Orbital Infrastructure Group, Inc. (OIG) Q2 2016 Earnings Call Transcript

Sanjay Hurry - IR William Clough - President & CEO Daniel Ford - CFO & COO, Energy Division

Eric Stine - Craig-Hallum Joe Maxa - Dougherty & Co. Rob Brown - Lake Street Capital Markets Amit Dayal - Rodman & Renshaw Marco Rodriguez - Stonegate Capital Markets Jim Kennedy - Marathon Capital Management Donald Besser - Manchester Management Gregg Hillman - First Wilshire Securities

Good day, ladies and gentlemen, and welcome to the CUI Global Second Quarter 2016 Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Sanjay Hurry, Investor Relations. Please go ahead, sir.

Thank you, Candace [ph]. Good afternoon and welcome to CUI Global's second quarter 2016 results conference call. A copy of the Company's earnings press release and an accompanying PowerPoint presentation to this call are available for download at the Investor Relations section of the CUI Global website. With us on the call today are William Clough, President and Chief Executive Officer, and Dan Ford, Chief Financial Officer. The purpose of today's call is to review the Company's financial results for the second quarter and year to date, as well as provide you with some additional color on the business going forward. Following management's remarks, the call will be opened up for question and answers. A telephonic replay of this call will be available until August 22. You may also access the archived webcast and accompanying PowerPoint at any time on the Investor Relations of the CUI Global website. As a reminder, this call will contain certain forward-looking statements made within the meaning of Section 27A of the Securities Act of 1933 as amended, and Section 21E of the Securities and Exchange Act of 1934 as amended. Such statements are subject to risks and uncertainties that could cause actual results to vary materially from those projected in the forward-looking statements. The Company may experience significant fluctuations in future operating results due to a number of economic, competitive, and other factors, including among other things our reliance on third-party manufacturers and suppliers, government agency budgetary and political constrains, new or increased competition, changes in market demand, and the performance or liability of our products. These factors and others could cause operating results to vary significantly from those in prior periods and those projected in forward-looking statements. Additional information with respect to these and other factors, which could materially affect the Company and its operations, are included in certain forms the Company has filed with the Securities and Exchange Commission. Before starting the call, be advised that Bill will be in New York City during the week of August 15 and is available to meet with investors. Management's next conference presentation will be on September 28th in Minneapolis, at the Dougherty & Company Institutional Investor Conference, where he will be available for one-on-one. Please contact me via contact details listed in today's press release or your Dougherty sales person to schedule a meeting with management. With that, I'd like to hand the call over to William Clough, President and Chief Executive Officer. Good afternoon, Bill.

Thank you, Sanjay, and thank you all for joining us on our second quarter 2016 results conference call. I'll start with a brief overview of our performance for the quarter, after which Dan will review our financial results in greater detail. When Dan has concluded with his remarks, I will provide some additional commentary on some of the key initiatives we are currently working on at CUI Global, including some significant milestones for both the energy and electromechanical segments of our business. We'll then open the call up for Q&A. Let's begin. Let me start by saying I am pleased with our performance for the second quarter. This was our first full quarter of generating revenue under the Italian contract with Snam Rete Gas for our GasPT analyzer. I am very proud to say that we have delivered more than 250 devices on time and at quantity. As most of you know, Snam Rete was the first major gas transmission company to recognize the value proposition of our disruptive gas metering solution and will be a great reference account for our new business development efforts. The halo effect of their acceptance of our technology has helped us successfully bring the technology before operators in Spain, Portugal, and most significantly, France, in the quarter, and it's helped drive the energy backlog which sits at $15.7 million. Concurrently, we continued to manage our power and electromechanical business through the ongoing weakness in the electronics industry, with backlog to that segment at $18.3 million at quarter-end. In total, for the second quarter, we're reporting revenues up 12% sequentially to $23.1 million, as compared to $20.7 million in the first quarter of 2016 and $23 million in the second quarter of 2015. In addition to the 12% sequential increase in revenues in the second quarter, our gross profit margins remained steady at approximately 36%. Our SG&A increased slightly as a percentage of revenues in relation to severance costs incurred of half-a-million and $800,000 during the three and six months ended June 30, 2016. These one-time severance costs reoccurred as the Company transitioned the power and electromechanical R&D team to CUI Canada, in an effort to capitalize on R&D efficiencies and the talent at CUI Canada, as well as various other positions in both the power and electromechanical and energy segments where headcount reductions were identified. We expect these steps will allow CUI Global to continue to improve the overall cost structure of the organization and drive results going forward. Significantly, for the six months ended June 30th, the Company used only $455,000 of cash in operating activities, a dramatic reduction of $6.5 million from the approximately $7 million used in operating activities during the first six months of 2015, giving cash on hand at the end of the quarter of approximately $6 million. Now let me turn the microphone over to Dan Ford, our CFO, so that he can run through the numbers in more detail. Dan?

