Jeff Stanlis - Hayden IR Nathan Mazurek - Chairman & CEO Andrew Minkow - CFO

Matt Koranda - ROTH Capital Michael Potter - Monarch Capital Group

Welcome to the Pioneer Power Solutions, Inc First Quarter 2015 Conference Call. [Operator Instructions]. At this time I'd like to turn the conference over to Jeff Stanlis from Hayden IR. Please go ahead.

Thank you, Danny. Good day everyone and welcome to Pioneer Power's 2015 first quarter financial results conference call. The call today will be hosted by Nathan Mazurek, Chairman and Chief Executive Officer, and Andrew Minkow, Chief Financial Officer. Following this discussion there will be a formal Q&A session open to participants on the call. We appreciate having the opportunity to review the first quarter financial results. Before we get started let me remind you that this call is being broadcast over the Internet and that a recording of the call and the text of management's prepared remarks will be available on the company's website. During this call management will make forward-looking statements. These statements are based on current expectations and assumptions that are subject to risk and uncertainties that could cause actual results to differ materially. Please refer to the cautionary text regarding forward-looking statements contained in the earnings release issued today, and in the posted version of these prepared remarks, both of which apply to the content of this call. I would now like to turn the call over to Nathan Mazurek, Chairman and CEO. Nathan, go ahead.

Thank you, Jeff. Good morning and thank you all for joining us today for our conference call. The first quarter of 2015 was a quarter of solid double digit growth and operational progress. We’re on the right path, we delivered 38% revenue growth due in part to our acquisition of Titan Energy in the fourth quarter at the very end of the fourth quarter of 2014 but just as importantly on an organic basis we grew revenue at a notable 14% year-over-year rate. Normalized for foreign currency fluctuation, our organic growth rate translate to 21% year-over-year. Our growth was derived both from segments of our business -- from both segments of our business with the impact from foreign currency and our Canadian business being more than offset by growth from our U.S. businesses. Our two largest business units both in our T&D Solution segment performed very well and each exceeded our top and end bottom-line expectations for the first quarter. Our T&D switchgear business which we acquired in the second half of 2013 is getting closer to achieving our operational performance expectations, the revenue more than doubled versus last year and it's losses narrowed as the business continues to scale. More work is needed with our Canadian dry-type transformer business which still faces challenging conditions in the commercial construction market and we’re taking specific step to increase utilization, reduce cost, increased profitability and bring this business in-line with our expectation and standard. In our critical power solution segment we’re very encouraged by the growth of our tightened energy systems acquisition which has being delivering a growing stream of recurring service revenues. We’re also pleased with progress in integration it's operations and taken decisive actions to simplify it's business for greater profitability and alignment with our strategic priority. As most of you know we have been building a diversified organization through acquisitions, our model so far has being based on buying smaller technically competent and frequently undercapitalized businesses that attract the valuation. We then professionalize these organizations from a sales and marketing standpoint, bring their production operations up to our standards and increase their market opportunities by integration with other businesses we own through cross selling and by introduction of new product line. Our goal has been to take businesses acquired at valuations favorable to shareholders and make them worth significantly more in a relatively short period of time. Our Jefferson Electric business is a case in point. This doesn’t always happen according to our original schedule in each case, sometimes faster and sometimes slower. But our track record so far has been quite good. We only have one real lagger at the moment out of our six reporting unit. Our Canadian dry-type transformer business continues to face challenging conditions in it's market. It has not grown as expected and in the quarter it lost money which is not acceptable to me or any member of our management team. A lot of this was due to external factors that we did not adequately anticipate but we’re taking specific steps to reposition this business in order to meet our expectations and standards which we believe will show acceptable results in 2016. Our backlog at the end of the first quarter was 31.7 million up nearly 25% from a year ago, but down sequentially as we converted a portion of it to a current period revenue. Our order backlog continues to be diverse both in terms of size and source of orders and provides us with a clarity to reaffirm our 2015 full year guidance. Our focus this year will be to leverage the earnings power and the acquisitions we have already made through a focus on integration and optimization setting the stage for which I will believe -- which I expect will be a compelling earnings trajectory from 2015 forward. I will now turn the call over to Andrew Minkow, our Chief Financial Officer to provide the details of our first quarter financial results as well as a review of our 2015 guidance which as I mentioned we’re reaffirming today.

