Good day and welcome to today's Pioneer Solutions, Inc. Second Quarter 2015 Conference Call. Today's conference is being recorded. At this time it’s my pleasure to turn the conference over to your host for today's call Brett Maas from Hayden IR. Please go ahead.

Thank you. And welcome to Pioneer Power Solutions 2015 second quarter financial results conference call. The call today will be hosted by Nathan Mazurek, Chairman and Chief Executive Officer, and Andrew Minkow, 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 second 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 the 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 this call. I'll now like to turn the call over to Nathan Mazurek, Chairman and CEO. Nathan?

Thank you, Brett. Good afternoon and thank you all for joining us today for our conference call. During the first half of 2015 we delivered $55.3 million in revenue, an increase of 32% versus the same six months last year, due in part to our acquisition of Titan, but also as a result of 8% organic growth year-over-year evidencing the underlying strength and demand for our Power Solutions. We continued to build upon on our backlog of orders which increased to $32.8 million, up both year-over-year and sequentially. The backlog in our T&D solutions segment was essentially flat compared to the prior quarter, while the backlog in our Critical Power Solutions segment increased nearly 14% since March 31, driven in large part by our national service and repair business and a new multi-year regional service contract with a major cellular service company. Our acquisition of Titan in December 2014 is helping to drive top line growth and we are encouraged that it’s poised to now contribute meaningfully to our bottom line as well. During the six months in our T&D Solutions segment, our US transformer sales grew 40% versus last year, driven mostly by new US based OEM business, which helps often the impact of our Canadian transformer sales that were down 14% versus last year, stemming from recessionary economic conditions in Canada, coupled with the continuing decline of the Canadian dollar to near 10 year lows. Our relatively new T&D switchgear business is progressing according to plan, particularly in the area of sales growth, taking into account the acquisition we completed less than two weeks ago, which I will talk about more later. I think the prospects for our T&D switchgear business have been greatly enhanced. In our Critical Power Solutions segment, our generated sales and recurring service business…

Thank you, Nathan. Second quarter revenues were $26.5 million up 25.6% from $21.1 million in the second quarter of 2014. The $5.4 million a year-over-year increase in our revenue was driven by a $5.3 million increase in our Critical Power Solutions Segment that includes Titan revenues of $5.4 million. This increase was partially offset by an approximately $100,000 year-over-year decrease in segment revenue related to the manufacture, sale and service of switchgear for Critical Power application. The remaining modest increase of just under $0.1 million in our consolidated revenue was derived from T&D solutions segment and included higher sales of our switchgear equipment solutions, which is partially offset by a net decline in revenue from our transformer product line. The small overall net decrease in transformer sales was driven by our Canadian operations where sales declined $2.7 million or 22% most of which was as a result of foreign currency translation, which negatively impacted revenues by itself the currency change by approximately 12%. Partially offsetting sales performance in Canada was growth in our U.S. transformer businesses, which was up 31% year-over-year driven largely by a major new datacenter oriented customer in our OEM sales channel and new customer gains by our corporate selling group. From time to time our sales figures are negatively impacted by the effect of foreign currency translation, when comparing our results to prior periods, as well as the case this quarter. Approximately 38% of our consolidated sales were to Canadian customers versus 57% during the same quarter of last year 2014. Now their blended currency rate that was a 11% lower on conversion as compared to the same quarter of 2014. Our gross profit for the second quarter was up to $4.9 million or an 18.6 gross margin percentage compared to $4.2 million of gross profit…

Thank you, Andrew. And thank you everyone. Operator, I'd like to now open the call for questions.

[Operator Instructions] And we'll go first to Matt Koranda with ROTH Capital Partners.

Good afternoon, Nathan. Good afternoon, Andrew. Thanks for taking the question.

Yes. Hey, Matt.

So I just wanted to dig into the T&D Solution segment for a bit if we could, and particularly with focus on the top line. So just – so I understand it correctly, it sounds like most of the weakness kind of beyond large headwind you guys are facing in terms of FX in Canada would be coming from Bemag and Pioneer, those two divisions? I mean, can we get a little bit more granular with some of the weakness in end markets that you are guys are seeing in Canada. I mean, what do you hear from distributors, is it mainly oil and gas, is it weakness across the board with utility and general industrial as well, are there any bright spots or is it just all challenging at the moment there?

