technology front, we continue to see customer interest in our proprietary SkyBMS telematics product, which provides for remote fleet management and monitoring, delivering battery pack data to optimize performance and customer fleet tracking. I am happy to report that customer feedback remains very positive for Flux Power as a leader in technology for these applications. With that, I will now turn it over to Chuck Scheiwe, our Chief Financial Officer, to review the financial results for the quarter and year ended June 30, 2022.

Chuck Scheiwe, CFO

Thanks, Ron. Now turning to review our financial results for the quarter ended June 30, as Ron mentioned, revenue for the fiscal fourth quarter of 2022 increased by 83% to $15.2 million compared to $8.3 million in the fiscal fourth quarter of 2021. This was driven by increased sales volume and models with higher selling prices. Gross profit for the fiscal fourth quarter of 2022 increased to $3 million compared to a gross profit of $1.8 million in the fiscal fourth quarter of 2021. Gross margin was 20% in the fiscal fourth quarter of 2022 as compared to 21% in the fiscal fourth quarter of 2021. This reflects the recovery of approximately 10 points of gross margin decline that we experienced related to the supply chain disruption during the past year. Selling and administrative expenses increased to $4.1 million in the fiscal fourth quarter of 2022 from $3.4 million in the fiscal fourth quarter of 2021. This increase reflected rising outbound shipping costs, personnel expenses related to expanding quality in our service initiatives, and a significant increase in insurance premiums. Research and development expenses decreased to $1.4 million in the fiscal fourth quarter of 2022 compared to $2 million in the fiscal fourth quarter of 2021, primarily due to lower third-party testing and compliance expenses for product development stages. Cash usage, as discussed previously, supported our actions to protect our customer order delivery timing amid global product shortages throughout 2022. We have actively worked to reduce inventory balances as the pandemic-related disruptions recover. We ended the year with $0.5 million in cash and have over $8 million working capital line of credit with Silicon Valley Bank, of which $2.5 million is currently available, and a recently implemented $5 million credit facility, of which there is $4 million of signed committed debt availability, as resources to manage working capital needs. We believe that our existing cash and additional funding available under our SVB credit facility, combined with funding available through our subordinated LLC, will be sufficient to meet our anticipated capital resources to fund planned operations for the next 12 months, barring any unforeseen events. We fully intend to avoid raising equity capital prior to reaching profitability. We are executing on our gross margin improvement and cost control initiatives. Now turning to review our financial results for the year ended June 30, revenue grew 61% to $42.3 million for fiscal year 2022 compared to $26.3 million in the same year-ago period. This increased revenue was primarily driven by our sales of a greater mix of larger battery packs with higher selling prices and a higher volume of units sold to both existing and new customers. In the fourth quarter of 2022 alone, we booked $11.6 million in new customer orders. While there can be some seasonality with orders, strong customer demand continues, along with a gradual reduction in concentration from new customer acquisitions. Although gross profit was higher in the fiscal year, at $7.3 million compared to $5.8 million in the same year-ago period, gross profit margins decreased to 17.3% in fiscal year '22 compared to a gross profit margin of 22.1% in the same-year-ago period. Gross profit, as mentioned earlier, was impacted by higher costs for steel, electronic parts, and off-the-shelf parts during the year, and those were all partially offset by higher revenues associated with increased sales of our energy storage solutions. Selling and administrative expenses increased to $15.5 million in fiscal year '22 from $12.6 million in the same fiscal period of 2021, reflecting increases in outbound shipping costs, insurance premiums, and personnel expenses. Research and development expenses increased to $7.1 million in fiscal year 2022 compared to $6.7 million in fiscal year 2021, primarily due to expenses related to new product development and UL certifications. I'd like now to pass it back to Ron, who will offer some closing remarks.