Thank you, Nathan. First quarter revenues were 28.9 million up 38.3% from 20.9 million in the first quarter of 2014. The $8 million a year-over-year increase was driven by a $4.1 million increase in our critical power solutions segment. That includes Titan revenues of 5.1 million. The increase due to Titan revenues was partially offset by a 1 million year-over-year decrease resulting from a lack of major projects shipped by our original critical power switchgear manufacturing business whose revenues we expect to be back-end loaded in 2015 specifically with datacenter related projects from a repeat customer. The remaining 3.9 million increase in our consolidated revenue was derived from our T&D solutions segment and includes higher sales of our transformer product lines which was also heavily skewed towards data center application as well as a three-fold increase of sales of switchgear equipment. From time to time our sales figures are negatively impacted by the effect of foreign currency translation when comparing our results to prior year periods as was the case this quarter, where approximately 36% of our consolidated sales were to Canadian customers at a blended 11% lower currency conversion rate as compared to the same quarter of 2014. Our gross profit for the first quarter was upto 5.4 million or an 18.7% gross margin compared to a $4.9 million gross profit or a 23.5% gross margin in the first quarter of 2014. The decrease in gross margin percentage was driven mostly by the results of our larger T&D solution segment which included a smaller proportion of customer engineered higher margin liquid built transformers and unfavorable material purchase price variances due to the strengthening of the U.S. dollar together with an unfavorable mix shift in our critical power solutions segment. For the quarter SG&A expenses increased 33.7% on an absolute dollar basis to 5.1 million as compared to 3.8 million in the first quarter of 2014. Most of this increase is as a result of the acquisition we completed in December 2014, that being Titan, with SG&A expenses not included in our first quarter results of 2014 due to purchase accounting. As a percentage of revenue SG&A expenses decreased from 18.4% of revenue in the first quarter of 2014 to 17.8% of revenue in the first quarter of 2015. We had an operating loss for the quarter of 0.1 million compared to operating income of 1 million in the first quarter of 2015. The decrease was primarily the result of challenges that are Canadian dry-type transformer business and the timing of orders at our power line [ph] switch gear manufacturing business. As well as an additional 0.4 million of non-cash amortization expense related to intangible assets arising from the Titan acquisition and an increase of small one be it in general corporate expenses. Our net loss for the quarter was approximately $225,000 compared to net income of 590,000 in the prior year's quarter. Adjusted EBITDA was $834,000 during the quarter or 2.9% of revenue compared to $1.4 million or 6.9% of revenue in the first quarter of 2014. Non-GAAP diluted EPS was $0.03 down from $0.10 in the prior year. Turning to the balance sheet, our total debt at the end of the quarter was down to 14.6 million as compared to 18.9 million at the end of 2014. As of March 31, 2015, we had networking capital of 5.4 million compared to networking capital of 9.7 million at December 31, 2014. Our ratio of current assets to liability stands at 1.2 to 1 and we had 5.4 million of available and unused borrowing capacity from our revolving credit facilities. The availability of this capacity under our revolving credit facilities is subject to some restriction on the use of proceeds and it's dependent upon our continuing ability to satisfy certain financial and operating in covenant including financial ratio. Lastly as Nathan mentioned today we’re reiterating full year revenue and earnings guidance for 2015 which includes revenue of between a 110 million and a 120 million of which 85 million to 95 million is expected to be derived from our T&D solution segment and another 20 million to 25 million from our critical power solutions reporting segment. On a consolidated basis we are expecting adjusted EBITDA of between 6.5 million and 7.5 million and non-GAAP diluted EPS between $0.45 and $0.55. Our guidance is also based on the following key assumptions, the exclusion of the impact of any future acquisition and an updated foreign currency exchange rate budget of CAD0.82 to CAD1 which equates to an 11% unfavorable variance due to foreign currency translation as compared to last year which is expected to affect almost 40% of our sales. In addition our below the line assumptions continue to include an effective tax rate at or above 28% and a share count of approximately 7.4 million. Based on the composition of our backlog we expect that our second quarter results will be above the same quarter of 2014 in terms of revenue and at or slightly below our second quarter results last year in terms of profit. This concludes my remarks and I will now turn the call back over to Nathan.

