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

Matt Koranda - ROTH Capital Partners

Good day and welcome to today's Pioneer Power Solutions, Incorporated Third Quarter 2015 Conference Call. Today's conference is being recorded. At this time I’d like to turn the conference over to Jeff Stanlis of Hayden IR of Hayden IR. Please go ahead.

Thank you, Angela. Good day and welcome to Pioneer Power Solutions 2015 third 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 third quarter and year-to-date 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 the 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 will now turn the call over to Nathan Mazurek, Chairman and CEO. Nathan?

Thank you, Jeff. Good afternoon everyone and thank you all for joining us today for our conference call. Our third quarter financial results show improvements against last quarter at an operational level, but these results are masked by non-operational largely non-cash expenses which Andrew Minkow, our CFO will discuss in a few minutes. I’m especially encouraged with these results. From our restructuring plan we indicated will be coming in our second quarter earnings call and believe these changes put Pioneer in a position to return to acceptable levels of profitability. Just as importantly, these changes will make us more competitive in certain areas of our business helping us accelerate growth. The key elements of the restructuring plan have proceeded ahead of schedule mostly during the fourth quarter this year and our losses from our Bemag Canadian business has been reduced significantly. I would point out that most of the savings we expect from the restructuring plan have not yet been reflected in our results which leaves me more encouraged about the $1 million sequential improvement in our EBITDA this quarter. As previously discussed, we are taking decisive actions to improve profitability including the consolidation of six manufacturing facilities to three facilities. The largest phase of this consolidation has occurred already on October 31st, and will begin to benefit the company in the fourth quarter with a more significant and sustained benefit in 2016 and beyond. At the same time, activities are underway to consolidate our two Los Angeles facilities into one and combining two existing locations in Minnesota into one. We have -- in addition we have closed one sales and service location in Iowa, which region will be covered by our resources in adjacent states. We have also outsourced the manufacturing of certain lower margin products which began benefiting us in a more significant way this last quarter and have adjusted our headcount. As a result of these efforts we still expect to reduce our annualized fixed cost by at least $2.5 million. Due to these restructuring activities we recorded non-recurring mostly non-cash charges of approximately $3.4 million during the third quarter. We expect additional charges in the fourth quarter of 2015 and the first quarter of 2016 totaling approximately $800,000 to $1 million to complete the majority of our restructuring agenda. However, while this effort is proceeding according to plan, some delays in certain significant projects as well as some non-operational expenses Andrew will discuss in a few moments in detail have impacted our outlook for 2015. In most cases these project delays will ultimately benefit 2016. We are not yet prepared to revisit our preliminary guidance for 2016 as we want more clarity on the timing of the number of contingency including these delayed projects. We will provide a more clear and updated view into our 2016 outlook when we announce fourth quarter results in March. And while we believe our integration plan will help rationalize our expenses and position us for improved gross and operating margins in the future we still remain focused on growth. In our Critical Power Solutions segment revenue grew for the third consecutive quarter, increasing largely due to the acquisition of Titan which closed on December 2, 2014. Revenues within this segment of our business are of a considerably different mix than they were a year ago with service revenue of $6.9 million to date representing nearly 9% of revenue for the segment compared to less than 6% in the first nine months of 2014. In addition, the non-Titan component of our Critical Power segment which provides custom engineered equipment solutions for large and complex projects is poised to stop dragging on our earnings in 2016 and indeed be a contributor. We have introduced a new line of UL approved automatic transfer switches and last month received a $1.5 million order from a returning data center customer. Turning to our two operating units. In our Transmission and Distribution Solutions segment, we continued to be impacted by the Canadian recession, foreign exchange translation and lower sales this most recent quarter as our largest customer a utility decided to use up its existing stock of our product before changing over and taking delivery of the new product designs covered by our new supply agreement with them. Conversely, our sales to U.S. customers were up 3% for the quarter and a robust 27% year-to-date on increased demand for our custom magnetics in our OEM sales channel which helps to offset the continued weakness in Canadian market conditions and the ongoing impact there from a stronger U.S. dollar. In addition, the third quarter is the first quarter that includes the most recent acquisition, Pacific Power systems which we closed on mid-quarter. The integration of this business with our existing Los Angeles based switch gear facility is progressing as we steer towards completing that consolidation by the beginning of next year. I’m very encouraged by this acquisition, it has delivered, indeed it has exceeded our expectation so far and meaningfully changed the conversation we have with customers when talking about our product capabilities. The acquisition enhances our technical qualification and provides access to larger, longer cycle project type opportunities, newer customers and very strong end markets. Moreover, it provides us capabilities as a solutions integrator where we will be able to get value for our engineering and integration expertise. This should enable us to maximize our gross margins while also allowing us to use our actual manufacturing capacity in its highest and best form. Pacific’s backlog now exceeds $2.4 million reflecting $1.7 million in new bookings since we closed on the acquisition in August of this year. By effectively completing our portfolio of low and medium voltage switch gear offerings with these acquisitions, we are better positioned for sustainable double digit growth at gross margins that exceed what we could otherwise achieve before at our prior existing Los Angeles based operations. Our dry-type transformer business in Canada known as Bemag represents the largest target of our restructuring activities. Given its systemic challenges in now two years of cumulative losses we are integrating it fully into our U.S. dry-type business Jefferson Electric, to be managed directly by Jefferson’s management team. After the quarter end, we transferred the largest part of Bemag’s production to the Jefferson facility in Reynosa, Mexico. We believe the lower cost structure expected from this move in 2016 and beyond should enable us to compete more effectively and contribute to our growth going forward. As I mentioned earlier, the largest phase of this relocation occurred on October 31st this year and this timing represented our best case scenario vis-à-vis disintegration. We had previously commented that as a result of the business integration that we expected that there would be some loss of sales and/or customers but that the restructuring actions would allow it to operate profitably on a smaller base of volume. I am pleased to report that indeed the opposite bookings since the changeover have actually exceeded our expectations and Bemag has now had two quarters in a row of backlog growth, indeed to its highest level in almost a year. As a result of the changes we have made and are now making we are proactively setting the stage for continued growth and improved profitability in direct response to the poor economic conditions in Canada which still represents a significant portion of our EBITDA albeit at lower levels today. The changes we are making will soon begin to have a direct impact on our financial results creating more balance in our domestic versus Canadian EBITDA and relation to our debt load. But looking just at those list -- just at this last quarter we improved our adjusted EBITDA by approximately $1 million sequentially excluding the $3.4 million of restructuring and impairment charges and other non-recurring and another non-recurring charge of approximately $1.2 million which Andrew will discuss in detail in just a moment. I will now turn the call over to Andrew Minkow, our Chief Financial Officer to provide the details of our third quarter and year-to-date financial results as well as our 2015 and 2016 full year guidance.

