Brett Maas – Hayden IR Nathan Mazurek – Chairman and Chief Executive Officer Tom Klink – Chief Financial Officer

Matt Koranda – Roth Capital Gregg Hillman – First Wilshire Securities Management

Good day and welcome to this Pioneer Power Solutions, Incorporated First Quarter 2017 Earnings Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Mr. Brett Maas with Hayden IR. Please go ahead.

Thank you. Good day and welcome to this Pioneer Power Solutions 2017 first quarter financial results conference call. The call today will be hosted by Nathan Mazurek, Chairman and Chief Executive Officer; and Tom Klink, Chief Financial Officer. Following this discussion, there will be a formal Q&A session open to participants on the call. Before we can start, let me remind you this call is being broadcast over the Internet and a recording of this call and the text of managements prepared remarks will be available on the company’s website. During this call, management will be making forward-looking statements. These statements are based on current expectations and assumptions that are subject to risks 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 yesterday, and in a posted version of these prepared remarks, both of which apply to the content of the call. I’d now like to turn the call over to Nathan Mazurek, Chairman and CEO. Nathan, please go ahead.

Thank you Brett. Good morning and thank you all for joining us today for our conference call. The first quarter of 2017 demonstrates the progress we have made and continue to make to improve Pioneer’s profitability profile. And increase shareholder value. We have eliminated most of the drags in our business and are continuing to take steps to improve our profitability. During the first quarter, we delivered year-over-year increases in both our operating income and adjusted EBITDA, while facing routine seasonality, which impacts both our service and equipment business during the first quarter. Looking forward we remain confident this will be a year of growth for us. We are reiterating our 2017 financial outlook that we have previously provided. And I am increasingly confident that we are on pace to achieve our stated goal. Looking at the results by operating segments in our transmission and distribution solutions or T&D Segment. We delivered a 5.5% increase in revenues year-over-year. It is important to note that our switchgear business delivered a modest profit contribution to Pioneer this quarter. Last year this business lost nearly $700,000 and was one of the primary areas of focus for us to address this historical systemic losses in this business. Specifically, we refocused our efforts on the more customized parts of the business that reward us with higher margins and took additional steps to address the profitability of this business. We have worked through most of the backlog for the lower margin business, that have previously been booked. And while we have more work to do, the business is in much better shape today than it had been in the past. I am encouraged that this business turned to modest profit in the first quarter, and now has the cost structure and appropriate backlog to make this a meaningful contributor to our 2017 bottom-line result. The mix of business in this segment resulted in a slightly lower gross margin in the first quarter of 2017. The change was due primarily to lower margin switchgear and dry type transformers sales. Partially offset by an increase in our liquid filled transformer sales. We continue to see growing good demand in this segment for our solutions to support distributed generation, Microgrid, data center and Medical Marijuana customers. These opportunities are significant and we expect these to contribute to our results in our growth in 2017 and beyond. We are expanding our production specifically renewable energy and stern OEM product lines produced in India. The development of this manufacturing capability in India is enabling us to compete in certain opportunities, where we have not participated in several years due to less favorable margins. Our Critical Power Solutions segment experienced the revenue impact of service, contract and equipment seasonality. Per our strategic plan however higher margin service revenue increased nearly 24% in the first quarter offset by a larger decline in equipment sales. As a result gross margins in our critical power segment more than doubled to 21.4% from 10.6% a year ago. Critical Power business typically ramps up in the second and third quarters. So we expect to see a more meaningful growth in the coming quarters. It is important to note that last year our Critical Power business generated approximately 62% of its EBITDA in the second half of the year. In addition, we recently announced two significant contract extensions, which should benefit our growth in 2017 going into 2018. The first was a three year approximately $3 million expansion and extension with one of the largest mobile operators in the industry. Our Critical Power segment will service and provide preventive maintenance for backup generators at the customer's cellphone tower site in an additional two state, bringing us to nine states total. The second service win was a three year, service agreement with one of the nation's largest drugstore chain. This agreement calls for us to service and maintain 100% of the customers 215 backup generator sites. This agreement is expected, to generate a minimum of $400,000 annually of additional service revenue. And we have opportunities for additional business with this critical customer. We continue to believe additional earnings improvement is achievable and sustainable within this segment. Our backlog at March 31, 2017 was a healthy $36.7 million compared to $38.5 million at the end December 31, 2016 and up from the $35.2 million as of March 31, 2016. We expect an increase in our backlog when we report the June 30, results. I will now turn the call over to Tom Klink our Chief Financial Officer to discuss our financial results and review our 2017 full year guidance and underlying assumptions.

