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

Matt Koranda – Roth Capital Partners Gregg Hillman – First Wilshire Securities Management Joshua Horowitz – Palm Global.

Good day everyone and welcome to today’s Pioneer Power Solutions, Incorporated Fourth Quarter 2016 Earnings Conference Call. Just as a reminder, today’s call is being recorded. At this time, I’d like to turn the conference over to your host for today, Mr. Brett Maas. Please go ahead sir..

Thank you. 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 the opportunity to review the fourth quarter and full year financial results.

Before we can start, 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 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. This was a solid conclusion to a strong year for Pioneer as we benefitted from our successful penetration into several new and rapidly growing market and also from the consolidation and margin enhancement initiatives we put in place at the end of 2015.

While we had several non-recurring charges that drove our fourth quarter net loss of $1.7 million, these charges are part of our continuing efforts to consolidate operations and enhance margins.

We have made tremendous progress to improve our profitability as evidenced by the $2.6 million in adjusted EBITDA we generated in the fourth quarter and approximately $5 million increase in full year adjusted EBITDA compared to last year. We’ve had five consecutive quarters of year-over-year increases in adjusted EBITDA.

Today we have streamlined our cost structure enabling us to grow profitably.

Additionally, we are encouraged by the discussions of the increased infrastructure spending including pipeline construction, as well as continued strength in areas like data center and cannabis related construction, seaport expansion, electric rail, - transit and distributed generation microgrid pipe deployment.

Simultaneously, our service business continues to grow as we concentrate on national multi-location users like retailers and mobile phone service provider. This business line creates a growing base of recurring revenue for Pioneer.

For the full year 2016, we reported $114.4 million in revenues slightly lower than our guidance of $117 million reflecting our strategic decision to avoid lower margin projects and focus on profitability during 2016. This decision was validated by our vastly improved profitability and the achievements of our profit guidance for calendar year 2016.

Our full year operating income was $2.1 million, $7.4 million positive swing compared to an operating loss of $5.3 million in 2015. Our net loss was $569,000 for the year compared to a net loss of $5.9 million in 2015.

As our income tax rate normalizes and we put the non-recurring charges for restructuring efforts behind us, we continue to deliver positive net income in 2017.

On a non-GAAP basis, excluding depreciation, amortization restructuring charges, stock-based compensation and other non-recurring expenses, our adjusted EBITDA was $8.8 million compared to $3.8 million in the year ago period, an improvement of $5 million.

These results demonstrate the underlying earning power of Pioneer and we believe we can further improve profitability going forward. More specifically, we are currently relocating the medium voltage dry-type transformer manufacturing business operations from Canada to our lower cost manufacturing facility in Mexico.

We expect to complete this move during the first half of 2017, thereby further improving overall growth in operating margins and positioning our medium voltage dry-type business to be a significant revenue driver over the next few years.

Looking at the result by operating segment, in our Transmission & Distribution Solutions or T&D segment, we delivered a 13% increase in revenues year-over-year and a nearly 1% improvement in our gross margin as a result of our continued shift for its higher margin switchgear product. The growth in the U.S.

for both our transformer and switchgear businesses is more than offsetting the decline of our Canadian transformer sales, a lower basis - made possible by facility consolidations and shifting of work to lower cost locations, coupled with solid sales growth are driving strong performance within our T&D business.

Our Critical Power Solutions segment had an exceptional year. This business is clearly benefitting from the strategic shift from a more equipment centric business towards a more service oriented business. This resulted in somewhat lower revenue for the year but significantly higher profit margins and greater absolute EBITDA dollars.

Gross margin for the year was up 150 basis points to 17.8% as a direct result of higher service sales which provides great gross margin than equipment sales.

For the year, we generated almost $1.4 million more in EBITDA from our Critical Power Solutions segment that we did for last year, an improvement of more than 219%, demonstrating the progress we have made in improving its profitability. In fact, our Critical Power Solutions segment generated $2 million in EBITDA contribution throughout this year.

Keep in mind, they were not profitable when we acquired this business two years ago. We continue to believe additional earnings improvement is achievable and sustainable within this segment.

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. Fourth quarter revenues were $28.5 million, up 8.6% compared to the $26.3 million in the fourth quarter of last year. Gross profit for the quarter was $6 million or a 21% gross margin compared to $6.1 million or 23.2% gross margin in the year ago quarter.

