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Edited Transcript of LMP.TO earnings conference call or presentation 9-Mar-17 4:00pm GMT

Thomson Reuters StreetEvents

Q3 2017 Lumenpulse Inc Earnings Call

Montreal Jun 28, 2017 (Thomson StreetEvents) -- Edited Transcript of Lumenpulse Inc earnings conference call or presentation Thursday, March 9, 2017 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Danielle Ste-Marie

Lumenpulse Inc - IR

* Francois-Xavier Souvay

Lumenpulse Inc - Chairman, President and CEO

* Peter Timotheatos

Lumenpulse Inc - Chairman, EVP and CFO

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Conference Call Participants

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* John Quealy

Canaccord Genuity - Analyst

* Amr Ezzat

Echelon Wealth Partners - Analyst

* Rupert Merer

National Bank Financial - Analyst

* Thanos Moschopoulos

BMO Capital Partners - Analyst

* Craig Irwin

Roth Capital Partners - Analyst

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Presentation

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Operator [1]

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Welcome, everybody, to Lumenpulse Inc. third quarter 2017 financial results conference call.

(Operator Instructions)

As a reminder, ladies and gentlemen, this conference is being recorded today, Thursday March 9th, 2017.

I would now like to introduce Danielle Ste-Marie, Investor Relations of Lumenpulse Inc.

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Danielle Ste-Marie, Lumenpulse Inc - IR [2]

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With me on today's call is F.X. Souvay, chairman of the board, president CEO and Peter Timotheatos, executive vice president and CFO.

Following their review of our third quarter financial results for 2017 will be a Q&A session open to sales side analysts. We invite you to advance the slides in the webcast player as we go along. You may also download a copy of the PDF presentation in the "downloads" tab.

Please note that we will be presenting both IFRS and non-IFRS financial results during today's call. These measures are reconciled in our MD&A, which is posted in the investor relations section of our Web Site, and filed on SEDAR.

Please note that some statements made on the call may be forward-looking. Actual events or results may differ materially from those expressed or implied. And Lumenpulse disclaims any intent or obligation to update or revise any forward-looking statements whether by the result of new information, future events or otherwise.

Such forward-looking statements are subject to numerous risks and uncertainties. Listeners are encouraged to review the full discussion on risk factors in our MD&A at Lumenpulse.com.

We are webcasting and recording this conference call and a replay will be available on our Web Site.

Now, I'd like to turn the call over to FX.

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Francois-Xavier Souvay, Lumenpulse Inc - Chairman, President and CEO [3]

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Good morning ladies and gentlemen, and thank you for joining us for today's third quarter conference call.

I'll begin today's presentation by giving you an overview of our operational performance and key highlights for the quarter. I will then turn the call over to Peter for a review of our financial results.

I'll ask you to refer to slide five of our presentation. Lumenpulse's consolidated revenues grew by almost 50%, reaching $53.1 million in the third quarter of fiscal 2017, up from $35.5 million from the equivalent quarter of last year. Year-over-year growth largely reflects the contribution of our acquired product portfolios and reaffirms our acquisition strategy to grow our product portfolio and increase our presence within our various indoor verticals. Including the fast growing segment that cover office, retail and hospitality.

Variations in out product mix and a less favorable foreign exchange environment affect our gross margin. However, with continued discipline on operating expenses, we achieved double digit adjusted EBITDA margins. These results demonstrate our ability to deliver additional operating leverage as we grow our top line in the coming quarters.

On a year-to-date basis, our revenues grew 48%, reaching $155 million. These results are inline with expectations as we anticipated a slower start to the fiscal year followed by an accelerated growth during the fourth quarter.

We continue to expect to deliver solid year-over-year growth in this fourth quarter. However, we believe that recent changes in the political landscape have created temporary volatility that, combined with the timing of various product introductions and the realignment of our North American sales force by brand, negatively impacted our pipeline and backlog conversion rates.

Our market remains strong and our sales team are better equipped than ever and more focused than ever before. To account for the reduced momentum expected in the fourth quarter, we are taking a conservative approach and adjusting our fiscal 2017 financial outlook accordingly.