Ron Dutt, CEO

As Chuck mentioned, I want to emphasize that we fully intend to avoid raising equity capital prior to reaching profitability. Profitability is currently our top priority. We're taking it very seriously and putting in specific efforts to achieve it. Looking ahead, we continue to focus on increasing energy storage solutions for new and existing customers, who are anxious for the benefits of lithium-ion technology. We are also focusing on expansion into emerging sectors, such as warehouse robotics and high-voltage applications. Owning our technology reduces risk for our large customers. We are, after all, a technology company, which is advantageous for attracting customers. Our target customer base of Fortune 500 companies with large fleets seeks a supplier with equal or better technology, both now and in the future, and we can demonstrate that. As we have said, ours is a relationship business, and this is a strong predictor of our future, as shown by repeat Fortune 500 customers and more recently, multi-year letters of intent in negotiation. Furthermore, during fiscal '22, management brought on 6 new major customers with sustainability initiatives, which have 7-figure revenue potential. Price, service, and quality are key factors as to why we continue to win business and will ensure our goal to maintain our growth trajectory, particularly as shown on Slide 9. Our current facility is designed to support production well beyond $100 million annually in revenue, given our facility footprint, the second shift build-out, and lean manufacturing implementation. In summary, we are well positioned to create long-term value for our shareholders. Our strategic initiatives have been deployed and are now working to increase profitability and mitigate ongoing global supply chain disruptions while executing our customer order backlog. With continued increases in customer demand and related production capacity increases, we are accelerating our trajectory to cash flow breakeven and profitability. I look forward to providing our shareholders with further updates in the near term as we continue to leverage our leadership position in lithium-ion technology solutions with our growing list of new and diverse large customers. I thank you all for attending. And now I'd like to hand the call back to the operator to begin our question-and-answer session.

Operator, Operator

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

Amit Dayal, Analyst

Ron, just I want to congratulate you first on the strong revenue performance for the fourth quarter. In that context, how should we think about future growth, especially over the next, say, 12 months? You're growing at a pretty fast clip. Is this sort of a sustainable level or should we moderate our expectations for fiscal '23?

Ron Dutt, CEO

Yes, thank you for the question, Amit. We are experiencing capacity constraints and have more demand than we can currently meet, which is a positive challenge. If you refer to Slide 9, you can observe our impressive growth trajectory that reflects significant resources and infrastructure development. Growth requires capital, and we remain confident in our ability to sustain this growth momentum. However, we also need to be cautious about not growing too quickly at the expense of profitability. We have a clear budget plan for this year with specific initiatives and assumptions in place. We believe we are on track to achieve another year of solid growth while ensuring we remain aligned with our profitability goals. Therefore, while we do not provide specific quarter-to-quarter revenue guidance, we anticipate continued support from our current customers as they expand their fleets along with the addition of new clients. The three slides we presented highlight some of our key customers. In summary, we are managing through these challenges well. We don't want to provide guidance, but we view these as positive challenges to address.

Amit Dayal, Analyst

So in that context, the $35 million in backlog you have, are you expecting to deliver that in the next 12 months or even faster?

Ron Dutt, CEO

Yes, the backlog is interesting. It’s like a hopper. You've seen the table in our K and the press release reflecting the orders we’ve received but haven’t shipped, and period-to-period, we ship those orders and then receive new ones. The question really is about pacing. There’s still a bit of lumpiness that influences orders from our larger customers, mainly because they’re beginning to bunch their orders and protect lead times as opposed to placing smaller orders over time. We’ve seen that particularly in the last quarter. But did that help?

Amit Dayal, Analyst

Yes, absolutely. I can follow up offline on that as well.

Chuck Scheiwe, CFO

Yes, we can discuss that offline. Yes, we plan on getting that out pretty quickly. We have the infrastructure in place, we’re working through it, and it’s flowing well.

Amit Dayal, Analyst

Understood. And I mean we can probably assume you added some backlog since the end of June, right?

Chuck Scheiwe, CFO

Yes.