Thank you, Nathan. Third quarter revenues were $24.9 million down 4.5% from $26.1 million in the third quarter of 2014. The $1.2 million year-over-year decrease was driven primarily by a $4.5 million decrease in our T&D solutions segment which was partially offset by a $3.4 million in our Critical Power Solutions segment. This increase in Critical Power was driven by acquisition of Titan which contributed by itself $5.7 million in revenue in the third quarter. Gross profit for the third quarter was $4.8 million or a 19.4 gross margin compared to a $6.7 million gross profit or a 25.7% gross margin in the third quarter of 2014. The decrease in gross margin percentage was driven mostly by an unfavorable sales mix within our larger T&D Solution segment, and lower sales of paralleling switchgear related revenue in our Critical Power Segment in 2015, as compared to the year ago period. For the quarter, selling, general and administrative expense, excluding depreciation and amortization increased 13.2% or $4.4 million, as compared to $3.9 million in the third quarter of 2014. Most of this increase is attributable to the Critical Power segment as a result of the acquisition and inclusion of Titan in our result. T&D Solution Segment, SG&A expense decreased by $44,000, down 1.6% over the last year. As a percentage of our revenue, SG&A expenses, excluding depreciation and amortization increased from 15% of revenue in the third quarter of 2014 to 17.8% of revenue in the third quarter of 2015. Operating loss for the quarter was approximately $3.3 million including restructuring charges of $3.4 million compared to operating income of approximately $2.8 million in the third quarter of 2014. The decline was driven largely by impairment charges arising out of the restructuring and our plans to consolidate six manufacturing facilities into three reduction headcount and more closely aligned product lines and supply chain across our reporting unit. Approximately $3.1 million of the $3.4 million in expense represents non-cash charges primarily for access machinery and equipment of facilities -- has changed and will be sold certain raw materials made obsolete by reducing the number of redundant designs in our dry-type transformer catalogue and a small component of intangible assets. As Nathan mentioned, we expect our restructuring activities will yield annual fixed cost savings of at least $2.5 million. Besides from the restructuring charges, the decline was also driven by lower sales and gross profit from our Canadian businesses particularly in our utility sales channel as well as our short cycle distribution transformer product lines where the economic downturn and adverse effect of a stronger U.S. dollar has been felt harder. Following the quarter end, we identified a lapse in the filing payment of approximately $3.9 million in our federal payroll tax obligation and we immediately notified the IRS. As a result, we accrued estimated penalties and interest of approximately $1.2 million all in our third quarter 2015 results. We have since filed all required Federal payroll tax returns and are now paying our payroll taxes on a current period basis. We expect to pay the interest on the amounts due of approximately $80,000 currently and have submitted a request to the IRS for the abatement of all penalties. To the extent our request is accepted then any penalties already recognized this quarter and then will return will be reversed in a future period. Upon discovering the matter, an independent forensic accounting and consulting firm was engaged. Their initial findings are that they were no improprieties in regards to any company assets and no irregularities in our financial statements. Payroll expense was properly recognized and the liability was recorded for all past reporting periods and the incident was limited quite simply to compliance, failure to file and pay. We are now up to date on our payroll tax returns and remitting payments for current payments. As expected, our bank has taken precautionary measures mostly in the form of additional reporting requirements. We reached an agreement last week whereby the bank has waived all defaults at least through January 31, 2016 and has agreed to allow us to use up to 3 million of our current availability under our Canadian facilities for U.S. working capital purposes including partial pay down of our IRS obligation. As the waiver has a limited duration period, it caused us to reclassify all our long term debt with the bank to current in keeping with GAAP. Back to numbers for a minute. Inclusive of these two non-operational accounting charges one for restructuring and the other for payroll which totaled $4.6 million our net loss for the quarter was approximately $3.6 million. This compares to net income of $1.8 million in the prior year’s quarter. Adjusted EBITDA was $1.1 million during the quarter excluding $4.6 million in restructuring and other charges compared to $3.2 million in the third quarter of 2014. Non-GAAP diluted EPS was $0.03 down from $0.28 in earnings in the prior year. Turning now to the nine months financial results for the period ended September 30, 2015. Our revenues for the nine months were $80.3 million, up 17.9% or $12.2 million from $68.1 million in the comparable period of 2014. Breaking this down by segment, T&D Solution’s revenue decreased $599,000 million, down 0.9% compared to the first nine months of 2014. This decrease was driven primarily by $3.4 million in revenue decline from our transformer product categories offset by a $2.0 [ph] million increase in sales of our T&D switchgear related revenue. Revenue from Critical Power Solutions segment increased to $16.7 million or by approximately 328% for the nine months ended September 30, 2015, again due primarily to the addition of Titan’s equipment sales and service business. Segment revenue consisted of $9.8 million in power generation equipment sales and $6.9 million in service revenue, a materially different mix as compared to $3.9 million of revenue during the nine months ended September 30, 2014, which consisted almost entirely of several large paralleling switchgear projects. For the nine months ended September 30, 2015, our gross profit decreased 4.1% to $15.2 million at an 18.9% gross margin, compared to $15.8 million of gross profit or a 23.2% gross margin for the year ago period. For the nine months our SG&A expenses, including depreciation and amortization was $14.6 million or 18.2% of revenues, compared to $11.2 million or 16.4% of revenues in the year ago period. The 30.9% increase in our SG&A dollars was driven primarily by our Critical Power segment, which accounted for most of the overall year-over-year increase resulting from the acquisition and inclusion of Titan in our 2015 result. Our nine months operating income decreased to a loss of approximately $4.1 million, down from operating income of $4.4 million in the year ago period. Net earnings decreased to a loss of approximately $4.6 million, down from net earnings of approximately $2.7 million in the prior year period. Our adjusted EBITDA for the nine months was $2 million compared to $5.7 million in the first nine months of 2014. Lastly, our non-GAAP diluted EPS was $0.01, down from $0.43 per diluted share in the comparable 2014 period. Moving on to the balance sheet, our total debt at the end of the quarter was $16.1 million. As of September 30, 2015 excluding the reclassification of our long-term bank debt to current described a moment ago, we had net working capital of $3.2 million and no cash on the balance sheet compared to net working capital of $9.7 million which included $3.8 million of cash and equivalents as at December 31, 2014. Our ratio of current assets to liability on this basis stands at 1.1 to 1 as compared to 1.4 times at December 31, 2014. We had $4.6 million of available and unused borrowing capacity from our revolving credit facilities as of September 30, 2015. The availability of this capacity under our revolving credit facilities is subject to restriction on the use of proceeds and it's dependent upon our continuing ability to satisfy the conditions of our waiver agreement with bank. Lastly, as Nathan mentioned, we are addressing our 2015 full year guidance. Due to project delays and these non-operational expenses related to the restructuring and the payroll tax matter we're adjusting the 2015 outlook. From now expect revenue between $105 million and a $110 million of which $85 million to $95 million is expected to be derived from the T&D Solution segment and $20 million to $25 million from the Critical Power Solutions reporting segment. Adjusted EBITDA, between $3 million and $3.5 million, and non-GAAP diluted EPS between $0.07 and $0.09. Our 2015 full year guidance is based on the following key assumptions, that there will be no future acquisitions that the foreign currency exchange rate will stay at approximately $0.75 to CAD1, an effective rate at or above 28%, and then ending share count of $8.7 million. We also exclude the effect of any restructuring or non-cash charges arising out of our cost optimization plan. We're also leaving unchanged our preliminary guidance for full year 2016, which includes revenue of between $130 million and $140 million representing growth in the midst to high-teens as compared to our 2015 full year guidance. Adjusted EBITDA between $7 million and $9 million and non-GAAP diluted EPS between $0.55 and $0.65. The 2016 directional guidance is based on the following key assumptions, that there will no future acquisition, stability in the Canadian exchange rate at $0.75 to CAD1, the exclusion of any restructuring and non-cash charges, an effective tax rate of approximately 35%, and diluted shares outstanding of approximately 8.7 million shares. Our 2016 preliminary guidance is driven mostly by growth among our U.S. based businesses and is based on the strength of sales pipeline, expected production cost savings, facility consolidation and external factors which may or may not materialize in a way favorable to us. In Canada we have assumed no meaningful improvement in business conditions and the performance our liquid-filled transformer business will remain stable at its currently depressed level and net losses by our dry-type transformer business can be curtailed. This concludes my remarks. And I'll now turn the call back over to Nathan.