We expect total fiscal 2017 revenues to reach between $205 million to $210 million from a range that originally was forecasted to be $230 million to $240 million. And we expect to reach an adjusted EBITDA between 9% and 11% from our previous 12% to 14% range.

Although our updated full year outlook is below our initial financial outlook, it represents a substantial improvement in the financial performance of our Company versus the previous fiscal year. This updated financial outlook represents revenue growth of 41% to 45% for the fiscal year, and an adjusted EBITDA growth of 66% to 108% over fiscal 2016.

Notwithstanding slower current pipeline and backlog conversion rates, our pipeline and backlog conversion rates, our pipeline quoting activities remain strong. Our backlog continues to grow year-over-year and we do not expect a cancelation of any firm orders. To be clear, year-over-year growth is anticipated in Q4 of fiscal 2017, but at a temporarily reduced rate.

Despite these short term challenges, we believe that the long term fundamentals of our market and industry remain intact. The various segments in which our Company operates are expected to continue growing, and we remain confident in our long term guidance.

We remain constant in emphasizing the need to focus on the longer term outlook. The short term nature of the elements we have discussed and the project based nature of our business have significant implications on quarterly performance of our business.

Turning to slide six, we can see that we continued to grow in North America, with revenues increasing by 58% to $41.6 million.

The United States remains our largest contributor to revenue growing by 64% and reaching $32.5 million on strong acquisition and organic revenue. In Canada, revenue grew by 40% and reached $9.1 million on stronger organic growth.

Our revenues in North America reflect the strength of our product portfolio including our acquired product portfolio, which has allowed us to move, move quickly and deeper into various high growth indoor segments.

Additionally, as mentioned, during the 3rd quarter, we began the process of realigning our North American sales team by brand. Our increased product brands and applications solutions brought a level of complexity to our sales team that was not originally anticipated.

By aligning our sales teams by brands, and focusing on key families such as Lumenarea and lumenalpha, this will allow us to provide in-depth training and knowledge of our brands and further grow our agents' engagement to our expanding product portfolio.

Turning to slide seven, revenues from the rest of the world totaled $11.5 million, equivalent to 25% year over year growth. This main reflects the integration of Exenia product portfolio with the reminder of our product portfolio revenues in these regions being stable once adjusted for foreign currency variances.

Performance in these regions excluding the UK, was in line with expectations. We also continued to focus on the introduction of our Lumenpulse brand in the Italian market.

In the UK, our direct sales force is still focused on growing our presence, and working hard to build our pipeline of specified projects. New specifications are taking longer to develop and convert to revenue, but we remain optimistic that these efforts will pay off in the mid to long-term.

Turning to slide eight, I would like to discuss our accomplishments with regards to products and technology. In the 3rd quarter we launched several new initiatives, including upgrade to lumenfacade family with nine new optics offering additional lighting applications.

We further expanded our patent portfolio, and now have a total of 107 granted patents, up from 104 in the 2nd quarter of 2017, and 70 in the equivalent period of last year. We were also honored to receive an IS design award for flux works fold, lumenaire.

Subsequent to the end of the 3rd quarter, we announced to our teams that the Lumenarea manufacturing plant will transfer its' activities in Quebec City and will be integrated to the new Montreal facility in fiscal 2018. We believe this decision will further streamline our operation and facilitate the development of the Lumenarea brand.

We'll now pass the call to Peter.

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Peter Timotheatos, Lumenpulse Inc - Chairman, EVP and CFO [4]

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On slide nine of our presentation, we provide a high level view of our key financials. Consolidated top-line growth was 49% from the 3rd quarter when compared to the same period last year, reflecting organic and acquisition driven growth.

Our Q3 adjusted growth margin stood at 47% compared to 50% in the 3rd quarter of fiscal 2016. Impacted largely by changes in product mix, including a growing contribution from our acquired products and foreign exchange.

Operating income improved, and so did our adjusted EBITDA, which stood at $5.3 million. Excluding the change in the fair value of the contingency consideration recognized during the quarter, mainly in relation to the Fluxwerx turnout, higher authorization in gradual assets and other adjustments are outlined in our MD&A.

Adjusted diluted EPS stood at 10 cents for the quarter. We will talk about the Fluxwerx earnout later in this call.