Ron Dutt, CEO

Yes, yes, it’s kind of a continual almost month-to-month, even week-to-week scenario of shipping orders and reducing the backlog while getting new orders in. If you look back over the past nine months, that backlog has just continued to hover around 30%, with some variation moving around a bit. Meanwhile, we’ve been shipping $13 million, $15 million quarterly, and that backlog level is still manageable. We manage shipment schedules, typically receiving new orders, where the timing could be a couple of months before shipping. Hence, there is a delay, influencing why a level of backlog remains. But to highlight what’s critical with our customers is meeting their delivery timing. We can’t let orders sit in backlog for too long; that reflects the net of shipments leaving and new orders coming in.

Chuck Scheiwe, CFO

Yes.

Amit Dayal, Analyst

And you're already running a second shift to meet all this demand?

Ron Dutt, CEO

Yes. We started adding personnel to our second shift back in February. We currently have about six or seven people working there to help prepare for the first shift and also building some packs. We have a lot of potential capacity to expand, and we probably want to add seven or eight more employees to really ramp up to a full second shift. But as it stands, that’s not operating as a full second shift right now.

Amit Dayal, Analyst

Okay. And just one last one regarding the current market headlines around recession-related concerns. Is this filtering into your outlook or conversations with your customers? I want to see how you're managing in that type of environment that many are concerned about right now.

Ron Dutt, CEO

Yes. Everyone is concerned about it. Two things: first, we haven’t seen any impact on the order flow or the anticipation in discussions with our customers thus far. Second, one of the advantages of being in material handling is that product needs to move regardless of whether the economy is booming or contracting; forklifts and particularly battery packs are necessary, like filling up a car with gas. While some impacts might arise from an economic downturn, historically, our sector hasn't been as broadly affected as others like construction and banking.

Chuck Scheiwe, CFO

Yes, Amit, the other thing I might add is that our customers are large companies. Thus, we’re not overly concerned about receivables or related issues. They have the financial strength to manage through a downturn. If we were working with smaller customers, we would be more worried about concerns stemming from a recession, but our customers can weather this.

Amit Dayal, Analyst

Understood. I will take my other questions offline.

Operator, Operator

Our next question comes from the line of Chip Moore with EF Hutton.

Chip Moore, Analyst

I wanted to revisit the top line. I think you mentioned having about 90% visibility on your internal forecasts for fiscal '23. I know you don't give guidance, but you've mentioned potential reaching a $70 million run rate in the relative near term. Could you help us understand those dynamics?

Ron Dutt, CEO

Yes, again, if you look at our trajectory, our run rate, it doesn't take much imagination to see where we're going. We haven't been losing customers, relationships are being built as they expand their fleets and income revenues with new customers. We see this continuing. I would love to provide more specific guidance, but we have a practice of not doing that for various reasons. Nonetheless, the inertia and interest in our battery packs seems to be increasing.

Chip Moore, Analyst

That's a good perspective. And a potential segue to profitability; it’s great to observe the improvement this quarter, which I believe was over 500 basis points sequentially. Could you expand on this trajectory? You spoke of continued improvement, and the last time it was pretty dramatic quarter-over-quarter. If we think about product mix and your ongoing efforts, could you provide insights into that trajectory over the next several quarters?

Chuck Scheiwe, CFO

Yes, we have a very specific gross margin improvement initiative in place. Price increases are being implemented with current orders at new prices. Our actions on the cost side have been detailed; an example includes lowering costs by relocating harness production to Mexico, which was 70% lower than in the States. We’re finding dramatic improvements as we pursue this. We aim to return to 30% to 35% plus margins. We're working towards that goal, but it will take time as these initiatives come into play, and we're in process.

Chip Moore, Analyst

That's helpful, Chuck. And about the bookings, I believe you noted that the book-to-bill came in under 1; can you provide insight into that? Also, any updates on that large LOI mentioned?