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

Thank you. [Operator Instructions] And we'll take our first question from Matt Koranda with ROTH Capital.

Hey, guys. Good evening. Thanks for taking the questions.

Hey, Matt.

Just wanted to start off with 2015 outlook, [indiscernible] cutting near term the outlook, significant amount here. Maybe you could just talk about specifically where you're seeing the order delays in what business segment? And was that already in the backlog and it’s just delivery has slipped or were those purchase order you were expecting that have not yet come through? Just maybe a little color around that please?

That's really from two segments. It’s the service primarily Verizon and Target in the service side in the Critical Power business. These are awards – these are contracts that are already [spent] [ph]. They're just really shutting it down for the fourth quarter really for themselves. They're not spending right now for the fourth quarter and taking it to the bunker. And the other reduction is that - were going to be portion of the large solar project that we were awarded was going to – some of that was going to go in an accelerated basis in December, that's been pushed back to all into 2016.

Okay. Got it. And then, essentially is that just flowing through then to the non-GAAP EPS expectations as well, I mean, did that hit your margin? Just talk about the moving pieces in terms of kind of the bottom line that you guys have cited to for 2015?

Those delays are definitely a part of it and we’re also expecting some other non-recurring type expenses as a result of some of the news we disclosed on this call.

Okay. But wouldn't those non-recurring expenses be adjusted out of your non-GAAP outlook?

Yes, they would.

Okay. So, those wouldn't really impact the lower non-GAAP EPS guidance. It’s really just – I'm trying to get at it, is there anything below the line that would be moving that non-GAAP EPS down materially further or is it just -- it does sound like just the revenues that were delayed from these orders are what is really driving that lower non-GAAP EPS outlook for 2015?

It's primarily delayed revenue.

