Brett Maas - Hayden IR Nathan Mazurek - Chairman and CEO Tom Klink - CFO

Michael Potter - Monarch Capital Group

Thank you. Good day and welcome to Pioneer Power Solutions' 2015 fourth quarter and full year 2015 financial results conference call.

The call today will be hosted by Nathan Mazurek, Chairman and Chief Executive Officer, Tom Klink, 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 fourth 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 be making 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 the call. I will now hand the call over to Nathan Mazurek, Chairman and CEO.

Nathan, please go ahead.

Thanks Brett. Good afternoon and thank you for joining us today for our conference call.

The results we reported today underscore the progress we have made and bolster our confidence for 2016. For the year our revenue was in line with our revised guidance at $106.5 million for the full year and our adjusted EBITDA came in at $3.8 million exceeding the guidance of $3 million to $3.5 million for the year.

But the fourth quarter really shows the significant progress we have made. For the fourth quarter we grew revenue 5.3% sequentially and 8.8% year-over-year.

More importantly we narrowed our operating loss by $1.4 million and increased our adjusted EBITDA by more than 91% sequentially due primarily to the cost reduction initiatives we've put in place. As discussed in our third quarter conference call, we took decisive actions to rationalize our business, streamlining operations to put us back on the right path.

As part of this, we essentially consolidated six manufacturing facilities to three. In addition we've outsourced certain lower margin activities and adjusted our headcount.

As a result of these efforts, we expect to reduce our annualized fixed cost by at least $2.5 million. Essentially all of this is now been completed on or ahead of schedule.

A large portion of this initiative was completed during the fourth quarter and the remainder was completed during the first quarter. As a result, the benefit of the expense reductions is not fully seen in the fourth quarter financial results as several of the facility consolidation initiatives occurred during the first quarter.

Nevertheless we generated $1.9 million in adjusted EBITDA for the fourth quarter representing a positive swing of $900,000 on a sequential basis from the third quarter and up $2.7 million compared to negative adjusted EBITDA in the fourth quarter of last - of 2014. Annualized this would be almost $8 million in adjusted EBITDA and this gives us the confidence to raise both the bottom end and the high end of our guidance range for the 2016 adjusted EBITDA.

In the press release we issued earlier today we provided an outlook of $8 to $9.5 million an adjusted EBITDA for 2016. This represents projected profitability growth of 110% to 150% compared to 2015.

As we focused intently on profitable growth, we are also narrowing our full year revenue guidance today. This reflects our focus on higher margin, more customized projects where our expertise and customization efforts are appropriately rewarded.

As a result, we are electing not to pursue certain lower margin business specifically we will be deemphasizing certain parts of our business lines including parts of our Canadian distribution business, a portion of Titan equipment business and some of the lower margins switch gear business. This is resulting in slightly lower projected revenues compared to our original guidance for 2016 but higher profit margin enabling us to achieve the increase adjusted EBITDA guidance I mentioned earlier.

It is important to note that even as we narrow our focus and deemphasize certain low margin businesses, we are still projecting 2016 revenue of $117 million to $127 million representing growth of approximately 10% to 20% compared to the revenue for the full year 2015. We expect our first quarter to show meaningful improvement compared to the first quarter last year consistent with typical seasonality in some of our businesses and do good compensation of the projects in our backlog we expect our financial results to show further improvement as we move through 2016.

We expect the first quarter to be the lowest in terms of profitability and we expect that profitability to accelerate as we move through the year. The project oriented nature of our business particularly our Pacific Power business and lower service revenue from Titan in the first quarter due to weather constraints leads to non-linear results and several of the larger projects are expected to kick in during the second quarter and benefit to second half of the year as well.

We do expect each quarter in 2016 will be better in terms of revenue and profits than the same quarter in 2015. Turning to our two operating units.

In our Transmission and Distribution Solutions or T&D business, we continue to be impacted by a strengthening U.S. dollar and continued systemic weakness in the Canadian economy.

Offsetting this weakness has been the strength of our U.S. custom magnetics business and continued growth of our U.S.

switch gear business. Our most recent acquisition Pacific Power Systems purchased in July of 2015 in which we closed - excuse me - in July '15 has significantly exceeded our expectation.

