Good day everyone, and welcome to the Pioneer Power Solutions, Incorporated Second Quarter 2016 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to Brett Maas from Hayden IR. Please go ahead.

Thank you, and good day. 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. We appreciate having now to review the second quarter financial results. Before we get started, let me remind you this call is being broadcast over the internet and a recording of the call and the text of managements prepared remarks will be available on the company's Web site. 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 a posted version of these prepared remarks, both of which apply their content of this call. I would 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 for joining us today for our conference call. This was our third solid quarter in a row demonstrating the underlying earnings power and growth potential of Pioneer. We have eliminated drags on our earnings, including lower margin, less customized project, and we have successfully streamlined our cost structure and the results are apparent. During the first half of 2016, we reported $56.5 million in revenue and $0.09 in earnings per share and have expanded our backlog with the record 37.8 million of identified committed orders, most of this scheduled to be delivered over the next 12 months. These results and the strong backlog confirmed that we are on pace to achieve our full 2016 guidance. We are well positioned to further increase our profitability and cash flow and that is indeed our focus over the next few quarters. The material improvement in our profitability is a direct result of the tactical decisions we made to exit lower margin business as well as achieving higher growth from our core business segment and our cost reduction initiative, from a GAAP perspective operating income over -- operating income over $1.4 million for the quarter represented an improvement over the losses we reported in the second quarter of last year, while earnings per share increased $0.13. On a non-GAAP basis, adjusted EBIDTA of $2.2 million in the second quarter is $2.1 million improvement over the prior year's quarter, given our first half performance and our operational plans and commitments for the next two quarters, we expect adjusted EBIDTA to be stronger in the second half of the year, we are also encouraged by the expansion of our backlog of committed orders. At the end of the quarter, our backlogs stood at record 37.8 million and we…

Thank you, Nathan, good morning everybody. Our second quarter revenues were $29.9 million up 13.1% compared to $26.5 million in the second quarter of last year. During the second quarter of this year the foreign currency translation had a negative impact on sales of approximately $0.4 million. Gross profit for the second quarter was $6.1 million or a 20.5% gross margin compared to $5.1 million or 19.2% gross margin a year ago. For the quarter selling, general and administrative expenses decreased 17.5% on an absolute dollar basis to $4.7 million as compared to $5.7 million in the second quarter of 2015. As a percentage of revenue, SG&A expenses also decreased from 21.5% of revenue in the second quarter of 2015 to 15.8% of revenue in the second quarter of 2015. Operating income for the quarter was $1.4 million compared to an operating loss of $687,000 in the second quarter of 2015. The second quarter of 2016 included $62,000 in restructuring and integrations compared to zero charges for these categories in the second quarter of last year. Our effective income tax rate for the quarter was 75.7% of earnings before tax as compared to 22.3% for the same quarter last. Let me explain the reasons for our tax rate. First the tax penalties accrued related to the previously disclosed tax issues are not deductible for tax purposes. As of June 30, 2016, we have accrued approximately $1.2 million in tax penalties and as we discussed we are seeking abatement for the penalty. Secondly loans made by our Canadian operations to the United States operations are subject to a dividend tax. If these items were not included in these quarters the effective income tax rate would have been 29.8%. Each of these adjustments and accruals are non cash. It is important enough…

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

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

Good morning, Nathan and Tom.

Good morning, Matt.

Just wanted to start-off on the revenue outlook for the year, I know you guys were solidly [ph] up in terms of growth in Q2, and then comparisons in the second half of the year should get a little bit easier for you guys. With the backlog you have, could you just talk about the visibility that you have into the second half of the year, and maybe just talk about swing factors that will enable you guys to reach the high-end of the range in revenue, I guess maybe start there?

Yes, I think that -- I can't say about reaching the high-end of the range, I mean, for our liquid transformer business and the switch gear business, we pretty much know what the revenue is going to be for the rest of this year. The critical power business and the dry type business is less visible to us. So we are pretty confident that when we say, we are going to achieve the guidance, we will definitely achieve the bottom of the revenue guidance. And as the year is unfolding, we expect the profitability to increase a little bit during the second half of the year. So I think the question is how far -- how far above the lower range of the EBIDTA guidance we are going to breakthrough.