Right. So for us the weakness - and the only real systemically is that we have is in Bemag in particular, Pioneer the original liquid-filled business will hit its budget for the year and despite the affects of - the recessionary conditions in Canada still have an excellent year of profitability. It indeed of course is facing headwind. Its much harder, much more difficult, less margin than we had two years ago because primarily due to the decline that were - elimination of oil and gas type projects in Canada. Bemag is a more construction, commercial construction oriented business and depending on the province across Canada they are facing severe – this is the year is the year of terrible decline for whatever the combination of reasons. Overall, recession oil and gas of course impacts the Western part of Canada, metals and mining are subterranean or non-existent and that’s affecting parts of Quebec and Saskatchewan and others. So there is really systemic weakness all across Canada and Bemag is - the only get in a way that it cannot without or in our opinion it cannot without a severe elimination of redundant overhead and taking a very hard tact to, it survive in a profitable way. And we just can’t brook anymore loss.

Okay. Got it. Very helpful. When we think about the fixed cost improvements that you guys mentioned in the release and then you talked about a little bit in your prepared remarks as well. So about 800,000, I think to date and then sources of incremental, it sounds like another incremental $1.7 million to come. If we kind of had to break that out into where you're going to see the most improvements, I mean, maybe you could talk about either between headcount facility consolidation, outsourcing non-value add activities, I mean, where are we getting that sort of - that incremental 1.7 million in savings?

Sure. Right. I mean, that 2.5 million of which 0.8 million is already done, that’s all headcount. And really that headcount only reflects a portion of the whole basket of heads that we will look and consider, which the full road is if you will or could exceed for. So we're holding ourselves to at $225 million, which we expect to be in place and done by the end of this year. And the components of it skew a little bit - only about one third to our US operations really pruning at the edge of the [tree ][ph] where as some of the operational changes we are intending to make with facility will be more impact full at the sharp [four] [ph] level and that’s where the other two thirds of the potential savings is expected to come from and it will take more time.

Okay. Got it. So, it’s fair to say that happens roughly mid 2016, so by maybe the end of Q2 of 2016?

That’s the very end of it, that’s the very end. I think the biggest pieces will be in place at the end of the fourth quarter beginning in the first quarter.

Okay. Got it. All right. Just moving on to the outlook, so it looks like in terms of the - what you guys are looking at in 2015, especially from an EPS perspective. Could you just talk to me about the gross margins that are embedded in the assumptions that you are making for the EPS outlook in 2015? It seems like that’s probably the primary delta between the where you are and kind of where I was in terms of estimates?

Yes. I mean, it really comes down to - again I hate to say its Canada. I mean, this is the first I've ever seen of it for example. So if you take dry type transformers, which was the steady mid to high teens gross margin business for us when we originally took it on and the market place was much healthier, that’s now on the low single digit, through actually in this quarter negative, but still above water for the year-to-date. So that was quite a large component of it. I would also add that some of the major growth we've had in the US also again in transformers has been in an OEM channel that doesn’t looks so good from a gross margin standpoint. Its in the mid to high teens, but its much better than a lot of other business that we have compared - it doesn’t involve any selling cost in terms of freight, commissions are not great. So that’s had been dampener our gross margin, but a very good contributor to our operating margin. Our switchgear business in LA is performing at above time and so is the gross margin. So that’s not the issue there. And I think we were perhaps a little aggressive on how fast we expected our generator sales and service business to scale to 20% plus gross margin, its tracking there and it has a great sales backlog for the end of the year and I think we're going to get to target. So those are the pieces up and down.