For the quarter selling, general and administrative expenses increased 7.4% on an absolute dollar basis to $5.6 million compared to $5.2 million in the fourth quarter 2015. As a percentage of revenue, SG&A expenses decreased to 19.6% of revenue in the fourth quarter of 2016 down from 19.8% in the fourth quarter of 2015.

During the second half of 2016, we put in place additional initiatives designed to further streamline our cost structure. Specifically, we increased our focus on specialty switchgear product. This enabled us to reduce labor and overhead expenses.

We expect these strategic changes at PCEP to yield annual savings of $1.1 million, reducing our quarterly SG&A cost to approximately $5.3 million. The fourth quarter of 2016 $3.3 million in restructuring, integration and other non-recurring expenses compared to $2.1 million for these categories in the fourth quarter of last year.

Operating loss for the fourth quarter 2016 was $1.6 million including these non-recurring expenses compared to a loss of $1.2 million inclusive of non-recurring expenses in the fourth quarter of 2015. Our effective income tax rate for the fourth quarter of 2016 was 117% of pre-tax income as compared to 47% for the same quarter last year.

This is the direct result of three factors; first, the routine reconciliation of our income tax returns to our financial record; second, a review of our previously filed income tax returns being deducted[ph] in Canada; third, the benefit of the Internal Revenues Services decision to grant our request for abatement of $1.1 million in previously recorded penalties related to the company’s delinquent payroll tax by obligation from 2014 and 2015.

The abatement covers 100% of the accrued penalties from Pioneer Power Solutions at the corporate level, Pioneer CEP and Jefferson Electric. As you may recall, we recorded $1.2 million charge in the third quarter of 2015 for the accrued interest in penalties in the event the abatement was not granted.

The majority of this accrual was reversed during the fourth quarter of 2016. Net loss for the quarter was $1.7 million or $0.19 per basic and diluted share compared to a net loss of $1.3 million or $0.18 per basic and diluted share in the prior year’s quarter.

Adjusted EBITDA was $2.6 million during the quarter or 9.1% of revenue compared to $1.9 million or 7.2% of revenue in the fourth quarter of 2015. Non-GAAP diluted EPS was $0.21 per share compared to $0.15 per share in the fourth quarter last year. Turning now to the full year results for the period ended December 31, 2016.

Revenues for 2016 were $114.4 million, up 7.4% or $7.9 million from $106.5 million in 2015. Breaking this down by segment, T&D Solutions revenue increased $11 million or 13% compared to the full year 2015.

This increase was driven primarily by our low volt transformer sales in the United States and medium voltage switchgear sales offset by lower sales of our Canadian transformer product. Critical Power Solutions revenue decreased $3.1 million or 14.4% for the full year 2016 as compared to the full year 2015.

This decrease was driven by primarily lower equipment sales which were down $4.8 million year-over-year as a result of our decisions to concentrate on our efforts on service revenue which provides higher margins. This decrease was partially offset by a year-over-year increase in service revenue of $1.6 million or 24.5%.

For the full year, our gross profit increased 14.4% to $24.9 million or 21.8% gross margin compared to $21.8 million of gross profit or a 20.4% gross margin for 2015. SG&A expenses for the full year 2016 were $20.7 million or 18.1% of revenues compared to $21.9 million or 20.5% of revenues for the full year 2015.

The decrease in SG&A was primarily driven by our cost savings realized from headcount reductions in both segments of our business and in corporate overhead. Operating income for the full year 2016 was $2.1 million compared to an operating loss of $5.3 million for the full year 2015.

The dramatic increase in operating income was the result of lower operating expenses and increased sales volume in 2016.

During the fourth quarter of 2016, we received notice from the IRS that the penalties for failure to timely file employer’s federal tax returns and make the required payments that were discovered in the third quarter of 2015 have been abated for Pioneer Power Solutions, Jefferson Electric and Pioneer Customer Electric Products Corp.

The abatement of these - amounts approximately $1.1 million and is recognized in other income and expense section in our income statement. Our effective tax rate for the full year 2016 was 200% of earnings before tax as compared to 31% for the full year 2015 due to the reasons described year-over-year.

If these items were not included in this period, the effective tax rate would have been 19%. We have approximately $3.5 million of foreign tax credit which expire in 2018 and $39,000 of research and development credit which expire in 2032 that can be used to offset future income taxes thereby reducing future cash tax payments.