Thank you, Andrew. Operator I would like to now open the call for questions.

[Operator Instructions]. We will take our first question from Matt Koranda with ROTH Capital.

So just wanted to start off on the SG&A line, is this the right quarterly run-rate to now use for the rest of the year now that Titan is pulling for a full quarter. It looked like there may have been a couple of onetime items and would you expect any reductions to SG&A as we go through the year?

It's a pretty good, clean number to annualize for your purposes I point out. You know there is a significant non-cash component now they result from Titan almost 400,000 in intangible amortization as a result of the first accounting. But otherwise all the other cash based type SG&A expenses are good to go off for your purposes and for accounting [ph].

And then just looking at backlog composition, wondering if you guys could kind of just flush that a little bit for us and talk about what's in there Titan, versus the base transformer businesses and what kind of visibility does that give you into gross margins for the remainder of the year or are we kind of flat from Q1 in terms of gross margins or do you see any improvement happening?

Sure. I mean the backlog now we’re in a new place for us in the last five years where a significant portion of our backlog is not liquid filled transformer. And upto 31 million of backlog that we have as of March 31, approximately 9.5 of that is Titan and a large portion, I don’t know exactly in front of me is service business which increases the latter part of your question the March profile that we can accept as a backlog. So that is about 21 million of backlog. Our liquid filled transformer business it ended the quarter a little lower, we had a negative exchange rate which effects how we report that backlog it's in the range of around 15 million, about 31 million total and we have seen as of April and I pick up in that so we had expected to grow going into the second quarter.

The balances is switch gear, I mean the biggest portion of that is going to be the LA business, the specialized switchgear business of which he is probably at about -- for the backlog purposes it was about 2, he is at 3 right now so that should pick up.

And we also have a large, we had a lot of growth this quarter on our revenue and our profits of our original Jefferson business which is on-boarded a major new OEM customer in the data center space, so their backlog for that business is -- it used to be no more than 2 million, 1 million on any given month which for the most part effect represented a portion of the next month sale. That business of ours Jefferson has now become a real backlog business with long run orders to the point where they are at about a 4 million level in backlog as a portion of our total.

Looking at liquid filled growth it looked pretty strong and stronger than I had expected in the quarter, can you just talk about some of the end markets that are helping price for some of the liquid filled growth?

The liquid filled is actually facing challenges, it's any growth is experiencing is a testimony to it's diversity of the market that it services. You know the single biggest industrial market, oil and gas there are almost no revenue so see it with the first quarter. I say almost no just to be careful. I really think there is none and we don’t look for very much to be associated for the balance of this year. So oil and gas is very weak, mining is very, very weak. That being said it's network business, it's utility business, it's stronger general industrial activity has been helpful, so it's really a -- again it's a reflection of how overtime as we built a very diverse high-end customer engineered business, how it's weathering really headwinds frankly and it's path to more growth and profitability. I mean in the first quarter on a local currency, no FX translation based, it was up but versus the same quarter last year but that business so project driven with 12 to 16 week lead times, it's I would read too much into it in terms of a trend you can expect, you should assume that the increase this quarter versus last year was really due to project timing.

And then last one for me just on the critical power segment, the organic part of the business you mentioned the back half loaded year essentially with some data center customers. Could you just talk about kind of some puts and takes there what kind of gives you the confidence that you will be able to recognize that in the second half of the year and where is the customer spend in terms of taking delivery on software [ph]?

Right. We’re projecting it because it's our belief because these projects have to be done this, that’s the customer schedules, we’re in advance talk with them it's not part of the backlog yet but it should be part of the backlog relatively soon and we expect those jobs to ship the second half of this year. That business when we look at it by itself because it's still so small and so project driven it's subject to these kinds of erratic kinds of swings, let's say in ball park numbers that business did about a $5 million last year, it did about a $1 million a year before, it should do about $5 million this year. When you have a business that small, it's subject to this kind of this severe lumpiness.

