Good day and welcome to the Pioneer Power Solutions, Inc. First Quarter 2016 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jeff Stanlis from Hayden IR. Please go ahead.

Thank you. Good day and welcome to Pioneer Power Solutions' 2016 first quarter financial results conference call. 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. 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 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 last night, 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, Jeff. Good morning and thank you all for joining us today for our conference call. This was a strong start to 2016 for Pioneer demonstrating that our results are progressing according to our plan. The profitability reported for the first quarter of 2016 reflects most of the benefits of the cost reduction initiative put in place last year, as well as the impact of planned exiting of lower margin business. The results of the first quarter reinforces that we are on target to at least reach our full-year guidance for adjusted EBITDA of between $8 million and $9.5 million. We have taken decisive action to eliminate the drags on our profitability and looking forward, we expect sequential improvement in both our top and bottom line throughout 2016, as we grow our business and take advantage of economies of scale and operational efficiencies to drive profit margin higher. For the quarter, revenue was $26.6 million and adjusted EBITDA was $2 million. Our $1.1 million in operating income for the first quarter represented a $2.3 million sequential improvement and was higher by $1.2 million, compared to the first quarter of 2015. During the third quarter of last year, we announced decisive actions to rationalize our business and streamline operation with the stated goals of eliminating the parts of our business that were depressing our profitability. As part of this, we essentially consolidated six manufacturing facilities to three. In addition, we have outsourced certain lower margin activities and adjusted our headcount. As a result of these efforts, we expect it to reduce our annualized fixed cost by at least $2.5 million. We began this initiative during the fourth quarter of 2015 and completed them during the first quarter of 2016, while most of the reductions were reflected already in the fourth…

Thank you, Nathan and good morning to everyone. First quarter revenues were $26.6 million, down 8% compared to the $28.9 million in the first quarter last year. This decrease was driven primarily by plan reduction in sales of certain lower margin products as Nathan mentioned, which were partially offset by increased sales in our T&D solutions segment, driven by our acquisition of Pacific Power in August 2015. 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 $2 million. Gross profit for the first quarter was $5.9 million or 22.3% gross margin, compared to $5.6 million or 19.3% gross margin in the year ago quarter. For the quarter, selling, general and administrative expenses decreased 18.4% on an absolute dollar basis to $4.7 million, compared to $5.8 million in the first quarter of 2015. As a percentage of revenue, SG&A expenses also decreased from 20.2% of revenue in the first quarter of 2015 to 17.9% of revenue in the first quarter of 2016. Operating income for the quarter was $1.1 million, compared to an operating loss of $84,000 in the first quarter of 2015. The first quarter of 2016 also included $119,000 in restructuring integration and impairment charges compared to zero charges for the first quarter of last year. Net income for the quarter was $569,000 compared to a net loss of $225,000 in the prior year’s quarter. Adjusted EBITDA was $2 million during the quarter or 7.6% of revenue compared to $834,000 in the first quarter of 2015. Non-GAAP diluted EPS was $0.11 per share compared to $0.03 per share in the first quarter of…

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.

Hi, Nathan and Tom, thanks for taking my questions.

No problem, Matt.

So, I think the first question I had was – sorry, what was that?

There’s a lot of noise coming through.

Yeah, now I’m at an airport, sorry, guys. So it probably calm down in a second here, but can you hear me okay?

Yeah, perfect.

Okay, good, all right. So, the first question I had was around your outlook. So, essentially, it looks like EBITDA margins in Q1 really strong, 7.6%, which is ahead of where you guys are guiding at the midpoint, which I believe the midpoint of your guidance is about 7.2% EBITDA margins. Q4 also even they had a partial benefit from restructuring, you already had a deadline with your 2016 full-year EBITDA margin guidance. So, I’m just trying to understand essentially why not bring up guidance for 2016, this quarter’s, given where things are tracking, are you expecting sort of to flatten out here or I think you had mentioned you still expect to get some more benefit from some cost cutting you’ve done. So just talk a little bit about that and essentially, how you’re expect things to track in terms of EBITDA margins for the year?

We’re lucky in a lot of parts of our business, we have pretty good visibility. So the visibility into the second and third quarter is good and revenue was tracking according to oil and it’s up and therefore based on just the additional revenue, the EBITDA margins should – EBITDA is an absolute number, should go up in the second and third quarter and the margin should pick up a little bit as well. Don’t have a lot of visibilities into fourth quarter, yes, and that’s the reason we’re not changing the guidance. We’re not making any change in the guidance right now.

Okay. All right, that’s fair. And then you’d mentioned – I just wanted to get a little bit more color around some of the additional costs that you removed in Q1, I think you had said not everything was completely done and you’re able to remove additional costs in Q1, so could you just talk a little about those costs that you took out?

Yeah, probably the bulk – I mean, most – in an absolute term, most of the costs were already reduced in the fourth quarter. So, most of that was really the moving from Farnham to Mexico and elsewhere. So that was in body counts and in overhead and other [indiscernible] cost that was the highest piece of it. In the first quarter, we finally completed the move from the Spring Avenue facility in Santa Fe Springs to the Springdale, our original switchgear facility. So we really had the full three months in the other facility. So that’s probably the biggest piece, there may be with a couple of weeks to hangover in Minneapolis, but the bulk of what was finally accomplished was the combination of the switchgear facility --

Okay, got it.