Pacific has a more - has more robust business opportunity than we anticipated when we acquired them, its backlog has grown faster than we expected and the enterprises in general more profitable than we expected. In terms of product profile and market opportunity, this milestone acquisition has delivered exactly what we expected it would significantly enhancing our product offerings and providing access to larger, long cycle projects, new customers and end markets with our combined offering.

As of April 1, we will have fully integrated this business with our existing Los Angeles based switch gear facility improving the efficiency of both businesses. The backlog as of December 31, 2015 for the Pacific business exceeded $2.7 million and cumulatively since we purchased the business in July of 2015, we have booked over $5.4 million in new business.

In the last five years, in no single year did Pacific actually have revenue of more than $5 million than any one of those given years. So clearly we’re well ahead of Pacific's historical pace.

By effectively completing our portfolio of low and medium voltage switch gear offerings with this acquisition, we are better positioned for sustainable double-digit revenue growth at gross margins that exceed what we could achieve from our legacy Los Angeles based switch gear operations. Shifting to our Critical Power Solutions segment, where our sales and recurring service business continues to be strong.

We still expect earnings improvement from this portion of our business in the coming quarters. As I mentioned earlier, we are planning to be more selective in 2016 deemphasizing lower margin revenue.

This will impact the portion of Titan's equipment sales. In the Critical Power segment, our focus will be in expanding the broad base and profitability of Titan service business.

Titan already enjoys the solid and growing base of recurring service revenue that continues to expand, most of which originates from preventative of maintenance contracts for backup power system. For the year, service revenue grew to nearly 9% of total revenue up from 1%.

For 2014 due primarily to the full year contribution of the Titan business. We remain encouraged by the margin and EBITDA contribution we believe Titan can add to our overall results and by improving our selectivity in the business we pursue we think we can further expand these product profit margins.

As I’ve mentioned on prior quarterly calls, our Canadian distribution businesses unit has not performed as we expected and the most significant changes in our operations from our restructuring activities were targeted at improving the results from this business. During the fourth quarter, we completed the transfer of certain manufacturing operations of this business unit to our existing facility in Reynosa, Mexico and we outsourced certain other products to Asia.

In 2016, we are concentrating on maintaining the growth of this business as profitable meeting voltage dry-type transformer product and we are currently running at a pace that is double the volume of last year based on what we have shipped through March of this year and based on the amount we expect to ship through the end of June this year. I will now turn the call over to Tom Klink, our new Chief Financial Officer to provide the details of our fourth quarter and full year financial results, as well as our updated 2016 full year guidance.

Thank you, Nathan and good afternoon everyone. Fourth quarter revenues were $26.2 million up 8.8% compared to the $24.1 million in the fourth quarter of last year.

The increase was largely driven by the growth in our Critical Power Solutions segment and increasing recurring services revenue from our Titan acquisition. 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.

In the quarter the effect of foreign currency translation on sales had a negative impact of $1.5 million. Gross profit for the fourth quarter was $5.9 million or a 22.6% gross margin compared to $2.4 million or 9.8% gross margin in the fourth quarter a year ago.

As a reminder the cost to sales for the fourth quarter of last year included approximately $900,000 in expenses relating to the first three quarters of last year. For the quarter selling, general and administrative expenses increased 35% on an absolute dollar basis to $5 million as compared to $3.7 million in the fourth quarter of 2014.

As a percentage of revenue, SG&A expenses increased from 15.2% of revenue in the fourth quarter of 2014 to 19.2% of revenue in the fourth quarter of 2015. Operating loss for the quarter was $1.2 million compared to an operating loss of $2.6 million in the fourth quarter of 2014.

The fourth quarter of 2015 was impacted by a $2.1 million restructuring charge incurred for plant closings and consolidations, as well as the impact of penalties and interest for not filing and paying the company's pay roll tax liabilities in a timely manner. The fourth quarter last year included the previously mentioned expenses of $1.4 million related to the impairment of all the good will and a portion of the intangible assets associated with our Bemag transformer business in Canada.

Net loss for the quarter was $1.3 million compared to a net loss of $2.9 million in the fourth quarter of last year. Adjusted EBITDA was $1.9 million during the quarter or 7.3% of revenue compared to a loss of $800,000 in the fourth quarter of 2014.