Thank you, Bill, and good afternoon everyone. Let me take you through the financials for both the quarter and year to date ended June 30, 2016. As Bill mentioned, we are reporting total revenues of $23.1 million in the second quarter of 2016, as compared to $22.9 million in the second quarter of 2015. This puts us firmly within the range of analyst consensus estimates for the quarter. A revenue increase in the energy segment of $1.4 million offset the $1.1 million decline in our power and electromechanical segment. For the second quarter of 2016, power segment revenue was $15.4 million, as compared to $16.5 million in the second quarter of 2015. This decline is attributed to the timing of customer delivery schedules and sell-through distribution channels. Revenue from the energy segment in the second quarter of 2016 was $7.7 million, as compared to $6.3 million in the second quarter of 2015. Year-to-date revenues were $43.8 million, as compared to $39.5 million for the same period last year. Revenue breakout by business segment was $28.5 million for the power segment, for the six months ended, as compared to $27 million for the six months ended 2015. And for the energy segment, revenue was $15.4 million for the six months ended 2016, as compared to $12.5 million for the prior-year period. The revenues for the three and six months ended June 30, 2016 are attributable to the continued sales and marketing efforts, sales through the distribution channel customers, the addition in March 2015 of CUI Canada related products, the revenues generated since the January 2015 opening of Orbital Gas Systems North America, and the overall improved sales of gas-related metering, monitoring and control systems including the GasPT. The cost of revenues for the three months ended June 30, 2016 was $14 million, as compared to $14.6 million in the same period last year. As a percentage of revenue, the cost of revenues decreased to 60% in the second quarter of 2016 from 64% during the prior-year comparative period. As a reminder, this percentage will vary based upon the power and electromechanical product mix sold, the mix of natural gas systems sold, contract labor necessary to complete cash-related projects, the competitive markets in which the Company competes and foreign exchange rate. The cost of revenue for the six months ended June 30, 2016 was $26.6 million, as compared to $25 million in the same period last year. As a percentage of revenue, the cost of revenues decreased 61% from 63% during the prior-year comparative period. This improvement was due to the previously mentioned factors, especially the sales of higher-margin products to the energy segment. As a result of the improved product mix and energy segment for the six months ended June 30, 2016, the cost of revenues in that segment as a percentage of revenue dropped approximately 10 percentage points from 65% to 54%. This improvement helped to offset lower margins incurred in the power and electromechanical as the segment's cost of revenues as a percentage of revenue increased slightly to 64% from 63%. Gross profit was $9.2 million or 40% for the quarter ended June 30, 2016, as compared to $8.3 million or 36% in the same period 2015. For the six months ended June 30, 2016, gross profit was $17.2 million or 39%, as compared to $14.5 million or 37% in 2015. During the three and six months ended June 30, 2016, the power and electromechanical segment generated gross margins of 36% in both periods, while the energy segment generated gross profit margins of 48% and 46%, respectively. For the three and six months ended June 30, 2016, selling, general and administrative expenses increased $1.1 million and $1.7 million, respectively, as compared to prior-year comparative periods. This increase is largely due to $0.5 million and $0.8 million in severance costs incurred during the three and six months ended June 30. This severance was related to the transition within the power and electromechanical segment of the R&D team to CUI Canada and for various positions within the energy segment. We expect the related changes will improve our results in go-forward periods as cost efficiencies are achieved. SG&A was further impacted by increased audit and accounting fees of $0.3 million and $0.6 million included in the other category incurred in the three and six months ended June 30, 2016, respectively. Partially offsetting the increased SG&A for the six-month period was $0.7 million decrease in non-severance related SG&A associated with the activities of Orbital Gas Systems North America, which had opened in January 2015 and had increased startup costs during its first two months of operation. The remaining SG&A during the three and six months ended June 30, 2016 are associated with the ongoing activities to support existing and reach new customers, promote product lines including Novum, GasPT, IRIS, the VE-Probe technology, and other product introductions. The Company reported a net loss of $1.5 million or $0.07 per share for the quarter ended June 30, 2016, compared with a net loss of $504,000 or $0.02 per share in the prior year period. For the six months ended June 30, 2016, the Company reported a net loss of $4.1 million or $0.20 per share, as compared to the loss of $4.6 million or $0.22 per share in the prior year period. Included in the net loss for the quarter and six-month period are the severance expenses discussed previously, without which the Company's net loss and EPS would have been within the range of analyst consensus estimates for the quarter. Earnings before interest, taxes, depreciation and amortization, or EBITDA, loss for the second quarter of 2016 was $502,000, versus EBITDA of $179,000 for the second quarter 2015. Adjusted EBITDA for the second quarter of 2016 was $130,000 versus adjusted EBITDA of $470,000 for the second quarter of 2015. Year-to-date adjusted EBITDA loss was $1.2 million, as compared to an adjusted EBITDA loss of $2.1 million for the six months ended 2015. Adjusted net income or loss, which represents net income or loss plus the amortization expense of intangible assets acquired via the 2013 Orbital acquisition and the 2015 CUI Canada acquisition, plus the expense associated with stock and option issued for compensation, royalties and services, for the second quarter of 2016, was a loss of $0.6 million. This compares to an adjusted net income of $0.2 million for the second quarter of 2015. The year-to-date adjusted net loss was $2.6 million, as compared to a year-to-date net loss in 2015 of $2.8 million. At June 30, 2016, CUI Global held cash and cash equivalents of $6 million, a decrease of $1.2 million since December 31, 2015. Operating requirements generated a negative cash flow from operations of $455,000 during the first six months of 2016, which was a $6.5 million improvement from the negative cash flow from operations of $7 million to the second quarter of 2015. For the three and six months ended June 30, 2016, there was a significant foreign currency translation adjustment in the balance sheet of $1.6 million and $2.1 million, respectively, largely as a result of the decline in the British sterling following Brexit. That is a non-cash item that presents in equity and can also be seen on the statement of comprehensive income and loss. With regards to Brexit, the long-term effects will depend on the terms negotiated between the U.K. and the E.U., which may take years to complete. Our overall operations in the U.K. could be impacted by the global economic uncertainty caused by Brexit. The announcement of Brexit caused significant volatility in currency exchange rate fluctuations that resulted in the strengthening of the U.S. dollar against foreign currencies in which we conduct business, especially the British pound. The volatility in exchange rates is expected to continue in the short term and the strength in the U.S. dollar relative to British pound and other currencies may adversely affect our results of operations. During periods of a strengthening dollar, the local currency results of our international operations may translate into fewer U.S. dollars. We will continue to monitor situations during the Brexit and will continue to work towards solutions that grow our business and seek to limit Brexit's impact on our operations within the U.K. and internationally. This concludes my prepared remarks and I would now like to turn the call back over to Bill.