Okay, got it. And maybe just talk about, I guess, the cadence, especially as it pertains to the revenue line for the remainder of the year, do we expect kind of an evenly split second half or is there a bit of a ramp? I know that you are delivering some of the CEP projects that you have mentioned in the prepared remarks in Q4. So, is there going to be a bit of ramp in the Q4?

It's going to be -- it's about even. I mean, any movement is not material enough, not to call it, even. So they are both be about the same.

Okay.

The only reason, I guess I am a little, I don't know [indiscernible] on the revenue side, as every week if there is a -- if I make a trade, if I could have another $250,000 of EBIDTA and maybe do a little less revenue, I am going to make that trade all the time. So, as we continue to really walk away or try to reformat some poorer, lower margin business that we have taken in the past, it's less about the blowing through the revenue guidance and much more about achieving higher margin.

Got it, that makes sense. Gross margins, just wanted to cover that for a second because a little bit lower I guess than I would have expected in Q2, I kind of guess, I would have expected from a flat, relative to Q1, just given the better fixed costs absorption that you guys probably got, during the quarter, so maybe just talk about in Q2 was that a mix issue that kind of held gross margins back sequentially or was it something else?

It was -- you have identified it correctly Matt, it was a mix issue, we had the larger, the largest sales number ever from our dry type transformer division, historically their margins have run a little bit on the lower side and so that effect was to drag it down, that small percentage, we also have been surprised by the time that it has taken for the market to embrace the new energy efficient requirements and we expect that now coming in Q3 the old efficiency units are no longer available. So we expect an improvement in revenue from the higher cost new DOE efficiency and there should be a slight margin uptick comes with those as well.

Okay. And I kind of thought that was the legacy product, you guys were able to price that maybe more attractively, in terms of margins, was that just not end up being the case or essentially is there just some other -- something else going on in there?

No, I mean we were able to price it better than we had historically had run at, the -- it ended up not being as attractive or not being as high as we had originally hoped, but still higher that the historical level, also when we go to mix issue, the brand labeling agreement that we have which is done at lower gross margin numbers, but has low SG&A associated with it. They had a stunning second quarter. And so, that impacted the gross profit line that did not as big of an impact on the operating income line.

Got it. That makes a lot of sense. Thanks for that. SG&A, definitely very nice with the lower, I thought it would come in for the quarter, assuming the lower run rate, I guess is probably the result of the restructuring activities you guys undertook in the second half of last year and for Q1 of this year. Maybe you could just speak to how that trends for the remainder of the year. I guess should we kind of take OpEx, set that sort of 16% of revs for the remainder of the year and scale it with the ramp up with revenue or is there something else that we should be factoring in?

Yes, there shouldn't really be any surprises, I believe the run rate we're at this quarter at the 4.7 million or 16% is a good run rate. I don't see any unusual spends or any increases in SG&A during the course of the -- of that six months this year.

Okay. Got it. And then just how do we think of the modeling tax rate? I know it's kind of there's a lot of moving pieces with the -- I guess the non-deductible tax penalties and then the loans maybe the U.S. operations but -- and I understand there's a non-cash but in terms of modeling GAAP EPS for the remainder of the year, I mean how do we think about the tax rate that we should be thinking about for Q3 and Q4?

Right, until we get those abatements, Matt -- until we get final resolution on that we will continue to have a higher tax rate, I don't believe it's going to continue to be at this 76% rate or 53% as we had for the first six months. I'd say instead of being in the high 20s as we've done in our guidance I believe will be mid 30 -- 35% to 38%. The penalty situation adds between 7% and 10% to the tax rate.

Okay, got it. Let's kind of talk about some of the business segments for a moment here, I know the liquid fill business you guys mentioned not really counting on any kind of uptick there kind of business as usual. Just curious to get your take, do you see any risk at any further deterioration in that business on the depressed levels that it's at, just giving kind of the continued choppiness in energy or is that -- is energy just totally out of that business and it's just P&I and kind of stable there?

Yes, I mean the energy -- I mean, there is only -- we've continued risk and anybody that stay any business there's risk everyday. But it's the dynamic world. But yes, we had no oil and gas last year, we've had no oil and gas related business, no metals and minings so that's pretty much -- its pretty much what it is. But they the Canadian economy was probably even -- from our point of view a little bit weaker this year. Nevertheless, they're going to achieve in Canadian dollars for the year. They will achieve over $40 million in the -- in Canadian dollar which is going to be a little bit ahead of what we internally projected. So I would say this is the trough event.