Okay. That’s great. Looking at 2016, the preliminary outlook that you guys provided is very helpful. I just wanted to make sure I was clarifying something, what was the tax rate the effective tax rate that you guys were using for that outlook in 2016, that you guys were using for that outlook in 2016? A - Nathan Mazurek 35%, historically we've been in the 20-ish range, which reflects a blend of lower Canada rates and lower earnings from the US. Next year we expect to turn this thing on its head and be much more a US based, not only in terms of revenue but profit, which explains the higher effective tax rate.

Okay. Got it. Very helpful. That helps to explain a lot of the outlook to me. Okay. A couple more here just in Critical Power, I know, I thought you guys did a good job of calling our the services segment in the release and it was helpful to see kind of that broken out as a percent of revs. Maybe you could just talk about the pipeline of opportunities within the service segment, what that looks like, and maybe where you think service revenues could be in terms of percent of revenues by maybe 2016 or beyond, what's the internal target that you could maybe share?

Yes. The pipeline is super strong. They are stronger earlier than frankly I expected. They got some big wins and some high profile marquee type projects. They've got 1400 locations now for the third and fourth quarter and the ensuing years from a large cellular provider, a large international airport and continued growth with the key customer, more business and more locations with target. And the pipeline is super strong, most of it is relating to telecommunication type applications or similar to target retail type application. That’s where we seem to have the most success, that’s where our solutions and monitoring and I guess experience make us a better competitor. So that sort of the pipeline in service.

In terms of - as a percent of sales, we're expecting significant growth in service sales as compared to 2015. But as a percent of our whole, its still probably, it will be close to 10% of our whole. Its not for all the growth we're expecting in our T&D business which raises the bar higher. But around 10% is good figure to go.

Got it.

Well, you see it as a percentage of the company's revenue or of Critical Powers revenue?

Yes, more as a percent of the company's entire revenue, I think that’s great. I think very helpful. And remind me again the gross margin profile of service business versus some of the most standard products you are guys are doing?

We look at it by locations, some locations have more equipment sales and are doing other activity, that becomes of matter of how you look at the overhead there and what you're allocated to. But we do have two locations that are pure service, okay and those gross margins outstrip anything else we do anywhere in the company. In the range of double our blended gross margins.

Okay. Got it, very helpful. Last couple in terms of the recent acquisition Pacific you guys alluded to it in the prepared remarks, I think, but maybe you could just talk about more granularly. How this sort of changes the conversations you had with customers where you were previously bidding only transformers, I mean now it seems that you can bid a more comprehensive suite of products. Are there cost selling opportunities from this and what lift you kind of expect to get from that?

Yes I think it’s more than cross-selling I mean it really takes the original LA switchgear business that we bought a couple of years ago really bought at zero, it was zero was doing nothing. And build that business up from just a low voltage provider of special low voltage equipment to a fully lifted provider of medium voltage solutions, which really opens up the big utility in industrial markets for gear and drags along of course low voltage equipment with it. But the medium voltage solution becomes – that's what wags the dog, that's the higher ticket that’s what special and that’s where you get the value add and you get the better price accordingly. In order that, we alluded at least I eluded to it that that’s been committed but we don't in our backlog yet and part of the reason we're still optimistic going forward for that business fairly large solar farm oriented electrical equipment order that really we won't be in the conversion without Pacific. In fact, it was in anticipation of our closing of our Pacific that the customer and the developer went ahead and committed to us. So hopefully next few months we’ll be able to flush that out little bit more. But it’s probably the largest single order that we in Pioneer have ever taken.

That’s great very encouraging. Last month just looking at the balance sheet maybe we could just talk really quickly in terms of any concerns regarding debt to EBITDA covenants, just what the revised outlook you’re providing and maybe you could just talk about the cash situation and some of the options for cash management here. It looks like you do have the option to drawn a bit of the revolver, but just talk cash first for a moment as well?

Sure. You clearly maybe read the Q while we went on so long on the earnings script, but there’s lot of disclosures there. We did our bank agreement officially today to provide more room on covenants they were in good shape. From a liquidity standpoint, we have enough for our needs either from internal cash flow purposes to get us through these next few quarters. That being said, we're tied on covenants, if not the sort of thing where we’re feeling cash starved where we’re really considering doing anything about managing payables differently or being more aggressive about our AR, that's not what we are feeling at the moment. But some of the projects we are undertaking require significant investment and we’ll consider all options internally and externally for securing the cash or financing what we need.