Thank you, Dan. Entering the second half of the year, we remain focused on executing on our gross strategy to leverage our cash generating in power and electromechanical business to fund substantial growth opportunities for our energy segment. With regard to the power segment, we continue to solidify our leadership position in the electronics market and work to gain greater market share. Subsequent to the close of the quarter, we expanded our partnership with virtual power systems. In effect, our power segment has been elevated from a supplier to BPS to now being their key hardware design partner for their energy management and control solution, transforming how datacenters provision, manage and utilize power capacity. With this expanded partnership, we are enabling BPS's penetration of the datacenter space. Turning to our energy segment, the business driving our growth, we are employing a multi-pronged strategy to build greater industry awareness and further industry adoption. In addition to the successful Snam Rete deliveries, we reached more -- several more significant milestones. We announced the successful delivery and commissioning of our new GasPTi LNG analyzers to the most strategically significant and largest LNG importation terminal in Europe. We entered into a distribution agreement with Autochim for French and African sales of the GasPT and VE technology solution, thus forming a partnership with one of the largest and most respected gas integration integrators in Western Europe. As a division of Vinci Energy [ph], Autochim is a company which has more than 185,000 employees across 51 countries, with fiscal year 2015 revenues of more than EUR38 billion or $42 billion. More importantly, just like our Italian distributor Socrate, Autochim gives us a media [ph] credibility in the large French natural gas market. We announced the award of a $3 million United Kingdom network innovation competition contract for delivery of gas quality and metering stations within the U.K. This project, funded by the U.K. regulator Ofchim [ph], sponsored by the respective U.K. pipeline operator SGN, and supervised by the internationally recognized energy consulting group BNBGL [ph], is designed to prove the value and viability of deploying fast, accurate, relatively inexpensive monitoring site throughout the SGN network. We successfully beat out several major industry competitors to design, build and deliver the first 10 kiosks, including our proprietary GasPT analyzers, and we installed and evaluated with the results being used by Ofchim [ph] and BNBGL [ph] to recommend deployment of such kiosks throughout Western Europe. And finally, while not producing any immediate revenues, we also announced that Orbital Gas Systems North America became a full member of the American Biogas Council. As such, we can credibly present in North America our industry-leading biogas-to-grid metering solution which we have developed and installed throughout the U.K. We believe that the opportunity for biogas in North America is far more extensive than in the U.K. or Western Europe. And having fully designed, installed and operated solutions based on our VP and GasPT technologies makes us leaders in this developing North American opportunity. Additionally, in Western Europe, we are replicating the sales process used to win the business at Snam Rete. Our new distribution agreement with Autochim gives us entrée into NG, the national gas transmission company in France, and to certain natural gas producers in Africa. With Snam Rete as a reference customer, we believe the sales cycles will be significantly shorter. We are in active discussions with distributors that have relationships with gas transmission companies in other Western European countries, including Spain, Germany and Portugal. Staying with Western Europe and specifically the U.K. for a moment, I want to address investors' inquiries received after the Brexit vote concerning the impact on our U.K. business operations and our ability to conduct business across the E.U. given that our energy segment Orbital is headquartered in the U.K. Brexit is expected to have a minimal effect on our business. Certifications obtained for our GasPT and GasPTi solution in advance of our Snam Rete contract were mainly applicable to both the E.U. and U.K. markets. As Dan detailed in his prepared remarks, with volatility in exchange rates expected to continue in the short term, coupled with the strengthening of U.S. dollar relative to the British pound, our results of operations in the U.K. may be adversely affected. We will continue to monitor this situation and actively pursue solutions, continue to drive performance within our U.K. operation. In summary, we are executing across multiple fronts to broaden awareness of our gas solutions with game-changing technology and supported by a growing list of top-tier customers and a management team singularly dedicated to this substantial opportunity. We have a model that we are replicating both in Europe and in North America that lays the foundation for CUI Global's long-term growth. The difference now is that our technology is not only gaining traction. That traction is reflected in our sales deliveries and revenue. [Inaudible] contract in February has allowed us to greatly increase the number of units we delivered in all of 2014 and 2015 combined. That project, which translates into a minimum of 3,300 units, and, depending on the results, may be as many as 7,000 units, has allowed us to deliver 263 units through the second quarter. That compares to a total of only 65 units delivered in all of 2014 and 2015. In the near term, we have a meeting scheduled with Snam Rete in early September during which we expect to gain greater visibility into order flow for the balance of the year and greater clarity on our expected second purchase order under our 3,300 unit GasPTi contract. As we look ahead to the second half of 2016, I want to reiterate our optimism and commitment to providing superior technology, products and service to our customers. Our energy division continues to grow and the natural gas industry is increasingly beginning to recognize and adopt our leading-edge technology and devices. The employees at CUI Global have shown tremendous tenacity in pursuing new business to grow the Company and extend our market penetration. We will continue to introduce new products, attack new markets, seize opportunities, and pursue and partner with some of the largest, most recognized industry leaders in both the natural gas and electronics market, all in conjunction with our efforts to strategically grow our revenues, our profit, and enhance our shareholder value. In conclusion, I'd like to thank everyone for your continued interest and support of CUI Global. Now let's open the floor up for questions.