Let me now direct you to our revenue performance on slide 10. In the 3rd quarter fiscal 2017, consolidated revenues reached $53.1 million, up from $35.5 million last year. The 49% year over year growth breaks down as acquisition growth of 29.9%, organic growth of 26.7%, and 7.2% negative impact from variations and foreign exchange.

From a geographic standpoint, we experienced the strongest revenue contributions from the U.S. market, with organic growth of 35% and acquisition growth of 36%, for a total growth rate of 64%, which includes a negative foreign exchange effect of 7%.

In Canada, we continue to do well with total revenue growth of 40%, with organic growth revenue of 26%, and acquisition revenue growth of 14%.

Outside North America, and considering a 13% negative foreign exchange effect, our revenues grew by 25% year over year on acquisition revenue growth and improving organic growth.

Turning to slide 11, our gross margin stood at 46% reflecting the lower contribution from our acquired product portfolios and product mix. On an adjusted basis, gross margin stood at 47%. Despite our lower adjusted gross margin for this 3rd quarter, adjusted EBITDA stood at 10%. This demonstrates our ability to manage our operating expenses and leverage our cost structure.

As the level of revenue continues to grow, we expect to deliver further operating leverage.

On the next slide, we outline the evolution of our total OpEx and adjusted OpEx which we are continuing to manage closely. Operating expenses total $23 million in the 3rd quarter, an increase of $5.7 million compared to last year, which was attributable primarily to the consolidation of operating costs from fiscal 2016 acquisitions and commissions paid to our agent network, which are volume driven.

As a percentage of revenues, total operating expenses improved, representing 44% of consolidated revenues, down from49% in the 3rd quarter of last fiscal year, resulting mainly from lower G&A driven by lower professional fees related to business acquisitions and other reduced spending.

Our selling and marketing expenses, and research and development expenses remain stable as a percentage of revenue year over year during the 3rd quarter of this fiscal year.

Moving to slides 13 and 14, we see that we maintain a strong balance sheet and continue to generate healthy operating cash flow. We ended the 3rd quarter with a net cash balance of $12.6 million. This net cash position largely represents cash generated from operations in the amount $3.9 million, and cash used to settle a holdback payment to the former Exenia shareholders in the amount of $1.5 million.

Our capital expenditures totaled $1.5 million, well within our 4% of total revenues target range. Year to date capitals are consistent with our quarterly performance.

DSO in the third quarter of fiscal of 20 - 2017, sorry, came to 45 days, and improvement from the comparable period last year. Overall, the ratio has been trending down due to various initiatives and a constant effort to remain at or below our target DSO of 50 days.

Finally, inventory turnover improved at 3.6 times compared to last year. Before I turn the call back to FX, I would like to provide an update on our contingent consideration related to the acquisition of Fluxwerx

At the time - at the time of acquisition, the contingent consideration was initially measured at a fair value of 17.3 million, which represented our best estimate of the earn out. This fair value is re-measured at each reporting date and any change in fair value is reported through a net financing cost or income.

In light of Fluxwerx strong performance, both from a revenue and EBITDA perspective, the fair value of the earn out was increased by 3.4 million during the quarter for a total fair value of 23 million.

We continue to be very pleased with our Fluxwerx investment and the performance driven by the team. As a reminder, the earn-out payment of up to 25 million will be based on Fluxwerx fiscal 2017 results.

It's payable 90 days after our fiscal year end in cash or shares, at the option of Lumenpulse, and is subject to the achievement of a minimum adjusted EBITDA. This concludes my part of the presentation.

Again, thank you for your attention. I will now turn the call back to FX.

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Francois-Xavier Souvay, Lumenpulse Inc - Chairman, President and CEO [5]

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Since our IPO in 2014, we continued to show progression towards our five year plan. In fiscal 2016, we delivered 44% revenue growth and three quarters into 2017 we achieved 48% revenue growth.

On a year to date basis, our adjusted EBITDA margins stood at 10.4%, up from 9.3% for the equivalent period of fiscal 2016. We have a robust platform that continues to grow and is focused on long-term results.

With our five brands, we believe that we provide the industries most compressive spec-grade product portfolio and are well positioned to reach our long-term objectives.