Thank you Nathan. Good morning everyone. First quarter revenues were $27.3 million, up 2.6% compared to the $26.6 million in the first quarter of last year. Gross profit for the first quarter was $6.1 million or a 22.4% gross margin compared to $5.9 million or 22.1% gross margin in the year ago quarter. For the quarter, selling, general and administrative expenses increased 3.7% on an absolute dollar basis to $4.9 million compared to $4.7 million in the first quarter of 2016. As a percentage of revenue, SG&A expenses increased slightly to 17.8% of revenue in the first quarter of 2017 compared to 17.7% in the first quarter of 2016. The first quarter of 2017 included $155,000 in restructuring and other nonrecurring expenses compared to $119,000 for these categories in the first quarter of last year. As you might recall in the first quarter of last year we received an abatement of penalties in interests from the IRS on our past two payroll taxes of $369,000, which reduced the prior year expense. Operating income for the first quarter of 2017 was $1.2 million including these non-recurring expenses. Compared to $1.1 million inclusive of non-recurring expenses in the first quarter of 2016. Our effective tax rate for the first quarter of 2017 was 68% of pretax income as compared to 28% for the same quarter last year. The increase in tax rate was due primarily to the inclusion of deemed dividends from the Company’s Canadian operations. This tax is incurred as we transfer money earned in our Canadian operations to the United States. Excluding the impact of the deemed dividends the effective tax rate was 31.2%. Net income for the quarter was $133,000 or $0.02 per basic and diluted share, compared to $569,000 or $0.07 per basic and diluted share in the prior year’s quarter. Adjusted EBITDA was $2.1 million during the quarter or 7.6% of revenue, compared to $2 million or 7.6% of revenue in the first quarter of 2016. Non-GAAP diluted EPS was $0.17 in the both the first quarter of 2017 and the first quarter of 2016. Turning to the balance sheet in the statement of cash flows, our total debt at March 31, 2017 was $27.3 million, relatively unchanged when compared to $27 million at December 31, 2016. For the quarter ended March 31, 2017, we generated cash from operations of $978,000, as compared to the prior year period when we used cash in operations of $4.75 million. Turning to our guidance, we are reaffirming our full year 2017 revenue, net income and earnings per share guidance. Our guidance is based on expected business trends and the current composition of the order backlog excluding the impact of any potential acquisitions and any significant fluctuations in foreign currency exchange rates. For 2017, we expect revenue between $120 million and $127 million, net income between $3.5 million and $4.1 million, diluted earnings per share between $0.40 and $0.47. This GAAP guidance implies adjusted EBITDA between $10 million and $11 million and non-GAAP EPS between $0.83 per share and $0.93 per share. This guidance assumes no future acquisitions of currency exchange rate of $0.74 U.S. per Canadian dollar and effective income tax rate of 28%, a share count of approximately 8.7 million shares. And we exclude the effect of any restructuring and non-cash charges arising out of our cost optimization plan. Our outlook represents continued margin expansion and further improvement in profitability as we continue to benefit from the operational improvements we have made and continue to make. We remain focused on higher margin opportunities resulting in targeted growth. We see continued strong demand for our solutions as we expand our presence in the areas of microgrid, distributed generation, on-site generation service and data center solutions. The continued bottom-line improvements are due to our ability to extract operational leverage from our businesses and we are confident we can further expand profitability and cash generation as we scale the overall business. This concludes my remarks. I will now turn the call back over to Nathan.

Thank you, Tom. Operator, I’d now like to open the call for questions.

Yes, sir. Thank you [Operator Instructions]. And we’ll take our first question from Matt Koranda with Roth Capital.

Good morning, Nathan, good morning, Tom.

Good morning, Matt.

Just wanted to start off with the breakdown between T&D and Critical Power Solutions, could you just give sort of – if there’s any update to your outlook between those two segments I think, last time you guys had indicated about $20 million expected from Critical Power, is that still the case?

That is still the case, correct for the year.

Okay, got it. And then just in terms of the quarter, could you maybe help us understand just maybe the breakdown as I think you guys had mentioned strength in dry-type, was it liquid filled that was slightly weak or was that sort of as expected maybe could you give us the puts and takes between liquid and dry-type?