[Operator Instructions] And our first question comes from the line of Eric Stine of Craig-Hallum. Your line is now open. Eric Stine - Craig-Hallum: Hi, Bill; hi, Dan.

Hi, Eric. Eric Stine - Craig-Hallum: Just wanted to start with Snam Rete. Maybe just talk about how the installations have gone and also how early operations have gone. I know that you've been targeting data collection from that that you can then take to other customers. I'm just wondering where that process stands.

Yeah, I'll know more about that in early September. I can tell you that the first units that have been installed have worked perfectly. They did have a translation issue with the flow computer, not our issue at all, but flow computers issue, and we resolved that problem for them. So we've been quite helpful for them as well. As far as installations themselves are concerned, yeah, I'll know more of that in September. I know that they have had scheduling issues where their tier 1 contractor has been not able to gain access to certain sites at the time that they thought they would. So again it's something that I'll know more about as we get to meet with them in early September. But I can tell you definitively that the devices have been operating [inaudible]. Eric Stine - Craig-Hallum: Got it. And I know that - I mean it's just the initial, you know, these are the initial volumes, so it's a bit of a moving target, but I mean, when you think about it, do you think that you're going to need, you know, is it three to six months of data that you can then take down their customers? I mean, how should we think about that going forward? Whether it's Snam Rete or someone else.

Yeah, I'm pushing as far as I can to get that data as soon as possible, but again I'll know more in early September. I don't have it yet but I am pushing for it. Believe me, that's something I really want, because I think it'll be a big selling point for our advisors [ph]. Eric Stine - Craig-Hallum: Got it. Thinking about other customers of GasPTi, I know to this point you thought that one, whether it's France, Germany, Spain, that it would be the full system. Is that still the view or is it potentially the analyzer only?

No. It's -- in the case of everyone other than the Italian, it's all high-pressure transmission pipeline. So they would need the GasPTi full solution. It's quite an oddity not only in Western Europe but really worldwide for a transmission company like Snam Rete to actually deliver low-pressure gas, because that's what they do, and they've been successful at it [inaudible]. But they're the only [inaudible] that we know of who does that. So the rest would be called [ph] GasPTi [inaudible]. Eric Stine - Craig-Hallum: Okay. Maybe just an update on -- I know you've been targeting certification in Canada. I know that you'd reengage with France, Canada a little bit once you secured Snam Rete and could look elsewhere. Update there? I know that you were hoping that the E.U. certification might carry some weight.

Well, they have obtained the information from the E.U. regulators and have [inaudible] they actually might test one of our devices themselves [inaudible] and I'm being told by my technical people that we should have something sometime in September, so, I think in this quarter. It sounds like their testing process is a week to 10 days. It's a kind of long process [inaudible] but they have accepted the information from the regulators [inaudible]. Eric Stine - Craig-Hallum: Okay. That's it for me. Thanks.

Thank you.

Thank you. And our next question comes from Joe Maxa of Dougherty & Co. Your line is now open. Joe Maxa - Dougherty & Co.: Thank you. Hi, Bill; hi, Dan.

Hey, Joe. Joe Maxa - Dougherty & Co.: Thinking of the timing of the shipment of the GasPT to Snam Rete, are you expecting the orders or the flow to continue or is there potential for there to be a gap before the next quarter and when you complete the original order for 400?

Yeah. I think - obviously we have the entire 3,300 units and we have [inaudible] 400 committed and we're working our way through those now. We will finish with those, I believe our last shipment will be in October. I just don't know what the next series will be. I know that they're eager to get it done. I'm certainly expecting to know much more after I meet with them face to face in early September, but I think [inaudible] timing at this point, because again, and I think somebody else mentioned it, Eric mentioned it, it is the initial rollout. I know that they have had issues with scheduling, because many of these units are going into third-party facilities, even though [inaudible] with the installations, they have to arrange with the third parties to allow them to [inaudible] and I know that has been an issue with some sites, just pure scheduling. So again I'll know more at the end -- first part of September. But we expect surely to deliver these 400 flawlessly and we'll move on after that. They're [inaudible] they expect to [inaudible] 3,300 units at a minimum, so we think that we'll see that second purchase order certainly in the second half of the year. Joe Maxa - Dougherty & Co.: So it sounds like you're still shipping 50 a month today and --

Correct. Joe Maxa - Dougherty & Co.: -- with the anticipation of [inaudible] next year if all goes well.

Correct. Their broad [inaudible] is to install 800 units this year and to install 1,200 units in 2017 and another 1,200 in 2018. Then whatever is left would be in 2019. So that ramps up to 100 units a month [inaudible]. I would expect that to happen. Joe Maxa - Dougherty & Co.: I see. Okay. And then just looking at your backlog, being down a bit sequentially. It does make it -- just thinking about where revenue could be for next quarter, it doesn't look like you have tremendous upside from maybe last year's 3Q, is that what we should -- how we should be looking at it?

Yeah. Again, we don't -- obviously we don't give forecasting, but I mean I have to point out that the industry as a whole is seeing less than a turnaround than it expects, and it's one of our largest competitors reporting more than a 40% year-over-year reduction in business. And I think in their call, as a matter of fact, they talked about the fact that they have predicted that the turnaround in gas and oil would be felt sometime in April this year, and now they've moved that out to the second quarter of next year, 2017. We haven't seen that kind of decline and certainly, the fact that we have [inaudible] that kind of problem. But again, it's a difficult market, and especially [inaudible] North America now, because of some of the controversies surrounding the presidential election, there's people holding on to their money waiting to see who's going to be running the company -- or the country at the end of the year. So I think, yeah, I think your assessment would be correct.