In the coming quarters, we will be focusing on growing revenue by brand, leveraging our North American network with our newly reorganized sales team, continue expending our product portfolio to deepen our penetration within verticals, and delivering adjusted EBITDA margin expansion.

I would now be pleased to answer any questions you might have.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

John Quealy from Canaccord.

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John Quealy, Canaccord Genuity - Analyst [2]

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First question, back to the guidance in the channel, so we've seen other lighting companies for this calendar period talk about some weakness on political regime change here in the US. Sounds like the springtime, at least through March, got a little bit better.

Can you key out the difference between end market demand on - on your side of the market versus switching up the channel a little bit, and I'd like to dive into the channel question in a little bit - in a minute - in a minute. Thanks.

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Francois-Xavier Souvay, Lumenpulse Inc - Chairman, President and CEO [3]

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Okay, I can answer that, John, this is FX. So, essentially, what was happening, it was just delays on conversion, on backlogged orders that we have in our hands that took longer than planned, some of them that should have been released to be shippable in Q3 and some of them that were supposed to be released also in Q4 that are being pushed out.

The other aspect was also the pipeline conversion, which is the spec that we have in the market. Obviously, we track down on a weekly basis and we have clear visibility and years of experience of conversion rates of those specs converting into backlog.

Visibility was very strong at the end of the Q2 and up until the beginning of, obviously, December when we had our last call. And it's started to slow down a little bit towards the end of December but not to a degree to be concerned.

And it's more towards January that we started to see that orders were not materially happening as fast as planned. And, essentially, I started to ask questions in the market if this was structural.

And this is evidentially not structurally at all because we see our pipeline activity growing significantly. We're continuing to develop specs at a very high level and even our backlog continues to grow much greater than the previous year.

So, it's really around that political situation and a lot of the projects we were working on we had a lot of infrastructure related projects, such as bridges, airports, different types of projects like that that for a reason got delayed.

They were not canceled at all, but they were just delayed. And that's pretty much what happened to us and those projects could be very sizeable.

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John Quealy, Canaccord Genuity - Analyst [4]

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In terms of the channel, as you folks know better than I do, the lighting channel seems to be very fickle in terms of relationships and things like this.

Talk about what you're doing, I see in the MDNA you've changed out some commission rates due to some regions, give us a little bit more detail around what you're doing in the channel and how you're comfortable - and how you're comfortable it won't cause any issues for several quarters.

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Francois-Xavier Souvay, Lumenpulse Inc - Chairman, President and CEO [5]

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Okay, we did not change any commissions in any regions. It's just when we're reporting we're reporting as add commissions as a total - as a percentage of total revenues.

So, the commissions we're paying to agents are the same; they're exactly the same. You know, we pay a standard 10% commission and they get a percentage of the overage. It has been like forever, and this hasn't changed.

The only change that we did, in the market, -- we didn't change channels, we didn't change pricing strategy, we didn't change commission. What we changed is, we changed the organization of our sales force so that they can be more focused by brand, instead of wearing too many hats.

And that is an advantage to the rep channels because they get a better service. They get a more concise and accurate expertise by brand, instead of talking to another generalist.

I mean, an agent don't need to talk to a generalist; they need to talk to a specialist. And that's really what we reorganized, but we didn't shake up the channels at all. It's the other way around, we're embracing the channels.

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John Quealy, Canaccord Genuity - Analyst [6]

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A good adjustment, in my opinion for Fluxwerx, talk a little bit about what's going on there in that line and prospects for that into next year. Thank you, guys.

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Francois-Xavier Souvay, Lumenpulse Inc - Chairman, President and CEO [7]

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The reason why we acquired Fluxwerx is because we recognized very early on that the office lighting market will explode.

And if you have been participating at strategies in light and strategies unlimited, you probably saw the most recent reports or updated global luminaries report.

And if you look through this report, you will see that they are identifying connected lighting for office, which they refer as troffer, and linear, and all sorts of products in the office lighting segment. They're projecting a CAGR, just in North America for that segment, up until 2022; a CAGR of 30% in that segment specifically. And if you look at Fluxwerx product category, it's right in there.

And then if you look at the European market for that same product category, they've been behind on the office lighting adoption. So the CAGR is projected to be 50% in Europe. So Fluxwerx has an amazing potential in front of us. So are the other product lines also that we have. But the office lighting is really, right now the latest adopter that has a massive opportunity in the market place.