Net loss for 2016 was $569,000 or $0.07 per basic and diluted share. For the full year 2016, an improvement of $5.3 million compared to a net loss of $5.9 million or $0.76 per basic and diluted share for 2015. Our adjusted EBITDA for the full year 2016 was $8.8 million compared to $3.8 million for the full year 2015.

Lastly, our non-GAAP diluted EPS was $0.73 per share for 2016, up from $0.36 per share in 2015. Turning to our balance sheet, our total debt at December 31, 2016 was $27 million compared to $16.1 million at the end of 2015.

This increase in total debt was used to fund our restructuring plan, changes in working capital and addition to our property, plant, equipment in the ordinary course of business as we continue our sales growth and develop our supply channel from lower cost manufacturing areas.

Turning to our guidance, we are reaffirming the full year 2017 revenue net income and earnings per share we provided in January of this year.

Our guidance is based on expected business trends and current composition of the order backlog excluding the impact of any potential acquisitions and any significant fluctuations in foreign currency exchange rate.

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 per share and $0.47 per share. This GAAP guidance complies adjusted EBITDA between $10 million and $11 million and non-GAAP earnings per share between $0.83 and $0.91 per share.

This guidance assumes no further acquisition of foreign currency exchange rate of $0.74 US per Canadian dollar and effective income tax rate of 28% and a share count of approximately 8.7 million shares. We excluded 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 strap operational leverages 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 and I now turn the call back over to Nathan. .

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

Thank you. [Operator Instructions]. We’ll go first to Matt Koranda of Roth Capital. .

Good morning, Nathan and Tom. .

Good morning, Matt. .

Good morning, Matt. .

Just wanted to get a little bit more color on the restructuring in the quarter, could you just give a little bit more on sort of what that was associated with? And then, is that all complete now and may be if you could also tell the cash component of that restructuring charge?.

Go ahead. .

Certainly. The restructuring charge the bulk, all of it is from the relocation of the medium voltage restructuring to move the facility from Farnham, Quebec to Reynosa, Mexico. That charge was taken in full in the fourth quarter.

Of the $2.4 million total for the year, there was an accrual included in there of approximately $800,000 for cost that will be paid during Q1 of 2017. This is being done like our plan stated to improve the profitability and our competitiveness in the medium voltage dry-type business. .

Got it. That’s helpful. Maybe you could also give a sense for just the gross margin impact of shifting that medium voltage capacities during those -- and when do you think we might see the impact I know Nathan, I think in your prepared remarks you said, you’re shifting that capacity during the first half of this year.

So does that mean we start to see the benefit in the second half?.

Tom, here. Yes, the shift is going on now Matt and will be completed early in the second quarter. Full production should be done or we should be in full production during the second quarter and during the second half of the year, you will see that improvement.

We expect profitability increases on this particular product line to be approaching double-digits improvement. .

Alright. Got it. That’s helpful. Let’s just spin back to Q4 for a moment, in terms of revenue, I think it looked like it came just a little bit below the low-end of your guidance for the year. So just, could you talk about was there a project or two that slipped or was that all just sort of shedding low margins business that….

It was -- I mean it’s only the project I mean that’s every quarter so that really doesn’t affect the overall year. We’re really shedding - this is Nathan.

During the year, when we had a choice I think I’ve said on many of the prior calls this year, given the choice between a poor use of working capital and avoiding the sale, we’re going to avoid the sale.

So - a lot of that was our switchgear business and that was lot of the transformation from a sales mix point of view that I think we achieved in 2016 and the goals there really are now execution and operating margins in 2017. So the shorter answer is yeah, this is deliberate shedding of low margin business. .

Okay, good to hear.

In terms of the gross margin during the quarter, was that just a function of mix or was there lower service revenue anything else to highlight?.

It was really a function of mix, Matt. We still had some jobs in the queue for the switchgear side of things that were low margin, seemed to be a disproportionate percentage in this quarter that we pushed out the door in this quarter. So it was truly a function of mix. .

Okay. Backlog still up nicely year-over-year, I think it does imply that your bookings run rate slowed down a little bit sequentially.

Is Q4 just seasonally soft for bookings and maybe you could just speak a little bit to the backlog and then sort of what’s been there and what that implies for our gross margin outlook going forward?.