Okay. Got it. Thanks. And then just 2016, I mean, maybe talk about your visibility in 2016 outlook. I know it’s a preliminary set of guidance that you guys have given, but what gives you confidence in that preliminary outlook; it sounds like - just give me the puts and takes there, I guess.

Yes. The big part - it’s both on the revenue - on the cost side, on the revenue side we've been awarded the Siemens brand label agreement through Jefferson, because of the new Department of Energy standards we're getting a larger piece of that contract at a higher price. That's a big revenue grower. The Pacific business together with the original business that we had in Los Angeles, their visibility is very strong and indeed as I said earlier, they're exceeding our expectations already for the first and second quarter from a revenue and hopefully profitability point of view for 2016. The liquid-filled business, pretty much the first quarter is done and that's on track, if not a little higher than we would expect and we were initially projecting. So we're pretty buoyant on the – and then again the segments that – one of the segments that’s been dragging badly this year, the switch gear part of the Critical Power Solutions business which did very little revenue, less than a million this year is already probably approaching 2.5 for the first half of the year. That makes a big difference to us to go from – basically to go from a loss to a contributor again from an EBITDA point of view. From a cost point of view, the facility consolidation and the outsourcing that we've done with our partner business in India, all things remaining the same is going to represent a huge cost reduction across a broad spectrum of products for us. So, that's really in a nutshell that's the optimism for 2016. We're not projecting better economic conditions. We're not projecting any resurgence in oil and gas or favorable movements in the Canadian dollar, nothing like that.

Okay. Got it. That's helpful. And then, you mentioned the Pacific Power tracking ahead of the expectation. Could you give us the contribution to revenues this quarter in Q3?

Q3 it was small. It's about $140,000 and one element I left off our answer before is that our guidance for this quarter had originally included a larger portion of revenue from Pacific for jobs that were in process at the time of the acquisition, which is over $1 million. And in the end the way we closed that acquisition as we left [indiscernible] those jobs and the revenue associated there with the older owner, so didn't get account them in our result.

Okay. Got it. So ex those projects that is tracking ahead of your expectations then was the 140,000 contribution?

Yes.

Okay. Okay. Got it. In terms of the charges for the payroll tax compliance issues, maybe we could zero in on just specifically was with a particular business segment or is it across the segment?

It was across payroll taxes for U.S based employees.

Okay. So, for all U.S. based employees, okay?

Right.

Okay. Got it. And then, how much of that $1.2 million accrual that you guys talk is potentially going to be a cash payout to the IRS, or penalties and I guess for past due payroll taxes or is it I guess maybe just some color around that would be helpful?

Right. So the 1.2 is 80,000 is interest, the balance is the maximum penalties that could be possibly be assessed. It's our expectation that that's not going to happen. Indeed, we are in a position – we're probably, it’s most if not all should be abated, but obviously we don't know any of that and it’s going to months before that's going to be hammered out in any way with the IRS. So we took the biggest and broadest accrual, maximum number of penny -- maximum number we could take this quarter, because we don't know otherwise.

Okay. What gives you confidence that it gets abated, I guess, just a little color on that?

I have to careful because some of the deals with some employee matters and I don't want to prejudice any kind of dealings that we may have with some current or ex-employees. But we self reported, we discovered, the IRS didn’t discover it, we reported not a week later, we reported that day to them. It deals with an employee that had issues. The proverbial rogue employee, we self reported and have owned up to it. So that sort of almost by statute entitles us to not to have to pay these kinds of penalties, but until that's done in an agreement formally with the IRS we are taking this charge.

Okay. Got it. That's helpful. Maybe we can just talk quickly also about the precautionary measures the bank is taking that you guys were alluding to in the prepared remarks; essentially just could you run through those in detail once more you guys kind of ran through it pretty quickly. And I guess are they restricting or tightening the covenants at all on any of the debt or is it mainly just additional reporting requirements?

It's mostly additional reporting requirements, more periodic too, and these affect our earnings for this year as well. We're looking at higher interest rates and what we had outstanding by approximately 2.5% on our Canadian debt which is small amount outstanding and 2% on our U.S. debt. As far as the covenant, they're not being recalibrated at the moment. The bank has decided just not to test them. We have a waiver through January 31. They're going to collect more information and during this interim period what they've done is they've permitted us to use 3 million of our unused capacity in Canada in order to fund our U.S. working capital growth needs including to pay payroll tax. So, as of the moment we're just in collection – information collection stage, nothing has changed. They wanted to monitor our financial performance. See what the things with the IRS. And if everything should workout to plan and as we hope and expect sometime early next year or a few months into next year, we can look forward to a new set of covenant and an agreement that will put us in a position where we are continually achieving and maintaining compliance with those financial covenant.

