Brett Maas – Investor Relations Nathan Mazurek – Chairman and Chief Executive Officer Tom Klink – Chief Financial Officer.

Analysts:.

Good day, everyone, and welcome to today’s Pioneer Power Solutions Incorporated Second Quarter 2018 Earnings Conference. Just a reminder that today’s call is being recorded. And now it’s my pleasure to turn the conference over to Brett Maas. Please go ahead, sir..

Thank you, and welcome. Call today will be hosted by Nathan Mazurek, Chairman and Chief Executive Officer; and Tom Klink, Chief Financial Officer. Following this discussion, there’ll be formal Q&A session open to participants on the call. We appreciate having the opportunity 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 the management’s prepared remarks will be made available on the company’s website. During this call, management will make forward-looking statements.

These statements are based on the current expectations and assumptions and 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 earlier today and in the posted version of these prepared remarks, both of which apply to the content of the call. I’d now turn the call over to Nathan Mazurek, Chairman and CEO. Nathan, please go ahead..

Thank you, Brett. Good afternoon, and thank you all for joining us today for our conference call. I’ll begin the call by discussing our continuing operations, then make some remarks about our discontinued operations, the planned sale of our switchgear business and our exploration of strategic alternatives.

In our second quarter, we delivered significant an improvements across the board, revenue, margin, EBITDA, on a sequential basis when compared to the first quarter and especially, compared to the fourth quarter of last year.

As a company that serves multiple end markets and many different customers, the mix-related issues which impacted our margin and overall profitability in the fourth quarter and first quarter are part of our business. Our liquid-filled segment maintains long-term agreements with major utilities and large industrial companies.

On the plus side, these agreements provide us with a certain amount of stability and predictability. The nature and timing of projects covered by these agreements, however, are not only the optimal for Pioneer, and our customers are not required to cater to our particular wishes on a quarter-to-quarter basis.

Over the long term, we go through periods that have a higher mix of lower-margin business that per our agreements, we are required to fulfill. This utilizes our finite capacity less ideally, pushing out some higher-margin projects. That is the nature of our business.

In the fourth quarter of last year and the fourth – and the first quarter of this year, we went through one of those periods, and it impacted our profitability negatively.

The mix began to normalize in the second quarter, and we were able to deliver a meaningful improvement in revenue, gross margin and EBITDA as well as a narrowing of our net loss from continuing operations by more than $0.5 million from a loss of $581,000 in the first quarter to just $78,000 in the second quarter.

Looking into the second half of 2018, based on our actual backlog and current market conditions, we see a continued trend towards the norm. As a result we anticipate that the third quarter will be an improvement in all key metrics compared to the second quarter with further improvement in the fourth quarter.

This outlook is supported not just by the record size of our backlog but also the composition of the orders within it. We finished the second quarter with our highest backlog from continuing operations in our history, and we added more than $2.7 million to that backlog in July, surpassing $39 million in backlog at the end of July.

This represents a nearly $9 million improvement since March 31 of this year, and a new historic high for Pioneer. Accordingly, we are positioned for a very strong second half of 2018 as demand for our solutions are strong and growing, and we have a stable, efficient and cost-controlled platform for that growth. Some highlights in the current backlog.

Subsequent to the end of the quarter of the second quarter, we received a $1.4 million order, our largest single order for dry-type distribution equipment from an electrical distributor. This order is for our dry-type transformers to be used in a multiuse corporate facility in Downtown Toronto.

Besides the high dollar value of the order, what is significant about this order is that it touches the entire breadth of our dry-type product line, including low-voltage, medium-voltage, harmonic mitigating power and distribution-type units.

This is an excellent example of Pioneer’s ability to provide a comprehensive and integrated solution to our customers. The first parts of this order or first portions of this order will be delivered in the fourth quarter of this year, and the remainder scheduled for the first half of 2019.

In the last month, we also booked our first significant job related to cryptocurrency mining, a $500,000 project for our liquid-filled transformers related to a new Bitcoin mining operation.

