Flux Power Holdings, Inc. (NASDAQ:FLUX) Q1 2024 Earnings Call Transcript

Flux Power Holdings, Inc. (NASDAQ:FLUX) Q1 2024 Earnings Call Transcript November 9, 2023

Flux Power Holdings, Inc. reports earnings inline with expectations. Reported EPS is $-0.13 EPS, expectations were $-0.13.

Operator: Greetings and welcome to the Flux Power Holdings First Quarter Fiscal Year 2024 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 would now like to hand the call over to Maria Rico, Marketing Manager. Maria?

Maria Rico: Your host today, Ron Dutt, Chief Executive Officer; and Chuck Scheiwe, Chief Financial Officer, will present results of operations for the fiscal first quarter ended September 30th, 2023. A press release detailing these results crossed the wire this afternoon at 4.01 p.m. Eastern Time and is available in the Investor Relations section of our company's website, fluxpower.com. Before we begin the formal presentation, I would like to remind everyone that statements made on the call and webcasts 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, 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 opinion 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 revisions to these forward-looking statements in light of new information or future events. Throughout today's discussion, we will 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 for a more complete discussion of these factors and other risks, particularly under the heading risk factors. At this time, I will turn the call over to Flux Power Chief Executive Officer, Ron Dutt.

Ron Dutt: Thank you, Maria, and good afternoon, everyone. I'm pleased to welcome you to today's fiscal first quarter 2024 financial results conference call. Firstly, please note on Slide 3, if you're following the deck, for those of you new to our story, here's a short reminder of what we do in electrifying commerce. We are powering material handling, airport ground support, solar energy storage, port authority equipment and other applications with new and clean technology. Our products and services are focused on the growing demand from large nationwide fleets that are pursuing a better return on investment in a positive environmental impact compared to lead acid batteries. We are the leading lithium-ion supplier providing full service to the nationwide large fleets who require the best, both now and with future deliveries in product, technology, service, and ease of doing business.

Our reputation in brand are critical as we target household names, which I'll point out shortly. We must have a strong reputation and solid track record to reliably satisfy these large fleets that have hundreds of facilities and need their batteries for new equipment or existing equipment delivered on time without difficulty. Fortune 100 companies demand suppliers that are transparent, experienced, and accountable as they transition their fleets to new and clean technologies, which puts us in a very strong position in the electrification market. And we have a trend of on average adding two large new customers per quarter and without losing any of our installed base customers. Now on to our first quarter results. Our business priority this past fiscal year focused on progress to cash flow break even, while continuing to capture increasing demand for lithium-ion batteries.

During the first quarter of fiscal 2024, and including this past October, we remained encouraged by the underlying growth during the entire year, past year, of our products and also by the momentum toward cash flow breakeven and profitability. Revenue for the first quarter of 2024 decreased 17% to $14.8 million compared to $17.8 million in the first fiscal quarter of 2023. Due to fewer units of lithium-ion packs sold during the current quarter as a result of ongoing shipment deferrals related to [Oak] (ph) OEM forklift delivery delays along with some seasonal reduction in orders. We continue to improve gross profit, which increased 9% to $4.3 million compared to a gross profit of $3.9 million in the first fiscal quarter of 2023. Gross margin improvement initiatives contributed to a 700 basis point increase in the first quarter to 29%, up from 22% in the prior year quarter.

This very notable increase reflects the operational efficiencies we have been achieving in sourcing, design costs, lean manufacturing and improved pricing. Adjusted EBITDA loss improved to $1.2 million in the fiscal first quarter of 2024, as compared to a loss of $1.5 million in the fiscal first quarter of 2023, driven by the improved gross margins and holding operating expenses in check. For the first quarter, our customer order backlog declined from $28.5 million at June 30th to $21.8 million as of September 30th, 2023, reflecting timing delays in receiving purchase orders. As of November 2, though, backlog had increased to $31 million, reflecting continued and expanded ordering from the airport GSE market and some additional pickup in forklift delivery timing.

We've made progress on a number of our growth initiatives that will have near-term and long-term impacts. Our new series of heavy duty models will be added to most of our product segments, and along with a new OEM private label program, will both address strong market demand and launched beginning in early 2024 calendar year. And our automated assembly of cell modules is tracking similarly in timing. We plan to launch the industry's first integrated telematics fleet-wide program with a Fortune 100 customer later in 2024 calendar year. We believe that our leadership in telematics will serve as a continuing platform to introduce new features for operating performance and asset management that are highly desired by our customers. Also, we're exploring with partners, opportunities on fast charging technology and internal international sales opportunities.