Chuck Scheiwe, CFO

Yes, it's timing-based what we're seeing. The LOI is anticipated to turn into purchase orders in October, which will dramatically change the backlog when it happens. We're also seeing customers weighing their orders instead of placing multiple small POs, opting for larger orders to avoid disruptions. This trend will likely introduce more variability in our backlog in the future.

Ron Dutt, CEO

At the same time, please note that the delivery timing of those large orders is also spread out over time because the customer has to spread its forklift deliveries out, preventing operational disruptions with large shipments occurring all at once. So this is all extremely beneficial for us, pacing out orders from that standpoint.

Chuck Scheiwe, CFO

Yes.

Chip Moore, Analyst

Okay, that's helpful. One last thought from my side: regarding onshoring, can you elaborate on whether discussions are underway, how this transition is progressing, especially with potential incentives?

Ron Dutt, CEO

Longer-term, we’d prefer to source these cells from the U.S. or even nearby Mexico to mitigate transit time and possible geopolitical risks. However, there’s limited lithium battery production in the U.S., and it's nearly double the cost currently. Building those facilities takes time. We are seeing movement in this direction, but the pace remains uncertain. We are agnostic to cell chemistry and format, providing us flexibility. Our CTO monitors this space closely, seeking backup suppliers, as this is a significant component of our bill of materials. We're exploring every opportunity for cost management, delivery time, and supplier suitability. The landscape is evolving, and recent trends are promising as our battery cells have decreased in cost by approximately 30% to 35% over the last 8 years despite some minor increases.

Chip Moore, Analyst

That's helpful, thank you.

Operator, Operator

Our next question comes from the line of Jim McIlree with Dawson James.

Unidentified Analyst, Analyst

Orders in the June quarter were down significantly from the prior one. Can you help me understand what's happening, particularly regarding your comments about demand still being quite strong?

Chuck Scheiwe, CFO

Yes, it’s mostly timing; some customers are placing larger, less frequent orders due to recent delays. They’re trying to secure their build slots and prepare for deliveries. We’ve got numerous customers still preparing to reach PO levels; the pipeline remains strong behind that. The primary takeaway is that it's mainly a timing issue that will resolve itself.

Ron Dutt, CEO

Yes, just to add a little more color: The timing of our packs, since the majority of our revenue is closely tied to new forklift sales, relates to their longer lead times, like everything else in the economy. So our orders will align with adjusted lead times for forklifts. We expect to experience some of this unevenness. Our sales team collaborates closely with suppliers and forklift OEMs to monitor the pace, and we don’t foresee any long-term changes in pace from customers.

Unidentified Analyst, Analyst

Can you describe the lead times being quoted and where they're currently at in comparison to a couple of quarters ago?

Ron Dutt, CEO

A couple of quarters back, our lead times were over 6 months for some larger models. Now, they are improving, coming down to 2 to 2.5 months, and even 6 to 8 weeks for smaller packs. We anticipate more shortening in lead times going forward. The significant reduction has occurred primarily over the past 9 months.

Unidentified Analyst, Analyst

Lastly, can you clarify your gross margin goal as it pertains to a certain revenue level and what you expect in FY 2023?

Chuck Scheiwe, CFO

We’ve noted in previous comments that we don't provide forward-looking statements. However, you can analyze our operational expenditure at around $5 million to $5.3 million quarterly. Achieving gross margins up to 30% to 35% will imply certain revenue levels. Hence, you can calculate what the revenue should look like to meet that point. Margins are our main focus, and rectifying them is a priority post-COVID disruptions.

Operator, Operator

I would now like to turn the call back over to Mr. Dutt for closing remarks.

Ron Dutt, CEO

Thank you, Laura. I'd like to thank each of you for joining our financial results conference call today. We look forward to continuing to update you on our ongoing progress and growth. If we were unable to answer any of your questions, please reach out to our IR firm, who would be more than happy to assist. Thank you, and good day.

Operator, Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and enjoy the rest of your day.