On the Critical Power side of our business where we are mostly focused on the service part of that business, shortly after the second quarter, we received a follow-on order for our remote monitoring solution for generators to be installed in 80 additional stores – store locations for a leading U.S.-based home improvement retailer.

We had initiated a pilot program at this retailer involving two stores in the second half of 2017. We installed and maintain the proprietary solution, which enabled comprehensive asset management for on-site power generation and real time tracking of important generator metric.

Our equipment and software allows for extended tracking of this data over many weeks, enabling the retailer to rapidly identify negative trends and react accordingly before any outage occurred. Based on the success of this pilot program, the customer asked us to expand the offering to 80 additional store locations.

This customer has more than 2,200 store locations in the United States, and we hope and expect to add more of the locations over the next two years, with the ultimate goal of securing longer-term preventive maintenance contract for the customer’s on-site power equipment.

We generate revenue both from the installation of the remote monitoring system as well as maintenance feed for the monitoring itself, which provide pioneer with an ongoing contracted piece of revenue. We expect our success with this premier retailer will beget successes with other similarly high-profile retailers.

In May of this year, we signed a definite agreement to divest our switchgear business. This transaction is an important part of our strategy to simplify our portfolio, reduce costs and focus on our core transformer business. We expect to finalize the sale on or before December 31, 2018 as we continue to work through closing conditions.

As a result of this divestiture, we expect to being more profitable, carry less debt, have greater flexibility in our efforts to create shareholder value.

At the same time and in our view, the potential for accelerated growth and profitability of the switchgear business are enhanced by aligning its assets and capabilities went to an advanced energy solutions provider, such as CleanSpark.

CleanSpark is a microgrid company with advanced engineering software and controls for innovative, distributed energy resource management systems.

Folding a specialized vendor-agnostic hardware solution into its solutions set provides CleanSpark with a simplified business development model, more streamlined deployment, an opportunity for more rapid growth.

Through an equity position in CleanSpark, Pioneer’s shareholders will be able to benefit from the future success of this business in the hands of a more appropriate operator. Subject to market and legal conditions and board approval, it is our intention to eventually distribute the shares and warrants to our shareholders as a dividend.

We will receive approximately $10.3 million in total consideration for a business that historically has been generating negative EBITDA for us. This suggests that the current share price of Pioneer may be less than the value of the individual business units if they were viewed separately.

With this transaction as a backdrop, we are carefully evaluating paths to unlock shareholder value, including dividends and/or the sale of part or all of our business units. Unlocking shareholder value remains our most important objective, and as Pioneer’s largest shareholder, I am fully aligned with this effort.

On the less – I’m sorry, until there is something more definitive to report, I will refrain from further comment on the CleanSpark transaction or any other potential M&A and will not answer questions about the CleanSpark transaction or any other sales process during the Q&A section of the call.

With that, let me turn the call over to Tom Klink to discuss our financial results..

Thank you, Nathan, and good afternoon, everyone. Before I get started, as Nathan discussed, on May 2, we signed an agreement to sell our switchgear business. Accordingly, this portion of our business has been reclassified as discontinued operations for second quarter and year-to-date reporting.

The results presented in our press release and that I’m about to discuss, reflect continuing operations only. Revenue was $24.6 million for the second quarter of 2018, up 4.8% on a sequential basis with each business unit reports increased sales volume.

Year-over-year, second quarter 2018 revenue compares to $27.3 million in the second quarter of 2017. The year-over-year decrease was due primarily to lower sales of generator equipment and liquid-filled transformers, which was partially offset by an increase in revenue from our generator service business.

Service revenue from the maintenance of generators increased by $326,000 or 14.4% year-over-year. As a reminder, the second quarter of last year was a particularly strong quarter, especially for our liquid-filled products, creating a challenging year-over-year comparison.

Gross profit for the second quarter of 2018 was $5.2 million or 21.2% compared to $5.8 million or 21.3% gross profit in the year-ago quarter. Sequentially, gross profit was up substantially from 18.9% in the first quarter of 2018 with each business unit reporting improved profitability.