Sure, Matt. Both the transformer segments liquid-filled and dry-type combined, we’re up about 15% in total or about $2.9 million. The switchgear group was down about $1.7 million in revenue or about 43%.

Okay, got it. And I think you guys mentioned in the prepared remarks or at least in the release that it was medium duty that drove that weakness, could you just give a little more color on sort of the end market that were maybe soft and does that imply the specific is that as well or is that just component now?

Yes, so the switchgear business that you're familiar with, that decrease in revenue was really by design, as we are flushing out really the backlog that was less than stellar for us, less than optimal type work. We really only we were producing pretty much not 100% but revenue with a better margin work, the proof of the pudding was that business actually made a little bit of money essentially a little bit above break-even. So while they had a deliberate decrease in revenue that profit story there, is beginning to emerge and that's we're looking for them to actually making more significant contribution in the second half of the year. So that was really there's no end market softness it was on the T&D side, switchgear was deliberately down a bit from the prior year even from the prior quarter as we continue to go through this backlog that we were less than excited about, the core business the transformer business was strong. And Critical Power its in nature which we expected their first quarter is only their slowest as people don't want to pay for the more expensive service that goes on during January and February and March and really don't want to take equipment on broken ground for the most part. So this was not – this was nothing here was unexpected for us.

Got it, yes, just the shedding of the lower margin revenue that they’re going to sell. Got it, on inventory it does seem a little high in terms of raw dollars and days if you guys just talk about sort of what’s in there that’s driving in a little higher and then how you're planning on managing that inventory and when it may flush out during the year?

Yes, Matt, Tom here. The inventory went up in each one of the segments. In the Critical Power segment it went up as we're bringing these service contracts online getting some more parts inventory et cetera, et cetera. We also were setting up a node in South Dakota during the quarter. So there was inventory to support that node that was added. In the T&D solutions area, the backlog for the liquid-filled group is strong, their inventory went up to support that backlog as we are looking for them to have a robust second and third quarter and need the material to be in place to do that. Switchgear there was some growth there, medium voltage project tend to take a little bit longer through the facility so there were some growth in the inventory there as well. And finally, with the conversion or relocation if you will of the Farnham location to Reynosa for the dry-type transformer business, medium voltage dry-type transformer business there was duplicative inventory that was put in place in Reynosa to begin production while we were finishing up our production in Farnham. We anticipate the inventories to stabilize at Critical Power, there should not significant growth needed in that group anymore, until we add the note later this year in the Orlando or Tampa area. In the T&D Solutions, we would expect the liquid-filled inventories to come down during the course of the year or at least remain flat as their order rate remains strong. Switchgear, there are some jobs in there that we’ll be shipping out here in the second and third quarter, and those should allow that to tick down some. And then finally in the dry-type side, the inventory should go down because we don't need the duplication of inventory. And so that will come down to a more normal level here by the end of the second quarter and continuing on into the third and the fourth quarter.

Got it. So, net-net, it sounds like you guys should be generating some cash from inventory as things pick up seasonally for certain segments through the reminder of the year?

We fully expect inventory at the end of the year be flat for year-on-year or hopefully to push its weigh down with some of the initiatives we have in place.

Okay. So flat year-on-year would mean you guys would be flushing out roughly, I mean, do you see down to that low $20 million range in terms of inventory or is that – are you saying flat from the current level?

No. We started out the year at $26 million in inventory, Matt, at December 31. So right now we’re closer to $30 million. I would expect us to go back to $26 million and then down from there.

Okay, got it.

So, flat to a $1 million down for this year would be a win for us and then continued movement down is our goal.

Got it. Okay, I was looking at the wrong quarter here, so that makes sense.

All right.

In terms of the backlog, I think Nathan you mentioned, you expect to report an increase in backlog when you guys relate to Q2. Can you just help us understand sort of what's in the pipeline in the near-term area that gives you confidence in that increase?