-- which was not completed in the fourth quarter.

Okay, that makes sense. And then, in terms of backlog, it was a really nice increase sequentially, up 23%, maybe you could just talk about the different moving pieces in terms of the segments that drove that strength? And then specifically as a it pretends to Pacific, I know its slightly longer lead times, so how does that kind of impact your backlog burn now and your visibility that’s – I guess additional visibility that might be added that’s in the backlog now with Pacific?

Yeah, so, I guess the tick up was based really on three pieces contributed to the bulk tick up, the switchgear business that’s based in LA and most of that comes from the Pacific – what you’re referring to and we do internally as well, the Pacific side of the business, so that’s the medium voltage more complicated part of the gear business, that’s actually picking up. It’s almost overwhelming the old side of the switch gear business. The liquid-filled transformer business had a very strong booking quarter as well. So their outlook is very strong out of one sate through the whole year, but definitely for the second and third quarters they’re racing ahead of revenue expectations. And on the U.S. magnetics business, we continue to secure and I guess it sometimes gets lumpy, so then these backlogs takes a bigger jump up continue to secure significant orders for custom magnetics related to power distribution units, those what we call PDUs, those specialized pieces of equipment that are there for distribution protection inside the data center. Those will be the three biggest pieces leading to the uptick in the backlog.

Okay. That’s essentially helpful, Nate. And then in terms of liquid-filled strength, I’m curious to get your take on sort of what might be driving that in terms of that market, does that just lacking weakness in oil and gas in the Canadian market year-over-year or is there something fundamental going on there that’s we are missing?

You know, if you are missing it, I’m missing it too. I don’t know what fundamentally – oil and gas, none of it is from oil and gas, none of it is from metals and mining, it’s just between the U.S., Canada, just general industrial type work, there is one segment, there is no one job, it’s just having a much more robust – it will have a much more robust second and third quarter than we expected.

Okay, great. And then I wondered if you could give an update on the critical power segment in terms of the pipeline that you have of new customers, I know that there were maybe some additional long-term contracts that were up a bit and just any resolution to those – do you expect a resolution to those in the near-term, maybe an update there?

Right. So the largest was resolved, targeted was renewed for the year, essentially the same as we had it before. I’m throwing out a number that’s not current, about 1,500 locations throughout the United States. Verizon was done – for one year for the locations that we have in the various states that we deal with their self sites; those were the two big ones. They continue to – as is the strategy to try to secure larger more multi location type customers and are being successful without detailing who, but they are having success with larger airports with that has multiple locations within the airport from a service point of view, state and other municipal type prison systems from a service point of view. And that’s the success and that’s the focus for that business right now.

Okay. Got it. Maybe one for Tom here. In terms of – it does look like inventory days ticked off sequentially, maybe you can just speak to what’s driving that inventory, you building inventory for anything specific or is it just kind of transitory item here?

At this point, we are building inventory for the launch of the DOE product that’s required now in the United States for improved efficiency on units. These units are more expensive than the historical TP-1 units, that’s the dry-type division builds and at this point in time, we have an overlap between old units and new units. I would anticipate that that inventory of old style units, TP-1, if you will, will burn its way off during the second quarter and we will then be selling the new style units that we are now putting in the inventory.

Okay. Got it. So that may essentially – you will be – that was one of my questions actually, which is essentially with that changeover in standards, you guys are mostly sold through the old inventory by the end of Q2, so that inventory should drawdown that?

Correct.

Okay. Great. A couple more here for me. Maybe just in terms of some housekeeping items, you did mention the two divisions that are in installment agreements with essentially the IRS, just wanted to figure out essentially we have a timeline for the additional units and when they may be able to add it into an agreement for installments for the remaining portion?

We anticipate those entering into installment agreements here within the next 30 days, Matt. They – we had to do some address changes with the IRS in order for the agents for the IRS to be able to finalize those agreements with us. We have an agreement in principle with them. We just can’t memorialize it without the address change which recently was done.

Okay, got it. And then just lastly I know guys have recently reclassified some of your short term debt back to long term and you have extended your debt agreement with BMO. I think maturity goes through July of 2017. Maybe you could just talk to us about the relationship with BMO at this point and essentially how you plan on attacking further extension beyond that July 2017 timeframe.

Yes, the relationship with BMO is in a very good place at this time. They were very supportive during the trials and tribulations over the last six months. And the fact that we are able to extend the agreement for 16 months I think speaks highly of the partnership that has developed between the two of us. It is anticipated that we have enough working capacity with the current agreements for the rest of this year into next year and we would be looking in the first quarter of next year to do another long term extension.

Okay. Great to hear. I will jump back in queue guys. Thanks so much.

You are welcome.

[Operator Instructions] It appears there are no further questions at this time. I’d like to turn the conference back to management for any additional or closing remarks.

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

This concludes today's conference. Thank you for your participation. You may now disconnect.