Selling, general and administrative expenses of $4.15 million for the second quarter of 2018 were essentially flat on an absolute dollar basis, both year-over-year and sequentially. As a percentage of revenue, SG&A expenses were lower sequentially at 16.9% of revenue in the second quarter of 2018 compared to 17.9% in the first quarter of 2018.

In the second quarter of 2018, we incurred a foreign exchange loss of $197,000 compared to a gain from foreign exchange activity of $210,000 in the second quarter of 2017. Operating income from continuing operations for the second quarter of $857,000 improved significantly on a sequential basis compared to $156,000 in the first quarter of 2018.

For continuing operations, our effective income tax rate for the second quarter of 2018 was 191.8% of pretax income as compared to a benefit of 32.3% for the same quarter last year. The change in the income tax rate was primarily due to the U.S. tax code changes enabled in December 2017.

Specifically, it relates to the taxation of foreign-earned income and the deductibility of interest expenses.

Net loss from continuing operations for the second quarter of 2018 was $78,000 or $0.01 loss per basic and diluted share, a significant sequential improvement from the prior quarter where the net loss from continuing operations was $581,000 or $0.07 loss per basic and diluted share.

Year-over-year, second quarter 2018 net loss from continuing operation compared to net income from continuing operations of $1.7 million or $0.19 per basic and diluted share in the second quarter of 2017. Adjusted EBITDA for the second quarter of 2018 was approximately $1.8 million compared sequentially to $1.3 million in the first quarter of 2018.

Non-GAAP diluted EPS increased from $0.16 in the second quarter of 2018 compared to $0.12 in the first quarter of 2018. Now turning to the six months financial results for the period ended June 30, 2018. Revenues for the six months were $48.1 million compared to $52.3 million in the comparable period of 2017.

For the six months ended June 30, 2018, our gross profit was $9.6 million or 20% of revenue compared to $11.4 million or 21.8% of revenue in the year-ago period. Year-to-date, SG&A expenses were $8.3 million compared to $8.5 million in the year-ago period.

As a percentage of revenue, SG&A increased from 16.3% in the first six months of 2017 to 17.4% in the first six months of 2018. Operating income from continuing operations for the first six months of 2018 was $1 million compared to $3 million in the first six months of 2017.

Our effective income tax rate for the six months ended June 30, 2018 was 25.7% of income before tax as compared to a benefit of 7.5% for the first six months of 2017.

Net loss from continuing operations was $660,000 or a loss of $0.08 per basic and diluted share compared to net income from continuing operations of $1.9 million or $0.22 per basic and diluted share in the year-ago period. Our adjusted EBITDA for the first six months of 2018 was $3.1 million compared to $5.4 million for the first six months of 2017.

Lastly, our non-GAAP diluted EPS was $0.28 per share compared to $0.49 per diluted share in the comparable 2017 period. Turning to the balance sheet and the statement of cash flows. Our total interest-bearing debt at June 30, 2018 was $28.8 million compared to $28.2 million at December 31, 2017.

For the six months ended June 30, 2018, we used cash from operations of $1.6 million compared to the first six months of 2017, where we generated cash from operations of $2.3 million. Our final installments for the 2014 and 2015 payroll tax liabilities, which initially had balances greater than $4 million, were made during the second quarter of 2018.

We continue to expect to generate high single-digit growth in revenues from the continuing operations and to increase adjusted EBITDA for the full year of 2018 compared to 2017. This concludes my remarks. I now turn the call back over to Nathan..

Thank you, Tom. I’m encouraged with the sequential improvement, moreover, our record backlog. And improved mix of that backlog gives us a significant visibility into the remainder of 2018. We expect the second half of 2018 to be better than the first half, both on a top and bottom line basis.

In addition, we are expecting sequential improvements from Q2 to Q3 and again, from Q3 to Q4. Operator, I’d now like to open the call for questions..

Q -:.

Thank you. [Operator Instructions] And I currently have no questions, gentleman..

Great. Excellent. Thank you all for your time and support, and we look forward to updating you again on our next call..

And ladies and gentlemen, once again, that does conclude today’s conference. And again, I’d like to thank everyone for joining us today..