The other thing I'll add to that, Joe, is, you know, under -- if the FX rate for the U.K. stayed where they were at December 31, our backlog would have been $1.5 million higher, or even at March 31 it would have been a little over $1 million higher for the backlog. So that -- the Brexit and the impact on currencies has definitely had an impact from a backlog standpoint, so. Joe Maxa - Dougherty & Co.: That's helpful. Yeah.

And then are you having a similar [ph] issue with the IRS PO [ph] that we've been waiting on for a while now with national grid?

No, it's still moving forward, and I expect [inaudible]. They're very keen to the project, they're very keen to try our technology [inaudible]. The -- one of the things we're partnering with GD [ph] on, on that [inaudible] GD [ph] has developed a new platform that they want to introduce into the mix, which we think is quite exciting and frankly will make it a more dynamic [inaudible]. So that's part of the reason there's delays, because we're presenting that new platform to them. But I think at the end of the day we'd look at that [inaudible]. Joe Maxa - Dougherty & Co.: Okay. Thank you.

Sure.

Thank you. And our next question comes from Rob Brown of Lake Street Capital Markets. Your line is now open. Rob Brown - Lake Street Capital Markets: Good afternoon.

Hey, Rob. Rob Brown - Lake Street Capital Markets: Just following up on the North American market. You talked about some delays there. But could you just update us on kind of the opportunity set and when -- how you think that's going to develop I guess?

So there's two segments that we think are quite exciting in North America. First is the VE technology. That is developing at a, frankly, quite a great clip. We have now just finished the delivery and [inaudible] installation of the second half of our order in that South Texas ethylene plant, we expect to get -- to start [inaudible] out of those [inaudible] sometime in the next 30 to 60 days, and as I mentioned on another call, that customer has [inaudible] more additional plants, more than $100 million worth of work for us if that performs the way we think it will. We've also had some very great interest in our biomethane to grid terminals. That's kind of a developing market [inaudible]. But since we have so much experience [inaudible] we think we could make a real impact on the market, and [inaudible] California to New York and all the way in between for our [inaudible] solution. So again we think that's going to be [inaudible]. TransCanada, as I mentioned before, has reengaged. Once we get the [inaudible] Canada certification [inaudible] I can't really say how many at this point, but TransCanada is a very big operator, that has some real consistency [inaudible] out there in the field [inaudible] opportunity for us. We expect to reengage with the energy transport partners [inaudible] have finished the [inaudible] and they're definitely back interested in operational matters, and we're one of those operational matters. And they [inaudible] going on two years to perform flawlessly [inaudible]. So, overall, the U.S. process and North American process is one that is just in the beginning stages still, but will rapidly I think escalate to a point where [inaudible] certainly in Western Europe it's the opposite [inaudible] tremendous because there is just so much more pipeline and so many more monitoring sites. So we're excited about the opportunities. Rob Brown - Lake Street Capital Markets: Okay, great. Thanks for that review. And then on your SG&A cost [inaudible] one-time items, but what's sort of the correct run rate in that business? Is it sort of the netting up the one-time items or should they continue to decline a little bit?

Dan, you want to take that?

Absolutely. Netting out the one-time items gets you right in line with that Q4 run rate that I had reiterated following last quarter. So the Q4 run rate should be the rate I believe. Rob Brown - Lake Street Capital Markets: Okay, thank you. I'll turn it over.

Thank you. And our next question comes from Amit Dayal of Rodman. Your line is now open. Amit Dayal - Rodman & Renshaw: Thank you. Good evening guys.

Hi, Amit. Amit Dayal - Rodman & Renshaw: In regards to your guidance, I didn't hear the guidance. Are you maintaining it at the $105 million to $108 million level for 2016?

No, we don't give guidance, Amit. I think [inaudible] I would reiterate what I said earlier [inaudible] our competitors reducing their estimates by 40% and 50%, we don't give [inaudible] estimates, so I'm not [inaudible]. Amit Dayal - Rodman & Renshaw: Right. Thank you.

Hello?

Our next question comes from the line of Marco Rodriguez of Stonegate Capital Markets. Your line is now open. Marco Rodriguez - Stonegate Capital Markets: Good afternoon guys. Thank you for taking my questions.

How are you doing, Marco? Marco Rodriguez - Stonegate Capital Markets: Hey. I was wondering if maybe you could just a little bit more about Brexit. I heard your prepared remarks and how you guys are kind of thinking through it. But just wondering, have you had an actual conversation on directly Snam Rete post the Brexit announcement?