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Operator [8]

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Thank you. Just one second. And our next question comes from the line of Amr Ezzat from Echelon Partners. Your line is open.

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Amr Ezzat, Echelon Wealth Partners - Analyst [9]

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You attribute the change of guidance to the impact of politics partly, and in other parts it would be sales re-org. Can you quantify how much of it is macro versus the sales re-org? I'm trying to get a sense of the dollar value, I guess, of the late conversions.

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Francois-Xavier Souvay, Lumenpulse Inc - Chairman, President and CEO [10]

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Yes. So, Peter, do you want to?

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Peter Timotheatos, Lumenpulse Inc - Chairman, EVP and CFO [11]

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It's hard to break up the two numbers because ultimately what we're saying is, yes the politics caused some temporary short-term chaos. There was slow down in the conversion rates from pipeline to backlog to revenues and the re-org, if it was done sooner would probably help us mitigate some of that temporary volatility.

So it's not really easy to quantify these things between the two elements. It's more one element could have helped us really reduce the impact of the other on a short-term basis. But the temporary volatility seems to be tied to political issues but it's hard to quantify; ultimately, better focus brings you better results.

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Amr Ezzat, Echelon Wealth Partners - Analyst [12]

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Then maybe if I'm looking beyond Q4 and in to fiscal 2018, you reiterated that backlog remains strong. Number one, can you tell us how the backlog evolved quarter on quarter. Then, number two, do you believe we can see some lingering effects, be it from a macro standpoint or from the sales realignment slip over to Q1 of 2018?

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Francois-Xavier Souvay, Lumenpulse Inc - Chairman, President and CEO [13]

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So, as far as the sales realignment, I don't see any issues there negative. It's just that we're going to generate more focus. So, in the next fiscal year, we definitely going to see growth in all of the three - that realignment was done for three specific brands: the Lumenpulse brand, which is our native brand; it was for Lumenalpha; and it was for Lumenarea.

So we now have really tree distinctive teams. We had already started a year ago to separate the R&D teams, so that we focus on product innovation and launch more new products because new products are key to organic growth; so it's very important.

And then the second phase that we needed to do was to organize it by brand. One of the things that we have done in Q3 is we have promoted one of our internal, successful manager as president of Lumenarea. So he's now really focused, with a dedicated team, in every position to grow Lumenarea.

And Lumenalpha now has a dedicated sales team, which is new. So we've been doing that all in the Q3. We would have hoped to be able to do that before but we had some transition process that we needed to do before being able to reorganize that way.

So from a backlog point of view, backlog is growing quite significantly from a year over year basis. And that's really what we look at. You know the Q3, from a backlog evolution point of view versus Q2 as example. The Q3 backlog, there's not a big growth from the backlog from a quarter over quarter basis because the Q3 is the quiet quarter from an order input point of view, compared to the other quarters.

Because this where you have the holidays around the new year, around the holidays the Christmas days and all of those days, and then you also have the US thanksgiving. So that period is about three weeks out of the quarter that there's zero activity. But from a year over year basis, our backlog grew significantly.

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Amr Ezzat, Echelon Wealth Partners - Analyst [14]

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Understood. Then, from a margin standpoint, your guidance implies sale will be a flat sequentially from Q3 to Q4, but the EBITDA margin or the implied EBITDA margin for Q4 is a little softer relative to Q3. I'm wondering if you could give us a bit more color on what's driving the softer EBITDA margin sequentially.

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Peter Timotheatos, Lumenpulse Inc - Chairman, EVP and CFO [15]

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Just to be clear, from the fourth quarter this is really a short term temporary volatility that we're dealing with. And, we want to be conservative in our outlook in the remainder of the year. So, the guidance reflects that conservative thinking that we have right now.

It's simply a question of do we have enough time in this quarter to catch up what we've missed as momentum at the beginning of the quarter. As you look at our expense structure, right, we're not going to do anything silly based on a short term issue. We're thinking long term in any decision we make. As you look at our expense structure, right, we have four major categories.