Non-GAAP diluted earnings per share was $0.16 per share this year compared to a negative $0.18 per share in the fourth quarter of last year. Now turning to our 12 months financial results for the period ended December 31, 2015.

Our revenues for the year were $106.5 million up 15.5% compared to the $92.2 million last year. Breaking this down further revenue from our transformer and switch gear product lines decreased by $1.7 million or 2% driven by lower sales from our Canadian operations which were partially offset by significant growth in our OEM solutions which were up 43% or approximately $4.1 million.

Our Critical Power segment saw significant growth up $16 million or 254.5%. The increase in Critical Power revenue was both by the timing of acquisitions and internal growth.

On the acquisition side, our Titan acquisition which we completed in December of 2014 contributed approximately $19.9 million of our Critical Power revenue growth. For the 12 months ended December 31, 2015 our growth profit was $21.1 million or a 19.8% gross margin compared to $18.2 million or a 19.7% gross margin last year.

As for our sales mix which is instrumental and understanding shifts in our consolidated gross margin for the 12 months ended December 31, 2015 as compared to 2014, our liquid-filled transformers represented 28% of our consolidated revenue which is down from 42% of our consolidated revenue a year ago. Dry-type transformers represented 41% also down from 45% a year ago and CPC equipment represented 8% of our sales for the 12 months ended 2015 up 5% in 2014.

For the 12 months our SG&A expenses were $21.2 million or 19.9% of our revenues compared to $15.2 million or 16.5% of revenues for last year of 2014. Approximately 80% of this increase is due to a full year's work of expenses from our Titan acquisition.

We also had non-operational expenses impact both 2015 and 2014. For 2015, we recorded $5.6 million in restructuring charges incurred for the plant closing and consolidations and the impact of penalties and interest for not filing and paying our payroll tax liabilities in a timely manner.

For 2014, non-cash impairment charges related to the impairment of all the goodwill and a portion of the intangible assets associated with the Bemag transformer business in Canada totaled $1.4 million. Our 12 months operating loss was $5.3 million compared to operating income of $1.8 million last year.

Our net loss for the year was $5.9 million or $0.76 per share as compared to a net loss of $268,000 or $0.04 per share last year. On a non-GAAP basis, excluding the non-recurring charges related to our restructuring and tax situation, we reported net earnings of approximately $1.5 million or $0.19 per diluted share down from $1.8 million or $0.25 per diluted share for the 12 months ended December 31, 2014.

Please refer to the financial tables included in our press release today for a reconciliation of GAAP to non-GAAP results and guidance. Turning to the balance sheet, our total debt is $16.1 million as compared to $18.9 million at the end of 2014.

As previously disclosed, we secured a waiver of defaults from our lender dated November 18, 2015 with respect to our U.S. credit agreement and our Canadian letter of loan agreement to suspend testing of the existing financial defaults until January 31, 2016 and to permit borrowings of up to $3 million by our Canadian subsidiary in order to provide financial support to our U.S.

operations. As a result of this agreement, we reclassified all of our term debt as a current liability.

This waiver was subsequently extended to April 30, 2016. On March 28, 2016 we entered into a binding commitment to extend our facilities with the Bank of Montreal until July 31, 2017.

This binding commitment replaces the waiver that was to expire on April 30, 2015. This commitment contains revised covenants and funding amount that finance our cash requirements for anticipated operating activities, restructuring and integration plans, capital improvements and schedule principal payments of the long-term debt.

The amendment that will result from this binding commitment will allow the company to reclassify portions of its debt as long-term obligations upon its execution. We believe this agreement provides us with sufficient liquidity to execute our plans.

We appreciate the support and loyalty of Bank of Montreal as demonstrated. As previously disclosed during the third quarter, we discovered that we had not been filing payroll tax reports and remitting payments to the appropriate tax authorities for the period of January 1, 2014 through September 30, 2015.

Upon making this determination, the company completed and filed our payroll tax reports for the period in question and requested an abatement of all penalties from the IRS. As we have accrued all penalties in interest through December 31, 2015 any abatement should result in a positive adjustment.