Yeah. Snam Rete will be affected, because they are buying in pounds. So there was no translation issue with them. The bottom line is they are in pounds. So the issue will become pertinent really with the new customers who will be priced in euro. Interestingly, we pushed Snam to purchase in pounds because we felt that the euro was too volatile. Well, it turns out, who knows, we might have been better staying in euro. But at this point they're in pounds. So for them it's not an issue one way or the other. There's no issue as far as certification. And realize that we were -- they were required to get a waiver through the E.U. regulatory agency to be single-sourced, because we were the only technology [inaudible]. So there is no Italian product, there's no French product, there's no German product. We do what they want. So it's not a matter of them no longer dealing with a British company because of Brexit; they only have [inaudible] their only source, there's no other technology [inaudible]. So again I think for us, it's damn right, I think it's damn right, it will have no impact. In the case of other future business, the certification issue is already resolved. We have certification in both E.U. and U.K. We have to get that because U.K. has always required separate certification, which we got. And then we got new certification [inaudible] with Snam Rete. So we're fine there. What we will find though at the end of the day, if the pound stays depressed versus euro, is that, in essence we will have a little larger margin. And, you know, because our cost of goods will be a little less. But again it really -- it's hard for anybody to say what the end-impact will. We know now that it will be two, possibly three years, before they resolve all the issues. I don't believe anybody is talking about heavyweight [inaudible] on either side. They're both big customers of each other. And I think they'll probably come up with a solution. In fact, I can tell you that, spending as much time as I do over there, the consensus over there is that it will turn in essence the [inaudible] basically a free trade zone, which is what it was fully intended to be in the first place, rather than, you know, kind of a super-government. And at least vis-à-vis the British, it will become much more of a free trade zone. Now how that impacts immigration and some of the other tough issues that they got to deal with, I can't tell you. But I think at least short term, just seeing the impact [inaudible] reduction in the value of pound [inaudible]. And that, as I said, like I said, no impact on [inaudible] but will have some [inaudible]. Marco Rodriguez - Stonegate Capital Markets: Got you. So you guys, your talk here in terms of how Brexit obviously no one really knows that was going to necessary happen in the future, but if I'm hearing you currently and understanding some of what you're saying there, that no matter what happens from the renegotiations of all the trade aspects between the U.K. and all the other European countries, because you have that sort of certification there, you're thinking that it shouldn't be an issue to make a sale.

Correct. Exactly right. Yeah. Marco Rodriguez - Stonegate Capital Markets: Got you.

And again, that and the fact that we're the only viable technology that will do it. Marco Rodriguez - Stonegate Capital Markets: Understood. And then last question, I'll jump back in the queue. Any sort of an update you have on CUI Canada? I know that they've been a little bit of a drag on results, excuse me, on the power and electric. Just kind of give us an update as far as where that is in terms of your expectations and how you might be thinking about that as its impact on operating margins for the power and electric section.

Dan, you want to take that?

Absolutely. Yes. That's still in turnaround mode. It's still having great progress with the customer base that it brought with us and the one that we're adding. We're seeing a lot of manufacturing design going in there. So the future -- the funnel is looking really good. Again we expect that probably in year three where that will turn into production volume which is really the key to having the Canadian operation turn more profitable for the [inaudible]. The other aspect to reiterate on that is the value that they brought from an R&D standpoint and a prototyping standpoint company. That was [inaudible] transitioned our R&D group up to Canada, both from the resource they had and the marketplace available for the talent in the Toronto area and the power states, is very, very good. And that's also where we're facing our [inaudible] research and development program out of [inaudible] partially on a preexisting [inaudible]. So we're pleased with it. It is, you know, it's still in turnaround mode, but it's still in the right direction for us. Marco Rodriguez - Stonegate Capital Markets: Got you. Thanks a lot guys, I appreciate your time.

Sure thing.

Thanks, Marco.

Thank you. And our next question comes from Jim Kennedy of CUI Capital Management. Your line is now open. Jim Kennedy - Marathon Capital Management: Hi guys.

Hey, Jim.

Hi, Jim. Jim Kennedy - Marathon Capital Management: Hey, Bill, Dan. If you have not bid on or priced potential contracts outside of Italy yet, why would you not have some pricing power, therefore, overcoming any pound issues or whatever going forward? Wouldn't it actually be a benefit to you given that you were sole horse in one situation and you might be in others?

Yeah. Obviously that's one of the reasons we kept the pricing design so close to our vest. You're absolutely right, we do have, we believe, some real leverage there. That's the other reason I'm pushing so hard to get the data out of Italy once [inaudible] again that's more leverage for us. You're absolutely right. And if I can get, you know, two or three of the big customers on the [inaudible] so our leverage goes up even more because then I could say [inaudible] probably more clearly, is that, you know, it's first come, first served. So if we have [inaudible]. And those are things that I definitely [inaudible] because they're in fact [inaudible] customers are going to have to understand. So, yes, you're right, there will be definitely be some leverage. Jim Kennedy - Marathon Capital Management: Yeah. I mean at the end of the day you have a unique product addressing large markets and patent it, so you should have the requisite pricing power.

The other piece out of that too, Jim, and it's the obvious point, but our cost of production is going down with that, so the customer at the end of the day can still get a better margin than they would have gotten originally, and we can still make a better margin than originally. So we are seeing this as a [inaudible] opportunity because of the pricing power we have [ph], so. Jim Kennedy - Marathon Capital Management: Sure, absolutely. Bill, any comments on the installation at your northeast customer, or mid-Atlantic northeast customer? And any feedback in terms of how that's gone, what the data [ph] looks like, what they've said about it?

I think if you're talking -- I think if you're talking about the process with [inaudible] customer [inaudible] yeah, they're so very excited about the results. The results have been quite good. They are acting as the market resources for us and they will in fact [inaudible] and they are still very hesitant [inaudible]. So they have that great [inaudible] what they're doing. They're seeing dramatic changes [inaudible] efficiencies on [inaudible]. And the overall [inaudible] they do it on a [inaudible] basis. So it's one or two or three at a time. But again, they are definitely rolling them out and they're definitely very pleased with what they see. Jim Kennedy - Marathon Capital Management: Is there any reason why in the long run you would not be an option for the compressor guys in terms of either OEM-ing or being an option, therefore, comes directly from the compressor manufacturer?