Yeah, it’s Nathan, Q4 is not traditionally stronger or weaker especially from a bookings point of view. It was down a little bit, it’s much stronger now.

The trend year-over-year it was up signifnatly and quarter-to-quarter doesn’t make a trend, so it was down two quarters in a row that would be a more important and more significant that might start make up a trend. But I don’t think that that’s the case.

We’re actually looking forward and something at least a good portion of our business is we have pretty strong visibility especially through at least the first half of 2017 and we’re seeing quite the opposite, it’s a very strong year going forward. .

Okay.

Did you see bookings accelerate when you think in January, February could you speak a little bit as to just what’s happened over the last couple of months, Nathan?.

I think bookings have I know -- they’re not flying through the roof but they’re definitely firming and getting stronger and every month that we go forward.

We’re reaping rewards, efforts that we’ve been making for the last couple of years and they come in nothing comes in a smooth glide pattern, everything is project oriented businesses in a more serrated fashion. But it’s definitely unfolding stronger, both bookings and sales. .

Good to hear. For the 2017 outlook, I just wondered if you guys could provide, I think usually in your write-up you used to provide kind of a split between T&D and Critical Power Solutions but didn’t see that this time.

Could you sort of talk directionally towards the split in the business in the revenue outlook?.

Yes, we’re expecting the critical solution to increase from this year to next year approximately 10% to about $20 million in a rough number. So the balance of the increase will come out of our T&D segment specifically out of the U.S. transformer business. .

Got it.

On the Critical Power Solutions pipeline Nathan, maybe you could just give an update in terms of what large contracts are coming up for bid in 2017? And is there a chance that any of that revenue could hit this year or are we looking more like stuff that’s coming up for bid this year like that it kind of roll on maybe toward the end of the year or early next?.

Right, it’s an excellent point. So the big part we work on is on the service and as I said in the prepared remarks, that’s basically retailers self-service provider. The pipeline is very strong. We look good on several of them.

I don’t have the confirmation for some of it in my hands yet, so we haven’t announced them, we want to sort of do them together. But it is going to be retailer and self-service provider related. We’re looking to grow stronger with Verizon, Verizon is - businesses, single largest customer.

Our target is second, there are bunch of other retailers that we expect to land very shortly and to have revenue during the course of this year. .

And that would be at a similar margin profile to essentially to what you’re doing currently in that business, is that fair to say?.

That’s a similar margin profile I mean we’re way more rewarded on the service side than we are on the equipment side. So for us, to make the company more valuable, we compensate there. We appreciate the margins that we receive.

Our world’s sort of growing -- internally we’re growing our service shop business imitating the success that we’ve had in Miami, in Omaha, in [indiscernible] with sort of two to three person service shop one doing the technical work, one doing the sales doing all these administration out of headquarters and Minneapolis.

We expect to open a service shop in the next month in South Dakota and then one more towards the second half of the year in the Tampa, Florida area. And those add incremental profitable growth for us, since it’s all service related. .

Okay.

Maybe one for Tom really quickly on working capital, just wanted to see, it’s sort of becoming a little bit – there’s a bit of intensity here in terms of working capital by my calculations any way to lower that intensity or there are things you can do on the margins here that sort of help with that working capital intensity or lower in any way?.

Our approach -- our use of working capital is specifically the studying up of the channel from our low cost manufacturing area in Asia.

That should be stabilized, done now and in fact, we believe found some opportunities during 2017 to reduce the amount of working capital required in that channel for that inventory both from the supply of raw material that we are currently doing to support the low cost manufacturer as well as additional credits being received from him and reduction of inventories as we balance out what we bought in previously.

The transition to the new energy efficient product has not gone as quickly as we thought it was going to go and the supply channel over lead time out of Asia is six months. So we will start to see during the course of this year some reduction in that inventory.

In other words, I bought in a lot of inventory last year, I’m carrying too much and so we’ll be reducing it during the first half of this year. .

Okay, great.

Maybe last one just on the acquisition pipeline Nathan if you could just provide an update there and also just if you could speak to sort of general size of potential targets just wanted to see what capacity looks like to be something done if you’re looking at anything this year?.

Yeah, we’re really -- we weren’t planning on looking anything this year. We were going to put a mid-year take a harder look see how the year is unfolding, really what’s best for the business and what’s out there.