One of them being reps' commissions, which is going to move based on volumes and the rest of it is selling activities - selling and marketing, research and development and GNA. These numbers are constant from one quarter to another. We don't spend any more than we say we're going to spend and we're not going to do anything short term to reduce those numbers because we do feel this is a short term issue.

So, you're going to get some softness based on the volume and the related bottom line trickle down effect that it has.

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Amr Ezzat, Echelon Wealth Partners - Analyst [16]

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Then just one more last one from me and I'll pass the line. You mentioned that you increased the value of the Fluxwerx earn out on your balance sheets. It seems like it's driving towards the higher end of the earnout brackets, with the revised guidance; it implies that the softness is specific to the rest of the portfolio as opposed to Fluxwerx.

I'm just trying to understand the source of that disconnect. Why is Fluxwerx insulated?

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Francois-Xavier Souvay, Lumenpulse Inc - Chairman, President and CEO [17]

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Yes. So, they're doing fantastic. They're growing. It's going according to plan, but that brand sees the same issues that the Lumenpulse brand sees. So, we don't book the full number, we book a significant number, but it's not the softness that we see on the US side of things is not Lumenpulse alone - or Lumenpulse brand alone.

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Operator [18]

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Rupert Merer from National Bank.

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Rupert Merer, National Bank Financial - Analyst [19]

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Diving into the impacts of political change a little further, so it sounds like as primarily North America and doesn't include your other markets. Is that correct?

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Francois-Xavier Souvay, Lumenpulse Inc - Chairman, President and CEO [20]

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Yes. It's predominately here. Yes. That is correct. We already --

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Rupert Merer, National Bank Financial - Analyst [21]

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And then, looking at --

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Francois-Xavier Souvay, Lumenpulse Inc - Chairman, President and CEO [22]

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We already had the effect of confusion of Brexit in the UK into our number. But, it's really North America. It's really US.

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Rupert Merer, National Bank Financial - Analyst [23]

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And then looking at specific product lines, is it related primarily to infrastructure spending and, therefore sort of, outdoor lights or it sounds like you might see the impact on the office lighting space, as well. Can you give us a little more color in that tone?

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Francois-Xavier Souvay, Lumenpulse Inc - Chairman, President and CEO [24]

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I don't have those details as far as every segment, if you will. I've been in the industry for 25 years and any major political change there's always turmoil, temporary noise that I've seen in our industry because we're always related to construction. And, sometimes projects are being delayed around election days. It's very hard for me to have an accurate answer, but it's right now, it was pretty spread out.

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Peter Timotheatos, Lumenpulse Inc - Chairman, EVP and CFO [25]

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And it's hard to draw conclusions on such a short term issue.

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Rupert Merer, National Bank Financial - Analyst [26]

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And then, on product launches it sounds like you - it may have had some delays to product launches. Can you give a little more color there? Which products have been delayed? How long have they been delayed for example?

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Francois-Xavier Souvay, Lumenpulse Inc - Chairman, President and CEO [27]

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Yes. So, I don't want to give too much competitive information because I know we have competitors on the line. But it's certain product launches in certain brands were delayed by three to four months. We should have launched them earlier.

And, obviously, the earlier you launch new products the quicker you gain revenue within your fiscal year.

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Rupert Merer, National Bank Financial - Analyst [28]

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What drove the delays of those products?

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Francois-Xavier Souvay, Lumenpulse Inc - Chairman, President and CEO [29]

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It's really lots of activities going simultaneously. And, when the product is not ready as planned you're not launching it. You don't want to have quality issues in the field and some product developments took longer than planned.

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Rupert Merer, National Bank Financial - Analyst [30]

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Do you still expect the same positive impact when those products are released? The same impact that you were assuming you'd have a few months ago?

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Francois-Xavier Souvay, Lumenpulse Inc - Chairman, President and CEO [31]

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Of course. Every time we're launching new products there's a six month period of time really to build the pipeline and start converting that into orders. So, that's why our strategy - and this is why I said that we wanted to slow down on the acquisition so that we can focus on execution.

Because, the plan in our industry, what we're trying to do and specifically at Lumenpulse Group, is we want to launch products in fall and we want to launch product in spring. Because, those are the two best timings to launch products. It creates momentum between the holiday seasons and builds up a pipeline - strong pipeline generation that converts into the fiscal year, every year. So, those two period of the year are very important.