Yeah. We're still working through that. We are still in the process of getting through some of the [inaudible] compressor manufacturing, there are a number of them [inaudible] others, that we're trying to get to. And we think that's a [inaudible]. Again, not to belabor the point, there is some issues just economically at this point with that industry as a whole, because there's [inaudible] downturn that others are seeing, and so because of that, they're not necessarily focused on [inaudible] getting products out the door and stuff. So again, we are working [inaudible] we have a sales team based out of Houston that are pushing really hard to get to those OEMs. Jim Kennedy - Marathon Capital Management: Okay. Thanks guys.

Yes, no problem.

Thank you. And our next question comes from Donald Besser of Manchester Management. Your line is now open. Donald Besser - Manchester Management: Hi, good afternoon. I've got three detail questions and then one other one. Dan, what was the fourth quarter run rate for SG&A that you referred to? What was the absolute dollar number?

It was $8.5 million. Donald Besser - Manchester Management: Were you talking SG&A for --

SG&A in Q4 was $8,501,000. Donald Besser - Manchester Management: For what? For the energy division?

Sorry. I think you said for the overall. That was for the overall SG&A for the Company. It's not split out for division by division. Donald Besser - Manchester Management: Bill, who is the largest competitor you're referring to?

Yeah. You know, I'd rather not name them. I think -- I don't feel comfortable, I don't have any [inaudible] so I don't really [inaudible]. Donald Besser - Manchester Management: I don't see why your energy business itself is so affected by the lower price of oil and gas, maybe on prospective business but not on current backlog [inaudible] there's no --

No, no, not at all in current backlog, but I think it is just -- it is the economic environment we're in. And it's not that our business is particularly affected, because quite frankly we were up. So we haven't been negatively affected at all. Donald Besser - Manchester Management: So what's the point of complaining about a competitor to say that your business is being hurt?

No, no, I'm not complaining about a competitor. What I was trying to indicate is we're in a difficult economic time [inaudible] just the projects and moneys are not being spent the way that the industry expects them. I'm certainly not complaining at all about the competitor. They're a competitor and they do what they do. But again what I'm saying is they identified as we're identifying, this is a difficult economic time. And because of that, there are less projects. I mean one of the simple fact is we're pushing very, very hard to get the [inaudible] to move forward, and these are tough times to push that. It just is, because of the price of gas and because of the price of oil, because most of the big companies are involved in [inaudible] energy segment, and so they [inaudible] infrastructure cost and infrastructure project are things that are big dollar amounts. And as you look at the Snam Rete [inaudible] we'll get EUR150 million project. That's a big project [inaudible] almost five years and they went ahead with it, which is great for us and for everybody else. Again all I was pointing out is that this is a difficult environment because of the price of gas and oil and because of the economic turmoil that's created by things like Brexit, things like the Clinton-Trump presidency, you know, things that happened that are far out of our control. Certainly I'm not complaining. We [inaudible] to do, that's what we do, that's… Donald Besser - Manchester Management: Okay. Just a couple of more details. How many units has Snam Rete actually installed, do you know?

I don't know. I'll know more about that when I get there in September. Donald Besser - Manchester Management: All right. Dan, you said that [inaudible] in Canada was in turnaround mode. Does it have any sales?

All the sales that the CUI Canada operates goes through CUI [inaudible] through the power segment. So, yes… Donald Besser - Manchester Management: Right. So what are the sales?

They're better than the power and electromechanical group. Donald Besser - Manchester Management: Are there any sales in the Canadian division?

Yes, there are. That's our entire frontend power supply [inaudible]. Donald Besser - Manchester Management: Okay. So we need some elaboration on that. The backlog, since you bought that company, has declined in the power division. The sales appear to have been flat the last few quarters. What's actually going on?

So, year over year the power division is up about a million -- a little over a million dollars year to date for the period, and we're seeing faster turnover through the organization. The other piece, when we acquired that company, it had a large upfront backlog [inaudible] both prior to our acquisition, and then immediately upon acquisition [inaudible] who were afraid that they [inaudible] supply because they thought [inaudible]. So we worked through and what we'll continue to work through is a backlog scheduling with the customers. We've seen that most of them have [inaudible] overly built up supply now and that they are reordering products from us on a more regular basis rather than [inaudible] they had done. Donald Besser - Manchester Management: All right. So you've owned the company for 15 months, so what is the current quarterly run rate for that division?

The run rate for that division, the power segment did -- let's see, for the quarter, the power segment revenue, which includes Tectrol -- Donald Besser - Manchester Management: I want to know what Tectrol did. Tectrol sat $8 million -- just a minute. Tectrol sat $8 million of cash from the company. I want to know, you've spent all that money -- and it was actually more than that, including working capital, I want to know what the sales rate is for that investment. That's a reasonable question. It's not like you don't break things down. That's an extremely reasonable question.

So, Don, last year that segment did, I believe it was between [inaudible] between $10 million and $12 million. I believe it's the range [inaudible] that segment, in terms of CUI Canada and Tectrol. This year we're looking at a similar run rate for the year. Donald Besser - Manchester Management: [Inaudible] worked through the backlog of panic orders.

Yeah. Because what we're seeing is reordering on a more consistent basis. Donald Besser - Manchester Management: So it's basically even. So, $3 million would be a reasonable [inaudible].

That'd be a reasonable number. Donald Besser - Manchester Management: Okay. All right.

What we're working on is getting design wins so that the next round of production with the customer [inaudible] when they're designed, both the existing ones we have and future products. That's where the opportunity is [inaudible] turning around that business. That business was doing around $100 million about 10 years ago and $40 million around five years ago now. So it's got a lot of opportunity there with its existing base [inaudible]. Donald Besser - Manchester Management: And so what is your R&D expenditure here?