It would probably trend the either specialty transformer type related or more on the service side, I mean it would have to be impactful to us, it would have to be more than a $10 million year business and by the same focus we’re not going to set the bar on something.

But we’re really not super focused on that right now, mid-year we are going to see where we are and what’s out there and what’s the environment there. .

Okay, got it guys. I will jump back in queue here. Thank you. .

You’re welcome, Matt. .

[Operator Instructions]. From First Wilshire Securities Management, we’ll go Gregg Hillman. .

Yeah, good morning gentlemen. .

Good morning, Gregg. .

Hi.

In a concerning quality control, I guess I wanted to ask you first of all, what are you doing to standardize quality control across India, Reynosa, North America and also improve it?.

Speaking specifically, Gregg, this is Tom, speaking specifically to the quality control coming out of India, the control has been commensurate with what we receive when we produce in India which was Reynosa which is comparable to what we received when we produced in United States.

To ensure that every unit upon reaching the United States goes through a 100% quality inspection to ensure that it conforms to the Pioneer quality standard that we put out, quality product for our customer. To-date, we have not had any issues in any of the product lines for our quality control [indiscernible]..

Yeah just to give you little more color Gregg, we do a 100% -- our vendors does 100% test in each unit as we did when we made them. He does a 100% test for their shift out, we do a 100% test and make any corrections that we have to make before we put it back in inventory.

Any issues that we’ve had have not been from the construction really of the product, any issues we’ve had to adjust has been through the transit which over the last year and a half we try to get smarter with each container in-house to properly account for the amount of time that these units are spending in transit on the water and deal with moisture and - and mugs coming loose, that’s really what it’s been all about.

But thankfully, electrically everything has been terrific so far. .

Okay, good.

In terms of the plant in Santa Fe Spring, have your recruited a new manager for that plant and what’s going on there?.

Yeah I’m not going to talk about that specifically on the call. We made some adjustments towards the end of last year right before Christmas regarding senior management and we’re constantly looking for upgrade, but that’s all we’re going to say.

I mean they have an execution plan this year and that’s really – their focus and my focus for them is to, if they don’t have a revenue problem, that’s not the issue, they don’t have a mix problem anymore.

We took care of that during the course of 2016, they have strong book and they’ve really booked through 2017 the issue is just executing in a profitable manner. .

Okay. Thanks for the comment. .

You’re very welcome. See you next week, Gregg. .

Yeah, look forward to it. .

We’ll go next to Joshua Horowitz of Palm Global. Please go ahead. .

Thank you. Good morning. Hi, Nathan. .

Hey, Josh.

How are you?.

Good, good. Apologies I missed the opening remarks but good results, very pleased.

Couple of questions, maybe you can give some more color on where you’re seeing the most order activity in terms of the end markets that you serve and more specifically what is the health of some of these markets like energy, oil and gas, electric radio – how does this compare to say a year ago or two years ago, what kind of activity are you seeing? Where is your backlog coming from?.

Yeah, so big drivers of our backlog where we’re active, where we’re seeing a lot of activity is I guess on the switchgear side, it’s distributed generation microgrid that’s super, super active, that’s the largest single piece of our gear business right now. It was with distributed generation.

Data center construction is super strong our dry-type business and then overall, waste water treatment, health and hospital all that’s been very strong, I’m not sure, given the size of pioneers that we’re equipped to really see everything and be a great litmus test, but as we’re seeing a lot of talk I guess in high speed rail, electric rail energy was close to zero if not zero for us during the course of 2016.

It was really close to zero for the most of 2015. We get a big benefit for that to really come back, so are rumbling but that has not manifested itself in a very strong way cannabis construction processing and warehousing is another very strong area especially in California and Arizona right now. Those are some of the highlights.

I can’t stress sort of the distributed generation enough, I mean that’s where we put a lot of – it’s not most of our efforts on the switchgear side is in that arena. .

Great. I appreciate it. Thank you for that and we’ll follow up in the coming weeks. Good results. .

Yeah, thank you, Josh. .

And it appears there are no further questions at this time. I would like to turn the conference back over to management for any closing remarks. .

Thank you, operator. Thank you all for your time and support and we look forward to updating you again on our next call. Have a great weekend everybody. .

Thank you. And again that does conclude today’s conference. We thank you all for joining..