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Rupert Merer, National Bank Financial - Analyst [32]

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Just to summarize then, it sounds like you think the political impact is pretty short term, the new products are coming, the sales teams are realigned. Your guidance, you think, is still good for the long term so the jump up in business we were anticipating in Q4, you think into the next fiscal year.

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Francois-Xavier Souvay, Lumenpulse Inc - Chairman, President and CEO [33]

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Yes. So, obviously when your overall pipeline and backlog is being pushed out, it's - your short term trajectory is being delayed, right? That's what it is. But, it doesn't change the long term outlook of the business definitely. And, we're seeing very strong growth ahead of us. So we are now seeing a lot more releases, we're seeing a lot more backlog pipeline to back log conversion happening.

We don't see anything that is worrying us in the mid term to long term.

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Operator [34]

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Thanos Moschopoulos from BMO Capital Markets.

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Thanos Moschopoulos, BMO Capital Partners - Analyst [35]

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FX, from the topic of the UK, you said that was a little weaker than expected, as well. How much of that is macro related and how much would be your sales force still getting up to speed there?

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Francois-Xavier Souvay, Lumenpulse Inc - Chairman, President and CEO [36]

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I would say that the size we have as a Company I would say that it's 80% our team building the pipeline and 20% the macro if I had to put a percentage on it. I think there's a lot of uncertainty on Brexit, but I'm not seeing, really, a slow down from an investment point of view.

If you look at a good indicator is also to look at other public Company that are doing specification such as WSP Global is a good example, if you go see their results and their activities they're very, very busy. So, when firms are hiring it's a strong indication for specification business.

And, that's what we're seeing. That is really I line with the activity level we are seeing in the UK. It's like, we completely reinvented that team and orders are taking a little longer to release, but the pipeline continues to grow significantly.

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Thanos Moschopoulos, BMO Capital Partners - Analyst [37]

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Could you clarify the level of organic growth you're looking for in Q4. Just give us some of the moving parts around the acquisitions and currency? I just want to make sure I have the numbers right there.

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Peter Timotheatos, Lumenpulse Inc - Chairman, EVP and CFO [38]

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On the conservative side some of the things we're looking for is similar growth to this quarter that we had year over year. So in the 26% range and plus from an organic perspective as what we're conservatively looking at.

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Thanos Moschopoulos, BMO Capital Partners - Analyst [39]

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And on the expense side, maybe it's a little early to talk about 2018, but generally speaking, should we be looking for operating leverage in 2018? Or are there specific issue that might impact that such as the relocation costs or the higher cost related to the new facility?

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Peter Timotheatos, Lumenpulse Inc - Chairman, EVP and CFO [40]

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Okay. So, a couple things. We're working through our annual process now to, sort of, as to what the 2018 numbers are going to look like but - look like. So, we haven't, sort of, closed the loop on that because we're in the process but a couple things to know, right.

We do not anticipate any changes in our spending and our fixed operating expenses in the coming year because, again, we're looking to maintain our operational leverage and the double digit EBITDA. To any activity related to the move and things of that sort, we're going to treat as an adjusted item because they are nonrecurring in nature and a lot of them will be accruals that need to be made based on IFRS and I have to book it now even though I pay for it later.

So, from an adjusted EBITDA perspective you're going to see continued discipline on the spending and from the special activities and AKA the move that's coming, that'll be a below the line item.

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Thanos Moschopoulos, BMO Capital Partners - Analyst [41]

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Finally, what should we be looking for as far as gross margins over the next few months?

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Peter Timotheatos, Lumenpulse Inc - Chairman, EVP and CFO [42]

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Listen, the target that we look at is always in the 40 to 50 range. The other portfolios that we acquired are growing, they're not as mature as the Lumenpulse brand, which delivers 50 plus. Look for similar margins to this quarter or better.

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Thanos Moschopoulos, BMO Capital Partners - Analyst [43]

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Okay. Then just on the top line.

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Francois-Xavier Souvay, Lumenpulse Inc - Chairman, President and CEO [44]

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The work we delivered this year.

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Operator [45]

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Craig Irwin from Roth Capital Partners.