The majority of our R&D in the power segment is [inaudible] on the frontend power and the digital power market. So that, for the quarter, our R&D in that [inaudible] $475,000. Donald Besser - Manchester Management: Which would be mostly in Canada.

Correct. We moved the R&D development up at Canada, so that's right. Donald Besser - Manchester Management: Okay. So I appreciate your patience. I think you want to do a little self-thinking about disclosing more about that division since it was such a drain last year and is not contributing anything of significance, and the power division is what's been disappointing the stock market. That's what disappoints. So you sort of got to come clean with what's going on there and what you hope to do about it.

Well, first of all, Don, we come clean with everything, believe me. We're [inaudible] so we're very clean. Secondly, the only reason we've got the VPS opportunity in front of us, which is a huge opportunity, if you know anything about [inaudible] market, because we have the CUI Canada operating both the frontend power and the R&D. We believe that over the course of the next several years Canada will be a tremendous contributor to both top and bottom line [inaudible]. Again though, it's going to take, we talked about it when we acquired [inaudible] take four years to get that done. That's what we're in the process of doing. Donald Besser - Manchester Management: Okay. Thank you for your patience.

Sure.

Thank you. And our next question comes from Gregg Hillman of First Wilshire Securities. Your line is now open. Gregg Hillman - First Wilshire Securities: Yeah, good afternoon. Hey, you talked about the Virtual Power Systems that [inaudible] and I was just wondering, for backup, the thing that was in the news yesterday about Delta Airlines going down, I guess they didn't have a good backup power system. Do you have the capability to replace the existing vendor at Delta or is that above your capability?

No, no. That's exactly the kind of thing the VPS software [inaudible] addresses and the hardware system addresses. What it does is it leverages power. Basically it's the combination of battery array and very precise, very controlled power delivery, so that when a system gets confused load, whether it be a Delta Airline system or a Google server problem [inaudible] huge power load [inaudible] what happens is we can service the system on a temporary basis with the batteries, so that we could then draw power down or make -- draw power down from the grid. That's exactly what it does. The issue though is, as anything that gets done in [inaudible] anything that gets done at the Blade server level, there's data testing that has to go on [inaudible] do not put, you know, power supply systems on those Blade server [inaudible] and that's what the processes are doing. We've got some really significant design wins, we've got the big partners who are looking at it, and frankly that's why we think it's such a big deal. And it's not just Delta. It's Delta, it's Southwest, it's Google. It's anyone who uses the big server farms to keep track of data and have a power [inaudible]. That's what happens. Now I'm not particularly intimately involved with what happened at Delta, but if there was a power problem, that's exactly what VPS is trying to address. Gregg Hillman - First Wilshire Securities: And I take it with, you know, EVS, is that VAR [ph] serving [inaudible] in Canada or are they serving the whole world?

I didn't catch what you're asking. What is it? Gregg Hillman - First Wilshire Securities: The one that's -- that joint venture, the Virtual Power Systems, does that VAR [ph] serve just Canada or do they serve the world?

No, VPS is not a Canadian company, it's a Californian company. I'm not sure --

Listen, we have the exclusive rights with them for this technology globally. So we're going to market with them globally.

I got your question. Yeah. No, it's global, Gregg. Yeah, it's global. It's globalized. Gregg Hillman - First Wilshire Securities: Okay. And then these server farms, the backup power, I take it has a major -- that's going to be a major part of your division going forward, the power division, I take it, backup power systems?

Again, depending on the rollout of this [inaudible] VPS software designer, but depending on the rollout of that, it could be a very, very major part of the business, absolutely, because again it is unique. We don't own the -- or have any rights to the software, that's certainly VPS's proprietary software, but we now will be designing and building all the hardware to support that software. So, yeah, it could be very big. Gregg Hillman - First Wilshire Securities: And then, why is your solution better than the solution of other people out there? Or how is your solution differentiated with Virtual Power Systems software and your hardware? How is your system differentiated?

The solution, to be clear, the solution isn't a backup battery, it's not a backup battery system. So that's something that companies are still going to have. What our solution is, is it's software managing the power supply system. So what it does is in times of lower usage, what it does is it diverts or [inaudible] power and stores it in the battery componentry that's part of our power supply system. And then, so that when there are cases of high internet volume, where their servers get a bunch of requests, the power is able to draw not only from the grid but also from the stored backup battery, so that that big draw from the internet doesn't cause a crash internally where they end up having an array go down. And so what that allows them to do is operate more efficiently and more responsive with less capital outlay on an ongoing basis. They're still going to have a backup battery and probably a generator system and all those kind of things. What we allow them to do is let's call peak shave and respond quicker to the power needs, without having any -- without crashing any of their Blades or [inaudible]. Gregg Hillman - First Wilshire Securities: Okay. And your partner is providing the software solution, you're providing more the physical design pieces that go along with the software solution, the intelligent management of the power?

Correct. Gregg Hillman - First Wilshire Securities: Okay. Got it. Okay. Thanks guys.

No problem, Gregg. Thank you.

Thank you. [Operator Instructions] And that concludes our question-and-answer session for today. I'd like to turn the conference back over to Mr. Clough for closing remarks.

Thank you and thank you everybody for attending the call. Again we will continue doing as we have in the past pushing the products forward both in the electronics division and in the power and energy division. And we are quite excited about the opportunities coming forward. I think that we have some very dynamic technologies in both power and energy. And we thank all of you for your support, your time, your questions, your interest, and if we can explain any further interest, don't hesitate to call us. Thank you and thanks everyone else.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Have a great day everyone.