We are highly focused on achieving cash flow breakeven during this fiscal year 2024. Key drivers of the improvement include gross margin expansion and supported by steady operating leverage from slow growth of operating expense over the year. Our cost and price initiatives mentioned earlier contributed to gross margin improvements to 29% in Q1 2024 compared to 27% in Q4 2023. Also, our inventory balances have been stable, reflecting higher inventory returns from improved operational processes and lean manufacturing implementation. Taken together for those two, we are executing operational efficiencies on our strategy for cash flow breakeven and sustained profitability as we continue to drive expansion of our product lineup and service network.

And we estimate our manufacturing capacity in our current facility could support a doubling of our current annual revenue. In the long term, our strategy revolves around building scale to sell our products to large fleets, building on our momentum in revenue, gross margin and operating leverage. Concurrently -- currently, we are growing organically within our capital resources, but have begun to explore and develop strategies, including those already mentioned, to build partnerships that can leverage revenue and growth, technology and profitability, and achieve our goal building scale to meet the needs of our top tier customers. Our efforts on increasing revenue and margin improvement, specifically for adjusted EBITDA are reflected on Slide 7.

Showing the upward trend over the past fiscal year and momentum toward breakeven. That decline in Q1 2024 is directly attributed to the quarterly revenue decline tied to seasonality, historically in that quarter, and along with shipment deferrals. We believe our historical trajectory to profitability is continuing, given our installed base of customers and consistent acquisition of new customers. Additional enablers include expansion of high demand models and continued operational and volume related supply chain cost reductions. Our current and potential pipeline of customers continues to expand with two new customers this past quarter and six new customers total in the calendar year 2023 year-to-date. Our full product line caters to large fleets who seek an ongoing relationship partnership to meet current and future needs, not just one-time transactional purchases.

These customers represent well-known household names having large fleets who require high-performing suppliers. While the forklift growth rate has historically been single digit, the adoption of lithium-ion reflects a double digit rate. Goods and materials need to be transported in all economic conditions. And this speaks nothing of opportunities in adjacent product sectors. The trajectories of our revenue and gross margin on Slide 9 speak for themselves. We have taken actions to restore our gross margin trajectory that was interrupted by the pandemic. Our highest priority now of achieving sustained profitability this fiscal year. Our ongoing improvement initiatives include a number of actions that are now impacting gross margin. They are price increases to offset commodity increases, increased pack volumes, more competitive shipping costs, lower costs, more reliable and secondary suppliers of key components, expanded manufacturing capacity and production processes, and transition of product lines to a new modular platform which has more efficient design for both assembly and service.

An engineer examining an electric vehicle design in a lab, showing the company's innovative battery systems.

All these initiatives are part of our plan to accelerate gross margins as our target is to reach 40% gross margin. Slide 10 highlights our backlog and inventory level trends, which are reflecting a more predictable pattern in recent periods, especially compared to the strong upward revenue trend of our revenue and gross margin mentioned earlier. As of November 2, our backlog increased to $31 million, as I mentioned, with two new customers contributing to this increase. Our run rate of backlog does vary at any point in time, but as a pattern, running ranging from $20 million to $38 million, depending on timing of orders. Beyond our backlog of open orders, we're working on a pipeline of high probability orders of well over $100 million, which does stretch beyond the current fiscal year ending June 30th.

We monitor the multi-billion addressable market -- material handling market for economic trends, new entrants, and customer demand trends. And we believe this market to provide a very positive growth environment with a strong, stable undercurrent, especially given the recognized double digit growth of lithium-ion solutions in the sector. Our strategic initiatives also include sourcing actions to mitigate part shortages, accelerating backlog conversion to shipments, and increasing inventory returns. With that, I will turn it over to Chuck Scheiwe, our Chief Financial Officer, to review the financial results for the quarter ended September 30th, 2023. Chuck?