Okay. And then, what's the January 31 date, maybe you just explain why was that date chosen and potentially what happens after January 31, I mean, they were getting in the speculation about here, but maybe if you can describe I guess what's going on with the date there?

Sure. My interpretation of whatever it was the bank thought. But the bank wants more information and ability to study. More information being monthly reporting, some weekly cash forecasting, so they can get a better feel on how we're spending our cash, and January 31st is the date by which I think they'll have a – I assume enough information to decide would if any or next step, do they extend the waiver. Do they move right to recasting the agreement, new covenant level based on where our performance hit.

Okay. Got it. And just a couple of more guys, if we could talk about T&D Solutions, you've guys have mentioned in the prepared remarks a bit of progress in terms of consolidating Bemag and Jefferson, so maybe you just highlight for us, what else is left it sort of move, especially in terms of production and do you still expect to have all of that effectively done by the end of Q1, 2016?

Right. The bulk was done the biggest target of the restructuring with Bemag, the bulk was done by the end of October. Last quarter when we talked about it, we sort of said, that would be the earliest and sort of gave ourselves to the end of the year, so we did hit the earliest point to that and that's going to impact the fourth quarter favorably, because we'll get two months of those kinds of savings already in the fourth quarter. There's a smaller portion of Bemag that's going to be moving again, we're saying no later than June of next year. We think we'll do it well earlier than that, but that's left to be done. There are two facilities in Minneapolis are consolidating by first quarter.

Yes, end of January.

End of January, okay, somewhere in the first quarter, 2016 and the two facilities in Los Angeles for the most part our consolidating the end of the year, December 31 maybe a little bit a hangover for one or two pieces to finish up there, but almost immaterial.

Okay. Got it. That's helpful. And then just maybe we can talk briefly about the pipeline of business for Titan. I mean, now that you guys have won some additional business here, maybe you can talk about the prospects, what you're seeing in the pipeline for Titan and how that could kind of swing revenues in 2016? Have you already handicapped those and they are included in guidance or there are items that essentially are not envision in guidance, yet that maybe swing things a bit higher or lower?

Yes. Titan, I think I guess for me – I'm not looking at Titan to swing much higher from a revenue point of view in 2016, hopefully 2016 will be smarter and more profitable revenue that we do out of Titan. So, they'll probably repeat this year's revenue of $20 million or so and probably maybe a little bit more next year, but it's really going to be what that mix is both on the equipment and on the service side. So, Titan contributed this year positive EBITDA to the business probably a little bit more than maybe we thought would be for the first year considering that they lost money under the prior as an independent business for the last couple of years, so that's been a great swing. But it's really about going up to the larger propositions, the more valuable propositions there and being smarter about the service revenue. The big potential to swing up, sort of the gravy for next year is really in Jefferson and in both Switchgear businesses, both the Critical Power parallel in gear and in the Pacific part of the business that we bought. Those are the big swingers. They already exhibiting the pipeline and what's going on and the transactions are already exhibiting that. So, I think Pacific where we would have – we're budgeting them at about 5 million for next, that segment of the business I think they'll handily beat that. Bear in mind that that's a very profitable business. So every beat there is – every million has a very large impact from a bottom line point of view. I think Jefferson will also – they had the greatest potential next year to beat. They're coming in with a very strong cost structure, very modest cost structure in a very liquid market and we're already seeing those benefits. Jefferson had an outstanding quarter. This third quarter we're expecting them to probably have an all time higher quarter not just in revenue but in way -- by far in profitability for the fourth quarter as that outsourcing program takes deeper and deeper root.

Got it. Very helpful, thanks Nathan. I’ll take the rest of mine offline and I’ll jump back in queue later. Thanks Brett.

Thanks, Matt.

[Operator Instructions] And if there are no other questions, I’d now like to turn the call back to management for any additional or closing remarks.

Okay, thank you all for your time and support and we look forward to updating you again in our next call. Have a great evening.

Ladies and gentlemen this does conclude today’s conference. We thank you for your participation.