Got it. Okay, guys. I will jump back in queue. Thanks a lot.

Thank you.

[Operator Instructions] We'll go next to William Bremer with Maxim Group.

Hi guys. This is [Charles] [ph] speaking on behalf of Bill. First and foremost though, I'd like to focus on Canada. We've seen a lot of deferrals in there especially with out channel checks. Have customers voice to you when they might see the spending turnaround again?

I don't think they know. First of all they just like to complain in general so I don’t know if they want to - they only want lower prices and more discounts and more freight allowance, but they don’t see seasonally in Canada this gets a little bit better but systemically it’s just weak. I mean they’re about to have national elections in October and people are kind of focused on that as well as to what that’s going to do for the economy, but it’s truly a referendum on what they should be doing. The loss of oil and gas and the decrease in commodities pricing which has killed their mining, but mining sector as well has left them sort of look, where do we go from here. So I don’t really - I don’t know of any answers right now.

Okay. That brings me into my next question is, have you seen success in maintaining customer relationships and with that impact on pricing pressure?

We’re maintaining all the customers and the relationships are strong, we even did a little bit of price increase at Bemag in the face of all this to do something to stem the loss we were the lone wolf doing that and everything is that as clove. But without some deep cost cut, we can't – it's not contributing money for business of our size and for everything else that we do, we can't just sit around and wait for the economy to turn around. I can't wait for oil to go to $100 a barrel. So we've decided in the case of Bemag to be very aggressive on the cost side.

Okay.

On the part of Canada, I would add that the Canadian dollar as it is hurts us in Canada but it has been helpful and we’re seeing more traction in our sales into the U.S. from our Canadian operation.

That's good to know. And my last question is more in regards to the consolidation of production lines?

Right.

What locations are you specifically targeting and we do expect any material onetime charges in the second half?

Yes, I think you can expect some charges that's for certain. We talked quite a bit about our Canadian dry-type transformer business. But that business essentially is in the same business as our U.S. dry-type transformer business. And so there will be opportunities there to consolidate facilities for efficiency. So that I expect will be the biggest piece of any charges you see. There will also be some charges related to the consolidation of our Pacific acquisition into our existing location in LA five miles down the road and the others would be minor.

Okay, great. Thanks guys, I'll hop back in.

And we'll go next to Michael Epstein with Northeast Securities.

Gentlemen, I wish to compliment you on your extensive analysis of your products compared to Titan industry. I’m walking away with a much better understanding of your company. In light of Titan, how will you analyze that acquisition and what percentage of volume and is that your major service area?

Okay. So I’ll go backward, that is our major service. I think it's exclusively the service business as we discussed Michael, maybe publicly and with you as well is that, the impetus for buying Titan was the service business. And it's definitely been - it’s been a good business for us and we continue to put a lot of effort into growing that business. The positive surprise in Titan has been after in January especially after we sort of realigned and rebooted the management team there and realigned sales and centers for the sales people and so forth so cleaned up a little bit to our liking Titan. The equipment part of the business is albeit not as high gross margin, but a fairly simple and steadily profitable business. So we had certain internal projections for profit for Titan for what we call Titan this year and I’m pretty sure that they will be one of the real positives that one of the few positives surprises we have this year. So Titan will continue to exceed and we continue to the mandate is to grow the service business. It grows and it grows probably in scales and it becomes recurring. And at the same time we’re constantly looking for opportunities to grow our footprint with the industrial engine business. We have it down, it cooks. From a working capital point view it’s amazing we booked the order Generac chip set, we invoice it and we never hold it. So I mean it can’t be much better.

Thank you, Nathan and Andrew. Thank you for your explanation over the financials, I think you did a spectacular job. Thank you.

And at this time we have no further questions. I'd like to turn the call back over to management for any additional or closing remarks.

Thank you for your time and support. And we look forward to updating you again on our next call. Have a very, very good evening.