Okay, got it.

Even so, it's probably going to contribute in profit, you know, they are equal with the dry type business, or a little bit ahead for the year. So it's still at its depressed level, a stellar profit contributor.

Sure. For the CEP division, Nathan, I know you guys called out $3.6 million from new customers for DG [ph], for that particular opportunity, but maybe you could just help us frame that within the context of the larger opportunity that you see in distributor generation?

The larger opportunity in distributor generation of course to continue to do what we do to what that got us to achieve that kind of an order from this customer which is a lot of upfront engineering work a lot of the iteration that they tried to customize their solutions as part of a much larger package project that these kinds of customers are working on and hopefully to get more successes with them. It's also as these customers grow and become successful we become more successful with them being an important vendor to them. So we're very much very much focused on expanding our roster of customers in that world and really taking care of the ones that brought us to the dam [ph].

Okay, got it. Maybe moving on to Titan -- just wanted to get an update on the pipeline for you guys there. I know you really want your end customer in that segment over the last several months, but what are you looking? And I guess there could be incremental to revenues in that segments and sort of maybe to talk about the opportunity and timing of those revenues?

Yes, we're you know as I said in my prepared remarks we're pushing the service and much more, trying to increase on margin on the equipments side of the business. Again I take the trade any day and do less equipment and more on the service and on the service side we're trying to push where we think we have the competitive advantage which is large multi location types of users. So that's a lot of retail whether it be department store retails, drug store retail, specialty sporting goods, firearms, fishing whatever it is those types of opportunities we tend to shine do better self perform a lot of the work and get it better get a better return and boost from our efforts. On the equipments side, we're trying to push -- and that just get a better margins but where we can be a little bit more valuable where we could marry not just equipment but expertise from things like our CEP division or transformer division, allow us to provide a little bit better solution with the engine and that lets us get a better margin. I mean we did one job like in the second quarter -- one job provided on the equipments side almost as much margin as all the other standard kind of equipments failed to do together. So that was the pretty -- that was a pretty big revelation for everybody.

Thanks for the detail on that, Nathan. Just moving on to the balance sheet just wanted to cover a couple of items with Tom maybe. Inventory is ticked up sequentially and just kind of wanted to get your take on is there an inventory built for certain opportunities that you will be delivering on the second half of the year just would help frame the inventory levels for us here.

There is three components, I guess, to the inventory build, one is the continued build of the product that's coming in from the lowest cost manufacturing areas. Two, we are anticipating a very good quarter out of our liquid sales group, and in order to achieve that they had to bring in some materials in the second quarter so that they could deliver on those Q3 promises. And third, we have made some growth in our PCET group on some leading voltage switch gears opportunities that are delivering early in Q3 here. So the product was being built during the Q2 period.

Okay. That's helpful. And then AR as well ticked up sequentially was that just timing was some shipments that went out later in the quarter?

Exactly. It was timing -- all of the businesses their largest months were May and June. The industry historically has payment days that are around that 55-60 days time frame. So it's purely just the nature of the timing of the shipments during the quarter.

Okay, got it. I think that's it from me. I'll take the rest of my stuff offline guys. Thank you.

Thank you.

And now we'll take a question from Joshua Horowitz from Palm Global.

Thanks and good morning. Great quarter everybody.

Thank you, Joshua.

Thanks

Not sure, not more to ask; a lot of my questions have been covered by the previous caller, especially, in terms with tax rate which I had some concerns about, but I guess what you're saying is modeled somewhere in the low-30, I guess with the next 12 months out and then our net operating loss - should talk about, talking into next year.

Yes, Josh I would model it actually model mid-30s, and yes the NOLs and the foreign tax credits will cover the tax effect of this so there will be no income taxes payment required during the first certainly this calendar year may be that en of the next year and we're hopeful that the, the appeal of the abatement will occur sometimes yet this year so that will all hopefully normalize yet but the end of this year.

Great. And have you set a budget for capital expenditure -- sale did you discuss for now?

We have been running the last several years we probably running about $5, $600,000 a year I don't see any change the only, change would be as this week one product line that we think of moving but I don't know how much we're talking about additional crane or whatever I mean so, I don't know that may be that would add 100 to what we typically do so that's I say that's a fare, that's a fare estimate, for us unless the something special going on.