Yes. I mean, the fixed components of our backlog is only those liquid-filled and the switchgear business, they're the ones with the long lead projects, so that's really what comprises the backlog. The rest of the business is Critical Power and Jefferson, although being a large segment, they don't – they're not that high on the backlog, they're very immediate type parts. So liquid-filled was a little down on the backlog at the end of March 31, that’s backup actually and actually going strong. The first half of this year if you just use Canadian dollar to Canadian dollar, I don't convert for historical purposes, but it should be the second highest volume half that we've ever had historically. So that part is strong. The switchgear backlog was down as we were pushing stuff through and not really replenishing it with the same low voltage small type orders that were not beneficial to us. I don't expect their backlog to decrease any more, but I expect them to kind of stay stable from a sales point of view through the balance of this year as we put it in a position, where – we've got to first maintain an operational profit this year, put into position where they could grow profitably is opposed to growing – I don't know, more in a haywire way as that we did in the prior years.

Got it. I think over the last several months or so you guys have mentioned an uptick in quotation activity from oil and gas customers, but I think that the actual orders were kind of not really fully coming through, and you guys weren’t counting on them necessarily. But I wanted to understand what have you seen there an update just in terms of your activity on that front for the liquid-filled?

Yes. I don't want to say its zero, we want to be precise. There's very little activity in oil and gas, there's very little activity in metal. And mining, any kind of work that we see there is small and it's either replacement or some upgrade of an existing operation, nowhere near the kind of spend and the kind of activity that we were used to in 2013 and 2014, and we don't expect not in none of our expectations for this year. And frankly, as this year goes by it may not be in our expectations for next year either, unless there's going to be an uptick soon that we would actually benefit. The pipeline business though is strong. So oil and gas exploration is not doing well, but pipeline is doing well, and we expect to start seeing things related to the Keystone and Dakota type pipelines later in the year from an order point of view. But the most – I guess the most dynamic markets that we're engaged with right now are still distributed generation microgrid. Those customers that were successful for us in 2016 are more successful this year. They continue to book more work, larger work, and the more successful they are, the more successful we are. Data center is still a very robust market for us, one that we continue to do better and better as we expand our group of customers there. And as these customers continue to compete respectively in that market, those would be the two fastest, most significant pieces. And then on the service side, that business continues to grow the service of the equipment. We are putting as much effort as we think we can in growing that business primarily in the telecommunications and retail arenas with the focus really on telecom that the cell tower sites are more lucrative for us, they're more available and we do better. But retailer is the other we’re kind of – I don’t want to say we do nothing, but we shied away starting last year from the one-off, two-off type operations and that business rewarded pine year significantly last year, so we're trying to build on that. Sorry, it’s a long answer to your question.

No, that’s helpful, Nathan. Thanks. Mentioning the – I guess, the Critical Power business, I think you guys have said that about 62% of the EBITDA in that business was generated in the second half last year. Is that sort of what we should expect in terms of cadence for this year? Is it going to be kind of seasonally second half weighted as well or even more so? Just a little bit of help there on that would be great.

Yes, it's going to be about the same, maybe even a little bit more. I mean, the large retail drugstore chain that we picked up, their revenue is not going to start kicking in to a full extent until the third quarter. We're only going to see a little bit of that in the second quarter as they transition from their current vendor. Yes, I mean, that's the nature, we should have learnt I guess from last year and we did expect that. I think we didn't communicate it well enough on a quarterly basis, but their first quarter is only the weakest. We are in the Midwest, we do listen till – now it's May, but even in April we were still be doing service calls on snowmobiles for a lot of the customers. So, they tend to – they tend to customers tend to schedule a lot of the work in the second half of the year. Second and third quarter, but primarily the third and last year, the fourth was their most outstanding quarter as everybody wanted to get certain things done before it was too cold or too late in the year. So, I think, yes, I think at least that much if not more will be back end at this year.

Okay. I got it. And then just – could you talk a bit about what you're doing in the service business to drive and prevent the margins? I know that that the natural flow toward more service and less equipment helps your margins, but are there things that you're doing on the service side that will enable margin improvement during the year in 2017 or recounting on that for to hit the EBITDA range that you…

Yes. I don’t know to what extent we’re counting to hit the EBITDA but its part of the natural – its part of our job every day to enhance the margins and improve the value of the business. On the service side we continue to try to be smarter about it, but I think I just mentioned a little bit earlier, we do better for reasons – for practical reasons, we do better on the telecom. It’s more efficient, we’re able to do more calls per day. We’re able to leverage the technicians in a more efficient manner than we are on the retail side. That being said, we are still pushing retail because it’s a far cry from sending people to 25 disparate customers in a day. So as we continue to do more and more on the telecom side that improves – nature improves the margins for us. We’re doing more for national type customers we’re doing more on a sales performance basis. So we’re using more and more of our own technicians as we expand into other states with service contracts primarily with cell tower type customers, that allows us to absorb a technician or technician in those arenas and they were able to as opposed to – a customer like Target for as opposed to using a sub contractor to do some of the work we’re able to do more that ourselves and that that of course improves the margins.