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Craig Irwin, Roth Capital Partners - Analyst [46]

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My first question I think you answered a little bit, but I just wanted to ask a very simple question. But fourth fiscal quarter, do you expect this to be a profitable quarter or breakeven quarter? Or are we looking at something similar to what we saw in the third fiscal quarter?

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Peter Timotheatos, Lumenpulse Inc - Chairman, EVP and CFO [47]

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So we're looking for something similar. We're not -we're still going to be profitable, we're still in the black, we still target double digit EBITDA. Again we're holding the line on expenses so definitely profitable and similar excluding any adjusted items that we just talked about.

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Craig Irwin, Roth Capital Partners - Analyst [48]

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Then just to talk a little bit about the change in administration in the US and the anticipation of a trillion dollar spending program. So when Obama took office, he announced a huge--

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Francois-Xavier Souvay, Lumenpulse Inc - Chairman, President and CEO [49]

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Do you mind Craig, your voice is up and down. Are you close to a headset?

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Craig Irwin, Roth Capital Partners - Analyst [50]

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Does that work better?

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Francois-Xavier Souvay, Lumenpulse Inc - Chairman, President and CEO [51]

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A lot better.

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Craig Irwin, Roth Capital Partners - Analyst [52]

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When President Obama took office, he announced a very large stimulus program subsidizing energy efficiency projects and the like and the mistake in his program was that it provided competing funding for many projects that had already had funding in the market.

Now it sounds like President Trump's stimulus program, this trillion dollars is likely to be spent on mega projects rather than subsidizing refurbishments that are already in the plans. So maybe this Statue of Liberty will get the lighting system there fixed and upgraded off the stimulus program this go around, but I expect the majority of it will be for things like high speed rail, relocating New York's train stations back to that beautiful old building that's now the post office and things like this.

So as your customers out there come to understand this, the way many with their ears close to DC are understanding it, they should be coming to an understanding that they're better off moving forward with their projects because these really are identity projects and they don't want to be a late mover. Is this something you're seeing?

The understanding actual crystallize across your customer base or do you feel that there's still a tremendous amount of confusion that needs to be worked through for us to see the [palliative] projects that were maybe interrupted by the hope and anticipation of an Obama like mistake that still needs to see some of these clouds to clear?

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Francois-Xavier Souvay, Lumenpulse Inc - Chairman, President and CEO [53]

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So what we're seeing is obviously there's a lot of conversation happening right now. Less action, more conversations, but definitely what we're seeing is there's a tremendous number of projects that have been identified in infrastructure including bridges, including new bridges, refurbishing ones, including transit authorities and all of those types of projects are really projects of expertise for Lumenpulse.

So it represents an amazing opportunity for us. We are working on several of those currently as we speak. So currently we don't have a lot of request to meet Buy American Acts as an example. And if we do have some requests that are in line with that, it's going to be positive for us.

Because we make for the most part all of our electronics in the US and we also are assembling our products in the US in Boston when we have to comply with the Buy American Act. So we're very well positioned compared to a lot of our competitors that are doing finished goods in China or even some of them doing complete finish goods in Mexico.

So I believe that that we have an amazing opportunity once this gets clearer. But the type of projects they're caring about which is airports, which is transit authorities, bridges, all of those projects were projects that we've been active since we've created the Company.

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Craig Irwin, Roth Capital Partners - Analyst [54]

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Great, that's really good to hear. So then the follow up question would be, do you have an approximate number and I know it's not super easy to quantify but just maybe a range of the contribution in the US from municipal and government related projects in your past 12 months that maybe we could use as sort of a rule of thumb when we look at the component of business that's likely to be impacted in the short term and then in the medium and longer term?

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Francois-Xavier Souvay, Lumenpulse Inc - Chairman, President and CEO [55]

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I haven't really did that analysis, but I'm going to look into it.

Operator: (Operator Instructions)

At this time there are no questions in the queue. I would like to turn the call back over to the Company for closing remarks.

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Danielle Ste-Marie, Lumenpulse Inc - IR [56]

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Ladies and gentlemen, thank you for joining us today and we look forward to speaking with you in June 2017 following our Q4 end full year fiscal 2017 results. Thank you.

Operator: Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone, have a great day.