Looking at as you model fairly low interest expense and what should be fairly low taxes and CapEx is there a plan for you free cash flow?

Right now the free cash flows going continued to reduce debt and then strengthen the balance sheet and we're going to see from, we're going to take it from there. We don't have anything for the remainder of 2016 there is no special plans as we go into 2017 and hopefully continued to perform and continued to perform better we definitely you're going to reassess what the extra cash has being, how it's being deployed.

Terrific. Well, congrats again on a great quarter and certainly a great first half of the year execution of the top-line?

Thank you, Josh. We appreciate it.

Thank you.

Moving on we'll hear from Jim Kennedy from Marathon Capital.

Hi, Nathan, hi Tom.

Hi, Jim.

Nice quarter, I just had a Matt was very comprehensive in his questions I just had one quick one for you if you can address this and you mentioned early on that you success in the Data centre market is coming from your highly customized magnetized solutions, can you explain exactly what that is, why its different from anyone else out there or these competitive situations and what is your technology doing that others may or may not be able to do?

Yes, I don't know if it's the technology itself or the application of the technology and lot of those orders, when we look at data centers we actually serve them in two ways we attract that market I call, inside the room and outside so, this is over for -- stuff, but inside its mostly for what that the data center having slight co powered distribution unit that variety of vendors filled for the data center developers and we are providing, depending on that customers, type of solutions that they want to offer within the server room where customizing the magnetic that go in so that we treat them not but they are not but we treat them as an OEM that's what it is these coils are being integrated into a piece of equipment that our customer is assembling and designing for inside the server room. And the edge is just the application engineering that's the edge.

Got it. Okay. Very good, I appreciate the explanation.

Thank you, welcome Jim.

[Operator Instructions] Our next question comes from Gregg Hillman from First Wilshire Securities Management.

Yes, good morning gentlemen.

Good morning, Gregg.

Hi Tom, could you talk about the actual amount, the net NOL in the United States and also the amount of foreign tax credit rate now?

The NOL is well in excess of $3 million, the foreign tax credit is over $1.5 million.

Okay. In terms of I guess the data center, you talked about basically the partner relationships you need to go to get in there and to get more traction, in other words I guess software people that help to help the data centers to do peak chasing in store, I guess more energy in the battery at times and I was wondering if you can be part of a team that provides comprehensive solution for the new data center including people who do the batteries or software or other pieces?

Yes I mean as we just said to Jim a few minutes ago, we go inside and outside, so inside it's way in the power sequencing, the PDU units are way after all of that and the power is already been transformed and it's been distributed or it's being distributed really, it's really final pieces of equipment and so we're providing magnetics that are being integrated into equipment that is making sure that the electricity sign wave, it's harmonics, it's cleanliness to use bad word, it is I guess acceptable to the equipment that is receiving, it's inside the circle rooms themselves. When you're talking about storage and stuff like that, you're referring more what we call the great part because it's all great metal boxes or outside the rooms, the actual power delivery and initial distributions that's going on in to date, we have been primarily doing those jobs with our parallel switch gears, so the redundant kind of switch gearing and engine generator controls that is helping the sequencing and the parameters are going that are going on between the backup units and the primary speeds that these data centers have. There hasn't been when it comes to storage, we're kind of we're out of the loop on it, we're agnostic to it from the storage point of view, we to date with the equipment and the solutions that we have it almost doesn't make a difference and almost it really makes no difference what you're choosing to do, you want battery, you want slide wheel, you want the rotary diesel UPS, I don't care what you're using there, it's not expecting on either side and either solutions that we're involved with right now.

Okay.

And is that helping or no?

Yes, yes and just in general if some of your various divisions I think you go through distributors and I was just wondering if you signed up any new important distributions in last six months or improve or improve your relationships with them.

Well we hope, we are always improving our relationships but…

Nothing significant, the distributor market is served mostly by our dry-type transformer business and nothing significant to report there.

Okay. Thanks very much.

You're welcome, Gregg.

And that does conclude our question-and-answer session today. Speakers I will turn the conference back to you for additional or closing remarks.

All right, thank you all for you time and support and we look forward to updating everyone again on our next call. Have a great day ladies and gentlemen.

And it does conclude our conference call today. Thank you all for joining us.