Got it very helpful. Maybe just one last housekeeping item. I know you mentioned in the prepared remarks that the tax rate was a little higher. Given some transfer pricing between the Canadian and U.S. operations. But if you just give a little more color there on whether you expect that to continue in terms of having dividends or should we be using kind of that low 30% rate on a go forward basis.

The first – during the first quarter Matt, we tend to take money from our Canadian operations to use in the United States. And the way it spends for several years that doesn’t seem to occur with as much frequency during the second, third and fourth quarter. Also with working on reducing the inventories et cetera, the need to put money into the United States from Canada should be the last or will be the last. So that should result in a more normalized tax rate as we don’t move money made in Canada into the United States. This is of course are subject to change should current tax policy to be modified as they’re talking about on areas like this. But at this point in time, we would expect to move closer to that high 20%, low 30% tax rate during the balance of this year.

Okay. All right guys, thank you.

[Operator Instructions] We next move to Gregg Hillman with First Wilshire Securities Management.

Yes. Good morning, gentlemen. Hey, Nathan first of all, on the data center are you moving the direction to provide like a more robust solution – the customer in terms of helping them to reduce the operating costs, CapEx costs by partnering with other people with more sophisticated software’s that optimize data center operations, do peak shaving, have batteries and that sort of thing.

First of all, good morning, Gregg. We are not – we are not really participating with data centers and that’s part of the market. We do participate with our customers that are doing distributed generation or microgrids or both for industrial or government type customers and the data center world our primary focus not the exclusive focus but our primary focus is inside the room with the power distribution units. That’s mostly an OEM focused for us. A couple of years ago maybe three years ago it was probably zero revenue for us or extremely low, today it’s a very significant portion of the OEM magnetic business that we do. If I went through all the projects we did in 2016 there are probably some that relate to data center construction from a transformer and switchgear point of view. I couldn’t pull the numbers on top of my head. But we’re really competing with a more valuable solution is inside the server room for a special magnetic that we are manufacturing for the power distribution units right now. That’s when we – when we say data center that’s what it means to us primarily.

Okay. And also could you talk about the Santa Fe Springs a little bit in terms of what your goals are there. And where you’re at right now?

Yes. Well, as the town, is a lovely town they have a rail museum, but for our facility that there. Yes the goal was to really start – we have a lot of value added type product lines that we manufacture – the engineering capability is very diverse. The mission starting last year although we were not successful in getting any value out of it last year, getting any profit out of it last year, we lost $700,000 there is to really focus on those areas where we’re unique or more unique than others and make a profit on those type – that type of work. Pretty much got room – most of that towards into the first quarter of this year, we had some managerial changes that we made towards the end of last year and completed the end of the first quarter of this year and we are seeing proof of the pudding is only we will make money or not and they actually made a small profit in the first quarter. I’m expecting them to contribute more, the primary areas that we focused on now there are either the integration – manufacturing integration of power houses. The controls engineering business, the paralleling switchgear and custom made transfer switches, and custom medium voltage gear. So we really – we don’t take any of the small low voltage jobs, no matter what the premiums are and we’re really not doing anything, any project that probably if I use the number like $100,000 or less I still might be on the low side there. We just can’t afford to apply the engineering talent and manufacturing expertise to projects that small. And we hope to see further benefits this year.

Okay. And on the marketing side, are you going to be able to – do you think that’s capable increasing their sales by 20%?

I think they – I only say it, in that business in particular we don’t have a revenue challenge there, the challenge there has been to make money. So the first step this year is for them to do – I don’t know, $50 million a year and make money at it on a consistent basis prove out the theory and then put them in a position where they can grow. And then grow in what segment more intelligently would be the next challenge. But this year – last year the challenge was to get to this point, this year the challenge is to do it now four quarters in a row and continue to increase the amount of profit that we’re able to ring out of that business right now. It’s really walk before you can run type business, they have the talent, they have a good reputation, we learned unfortunately the harder way that there’s no trick for taking a lot of revenue into ramping up the business if you’re going to just go haywire.

Okay. Got it. Thanks for your comments.

[Call Ends Abruptly]