Chuck Scheiwe: Thanks, Ron. Now, turning to review our financial results in the quarter ended September 30, 2023. As Ron mentioned, revenue for the fiscal first quarter of 2024 decreased by 17% to $14.8 million compared to $17.8 million in the fiscal first quarter of 2023. This is due to fewer units of storage packs sold during the current quarter, and this was a result of ongoing deferrals related to OEM forklift timing delays and some seasonal reduction with certain customers. Gross profit for fiscal Q1 of 2024 increased to $4.3 million compared to a gross profit of $3.9 million in fiscal Q1 of 2023. Gross margin was 29% in fiscal Q1 of 2024, as compared to 22% in fiscal Q1 of 2023. This is reflecting greater gross profit and lower cost of sales as a result of the gross margin improvement initiatives that will help us achieve profitability.

This was also partially offset by lower number of units sold. Selling and administrative expenses were at $4.7 million in fiscal Q1 of 2024, up slightly from $4.5 million in the previous year quarter. And this is showing the contributions to operating leverage we see. Research and development expenses increased slightly to $1.3 million in fiscal Q1 of 2024 compared to $1.2 million in fiscal Q1 of 2023 and this was primarily due to staff related expenses. Adjusted EBITDA loss improved to $1.2 million in fiscal Q1 of 2024 from $1.5 million in fiscal Q1 of 2023. And as we talked, this was mostly driven by the improved gross margins we're seeing. Our continued initiatives, business growth, and operating leverage all contribute to drive this trajectory.

Net loss for fiscal Q1 of 2024 was $2.1 million, very similar to a net loss of $2.1 million in the fiscal Q1 of 2023. The nominal improvement was principally reflected increased gross profit, offset by increased operating expenses and interest expense. Cash on the balance sheet was $1.1 million at September 30, 2023, as compared to $2.4 million at June 30, 2023. Please note that the cash balance will vary depending on timing of payables, receivables, and our borrowing on the working capital line. Net cash used in operating activities increased to $3.1 million for the three months ended September 30, 2023, compared to $600,000 for the three months ended September 30, 2022. And this is primarily due to growing the business, the timing of receivables, and other working capital timing.

We recently announced a new $15 million credit facility from Gibraltar Business Capital. This is to fund working capital and to refinance our existing credit facility with Silicon Valley Bank. This facility is intended to help meet our anticipated working capital needs to fund plan operations to meet the demands of our growth trajectory for the foreseeable future. The facility is structured to expand to $20 million if needed for additional growth. Our available funds include our line of credit as of November 2, 2023 under the $15 million credit facility from Gibraltar Business Capital as a remaining available balance of $2.9 million and that has the additional $5 million if needed under the expandable provision. We also have the $2 million available under the new subordinated line of credit.

Now I'd like to pass it back to Ron to offer some closing remarks.

Ron Dutt: Thanks, Chuck. Looking at the positive momentum of our existing customer base and new customer acquisitions, we're confident that we're on a strong trajectory toward reaching sustainable profitability during this current fiscal year. Our steady ongoing gross margin improvement reflects our goal to reach 40% gross margin, leveraging our cost, operational, and pricing initiatives. Our long-term plans include to focus on the strong demand of the market for sustainable energy, especially in our industrial sector, where there's no reliance on incentives, but only on ROI. We believe the combination of existing customer orders and the acquisition of new customers who want the benefits of lithium-ion technology can drive continued revenue growth.

We're seeing strong progress with our growth strategy including the introduction of new heavy-duty models to be launched in 2024, a new private label program to be launched with a major forklift OEM, and a potential partnership on fast charging proprietary technology, along with the automation of battery cells into modules. Partnering with a Fortune 100 company on the industry's first telematics integration for an entire fleet, and lastly, developing partnerships for international sales channels. And our current production facility should support annual revenues up to $150 million given our facility footprint, second ship buildout, and full lean manufacturing implementation. As I mentioned previously, we announced recently an improved capital structure that includes a working capital line of credit of $15 million with Gibraltar Business Capital to support current and planned growth with provisions to increase to $20 million.

And a new $2 million subordinated credit facility with Cleveland Capital with an extended maturity to August 15th, 2025. In summary, we are well positioned to execute our strategy of electrifying commerce as we offer customers deep experience as first movers in this sector and validation by Fortune 100 customers to entrust their migration to lithium solutions to us. I look forward to providing our shareholders with further updates in the near future as we strengthen our leadership position in lithium-ion technology solutions with our growing list of new and diverse large customers. I thank all of you for attending. And now, I'd like to hand the call over to the operator to begin our question-and-answer session. Operator?

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