In addition, we have requested the IRS to allow us to pay the delinquent payroll taxes over an extended period. We have since filed all required Federal Payroll tax returns and have timely paid all taxes since October 2015.

Recently we have finally been assigned a representative and are working closely with the IRS. While we cannot be certain on the outcome and do not yet know when this matter will be resolved, the progress appears to be moving appropriately and relatively expediently.

We will keep you apprised with the progress. Lastly as Nathan mentioned, today we are providing full year revenue and earnings guidance for 2016 which includes revenue between $117 million and $127 million of which $100 million to $107 million is expected to be derived from the T&D Solutions segment and $17 million to $20 million from the Critical Power Solutions segment.

This reflects us transitioning our Critical Power Inc. business into Pioneer CEP operations, shifting more revenue into our T&D segment.

Adjusted EBITDA will be between $8 million and $9.5 million. Non-GAAP diluted EPS will be between $0.55 and $0.66 a share which includes the impact of a higher effective tax rate as more of our revenue and profit shifts from Canada to the United States.

This full year guidance is based upon the following assumptions; No future acquisitions, no material changes in foreign exchange rates, and effective tax rate at or above 28%, 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 2016 preliminary guidance is driven mostly by growth among our U.S.

based businesses and it is based on the strength of our sales pipeline, expected production cost savings, facility consolidation and external factors which may or may not materialize and weigh favorable to us. In Canada, we have assumed no meaningful improvement in business conditions and that performance of our liquid-filled transformer business will remain stable at its current depressed level and that the losses by our dry-type transformer business in Canada will continue to be curtailed.

As Nathan said, we expect the second half of 2016 to be stronger both in terms of revenue and profitability than the first half of the year. This concludes my remarks and I will now turn the call back over to Nathan.

Thank you, Tom. Operator, I would like to open the call for questions, please.

Hi guys, congratulations on a very strong quarter and for a lot of information for 2016. Just couple of questions, Nathan can you give us an update on the - I guess the new rigs from the DOE that changed on the high efficiency transformers and how that is rolling out into market so far?

Sure. Those regulations are effective January 1 of this year, so you can't - there is a higher efficiency, can't sell transformers of a certain size of which most of Jefferson indeed actually most of our liquid-filled under in the United States.

As long as they were manufactured before January 1 of 2016, you could continue to sell them which we are continuing to sell our older version albeit at a higher price than we did from most of 2015. We will probably be out of the old inventory middle of the second quarter and then switch everybody over to the DOE product only because will be out of the other one.

And everybody most distributors want to take the old product as almost possible because it is cheaper than the new energy efficient one. Yes, it’s probably - even at our increase prices, it's still about 30% less than the new DOE 1.

The impact for 2016 we obviously bake that in and that’s probably one of the reasons - probably that is one of the reasons that the profitably continues and the revenue continue to increase as 2016 marches on. The DOE product is a very, very favorable margin product to us.

So if it figures mid second quarter, we got half the quarter in the second quarter of the DOE product and a full second half of the year which affects us both on a revenue and profit point of view.

Okay. And maybe you can give us - yes it does- and maybe you can give us an update with regards to - I guess Verizon and Target.

Yes, excellent. Mike, you don't forget anything that was said on any call.

So, the Verizon agreement is in place. It's actually been expanded somewhat from what we thought, it’s a great, it’s a larger swap in the Midwest, we picked up the site.

Our traditional Minnesota and Nebraska higher what we picked up a little bit of Illinois and North and South Dakota, the Verizon revenue is only started to trickle in this month of March of the first call that we made and that’s going to increase as the year goes on. They for correct reasons tried to do as little in January and February in the Midwest as possible becomes a very expensive call.

We have to do a lot of them on normal DOE or ATV and they'd rather just defer and do and pushes much as they can to March, April, May for their first. So that's a big positive going forward.

Target, that agreement is actually up right now. We rebid it.

We're expecting positive results. We're hoping for at least as much as we've before, may be even an increase but I will not know that - we will now know that for probably another month or so.

Okay, terrific. Thanks guys.

I’ll get back into the queue.

Thank you, Mike.

Thank you, Brain. Thank you all for you time and support.

We look forward to updating you again on our next call. Thank you and have a pleasant evening.