[Operator Instructions]. We will take our next question from Michael Potter with Monarch Capital Group. Please go ahead, Potter.

The Titan acquisition has been fully integrated at this point?

I mean what do you mean by fully integrating, from?

No operationally.

I would say, let's say for the most part, yes. I mean there is still luck, consolidation that we need to do facility wise in Minneapolis that’s not going to be done till the end of this year because there is no reason for us to have two facilities, we’re also holding probably so much space between the two facilities that we have in Minneapolis but other than that the integration went quickly. Sorry it's a long winded answer.

So we should see some additional cost savings from future consolidation whether it's the end of this year or going into 2016?

Right there will be some additional cost savings on the facility integration, we have rejiggered you know some -- lot of the senior positions there. We have probably seen most of the savings from that if anything that we should see frankly we think the surprise will be to the positive in service and more equipment sales than we were really projecting, because we have put in addition to realigning their sales forces, both the service and the equipment sales forces we have added three equipment sales people in territories that we have to increase our business there and added two service sales people. So we’re really looking forward to a very strong year for Titan.

And Titan is with a little bit investment and it hasn’t taken much is improving up probably to exceed our expectations for the year. This quarter the revenue was about 8% over what they did in the prior year and they beat our internal budget for the quarter by about 18%, so we’re pretty pleased with where things are going directionally there.

What about the -- do we have opportunities to expand our territory with Generac?

Yes, I mean we definitely do as do others I'm sure in our little club with them. Our first order of business has been to prove to them that we’re better stewards of this business in the territories that we have been given and to do a bang up job of which we measure and we and they measure very, very carefully not just in sales but in profitability and how we handle the give and take every single day. That’s going very, very well. As the year progresses we’re definitely going to try to push the equipment business, has been a very positive surprise to us both in profits and both in just the nature of that business. It's an exceptionally strong business and was that -- I don’t want to say undermanaged the euphuism for all kinds of things. It was just not aligned, the sales people's interest were not aligned with the company under Titan and they had a wide territory that they did not exploit you know some of these states are very large and they only dealt with one for example even our own home state there of Minnesota. We put a sales person in the [indiscernible] that whole section of this state was really not being tapped into. We only had sales person in Des Moines, the rest of Iowa was not being dealt with. We only had one sales person in Omaha; the rest of Nebraska was [indiscernible] for the business. So that’s why we’re pretty optimistic and on the equipment side you make an investment that doesn’t take very long for you to see results from that investment.

[Operator Instructions]. Move on to our next question from [Technical Difficulty].

Looking at the transmission in markets in particular, we’re seeing more and more of the large scale transmission project really being cut up into smaller pieces and given out to more players. I was just wondering if that trend helps you guys in any way that’s my first question, secondly in particularly on the onsite power-gen is there any particular markets and you voiced on that and fallen off by the waste [ph] a little bit and others have picked up. Any others that have come out that you’re seeing a little more growth, that’s a little surprising to you at this point, we’re all cognizant of the oil and gas activity and mining but more in essence you know the data center market and areas of that nature, any other potential end markets that we should pay attention to?

One question, two great parts to it. But the first part, you know I mean you know we top out with the transformers, we top out at 72 KZ, most of the transmission projects that you’re talking about are so way above that that we don’t participate whether they are on the one piece or in several pieces and even at that that’s the outer edge of our participation. So to your first question it's about really having any impact on us, you know at that level. You know we’re really focused on the substation, the substation is a substation, most of that activity is at 5, 15, 25 KV of which that part is not -- that part of the grid is not changing that much. Onsite generation with distributed generation or whatever you want to call it, micro-grid, semi-micro grid, those are big words and they encompass a lot and our perspective is not the be all and end all, we’re just seeing what we see. Taking that into account when we talk about on-site generation the area that we have seen, grow at least for us and that we’re trying to do more in both with gear and in transformer type products. Our CHP type projects, our small gas turbine combined heat and power where they used to do co-generation, different states have different incentives, different industries have different dynamics that make them better more profitable participant in that and I think also the development of smaller gas turbines has made that more economical, more appealing to a lot of big users that definitely has been driving, if it hasn’t been driving enough demand us, it has been driving a lot of quotation and I guess the mind share from us. I don’t want to call it, the reintroduction or the new love with reciprocating engines in similar dynamic has also led to that to microgrids where we feel that we can participate. So that’s where we see it from us, I don’t want to grumble on and on. I'm happy to answer more questions about it, but that’s kind of where we have been able to. The true -- I guess in my view what's a real microgrid type project, if you would be taking you know a big college campus take the University of Texas, at Austin or Ohio state or any of these monster state university campuses or military bases or very large sprawling medical complex where they are trying to balance and use a diversity of sources of power. They want to be connected to the grid, they want use a little gas turbine, they want to do some combine heat and power, they will throw wind and solar and you have issues of controlling and balancing all those different loads. Those would be appealing projects for us as well, they are -- there are many that are talked about very few get done and very few get done in a time frame that I can keep focus. They just drag on for so long for a company our size, there is only so much attention we can pay to those kinds of things.

When Nathan talks about CHP and more affordability in smaller gas turbines, how does that eventually installed in market opportunities for us as opposed to the data center business we have been doing and what we’re seeing some traction with large retailers specifically super markets that really a whole new market to us facilitated by this development and our capabilities and the other would be independent power producers. We’re using the gas turbines to supply the grid. It's been up all market for our business development activities since last quarter in particularly.

In terms of the super market, have you adjusted one-off or have you being able to sort of do some pilots and now hoping to branch out for the full chain?

So what Andrew is referring to is actually our customer is the engineering and constructing firm that under contract to Shoprite [ph] as an example and they are putting in CHP type arrangement, they are going to save money, they are going have built in backup and so forth and so on. We started with one that mushroomed into three jobs, there should be about 11 of those particular jobs as opposed to from a ticket price, as opposed to a big parallel and job for a data center instead of being a $1 million ticket job for us probably each one for the equipment that we are providing is somewhere you know let's say call it a $150,000 on average. Very profitable for us but that’s how it works, but they are doing, they are multiplying, you know they are taking their customer, they are doing one after the other, after the other. So that’s becoming an arena that we are paying a lot of attention to. Andrew, was referring to another customer in Texas that’s building. They have got their own system, they have built a modular pot with reciprocating engine to do really primarily for the oil and gas and chemical industry and have then as big users of power. Again it becomes a very, each sale is not that much but they are multiplying them because they are doing an in pod like form of which our equipment is a part of each installation.

Just a follow-up, good balance between the data centers large scale and then also on the smaller block [indiscernible] work. I want to go to the balance sheet and you sort of referenced integration of Titan and its possibly some additional synergies there. The other project or I should say the other facility that you’re referencing with over capacity is that owned by you or is that leased?

Both facilities in Minnesota are leased, both their leases are up in less than 12 months or so. But who does to make some changes, Titan is not really in the correct physical kind of facility that is appropriate for that business. That business is also growing especially on the equipment side, especially on the parts and service side. So we need to have a different profile and need a little bit more space, at the same time are -- switchgear paralleling business that we bought in 2013 and took on sort of their lease that they were in the middle of. They are having an excess they definitely have too much space for their needs and at the same time we don’t need separate facilities that are 10 miles apart.

And Andrew, one last one for me, your projection of cash flow from operations and CapEx for '15 please?

For CapEx that’s going to be a modest number that’s the easy one in this case be in the range of really few projects but in the range of 500,000 to 700,000 for the year. Operating cash flow is a little more challenging, I don’t have that in front of me just at this moment happy to talk to you about it after the call.

Ladies and gentlemen this does conclude today's question and answer session and I would like to turn the call back over to management for any additional or closing remarks.

All right. Thank you very much all of you for your time and attention. We look forward to updating you again on our next call.

Ladies and gentlemen, this does conclude today's presentation. You may disconnect now.