Earnings Call Transcript - PPSI Q1 2023

Brett Maas, Hayden IR

Thank you, and welcome. The call today will be hosted by Nathan Mazurek, Chairman and Chief Executive Officer; Walter Michalec, Chief Financial Officer; and Geo Murickan, President of Pioneer Mobility. Following this discussion, there will be a Q&A session open to participants on the call. We appreciate the opportunity to review the first quarter financial results as well as discuss recent business highlights. Before we get started, let me remind you this call is being recorded and webcast. During this call, management will make forward-looking statements. These statements are based on 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, which applies to the content of the call. I'd like to now turn the call over to Nathan Mazurek, Chairman and CEO. Nathan, please go ahead.

Nathan Mazurek, Chairman and CEO

Thank you, Brett, and good afternoon, and thank you all for joining us today. We carried the strong momentum from last year's fourth quarter into the first quarter of 2023, and this year is shaping up to be a record year for us, both in terms of revenue and profit. Demand for our unique solutions continues to grow at an outsized pace. We are adding new dynamic customers. Existing customers are providing us with new purchase orders and opportunities, and we continue to evolve our solutions to better serve the needs of our customers and expand the vertical markets for our solutions. After growing revenue nearly 50% in 2022, we anticipate 2023 to be another year of 50% growth. We also expect to be profitable for the full year. This marks a significant turnaround in our business following our reset and the sale of our transformer business in August of 2019. Indeed, this was our second consecutive quarter with positive GAAP net income. We have essentially reached a point where our projected annual volume enables us to achieve improved operating leverage and sustainable EPS. While we continue to experience some quarter-to-quarter volatility in our results, we are projecting between $42 million and $45 million in annual revenue for 2023, representing a growth rate of at least 50%, similar to 2022. We also expect continued margin expansion and positive net income with much of our income sheltered from taxes due to our net operating loss carryforwards. As I noted on earlier earnings calls, our e-Bloc and E-BOOST solutions directly address two durable secular catalysts with both drivers inextricably linked to the generational energy transition our nation is experiencing. Our e-Bloc suite of solutions is an integrated compact and outdoor automatic transfer switch scheme, circuit protection and power control system, specifically designed for users of more than one source of electrical power. e-Bloc allows facilities to add additional energy sources like solar, battery storage, fuel cells or natural gas engines without doing any internal upgrades to their existing electrical system. Additionally, e-Bloc allows the user to effectively manage, control and protect all these inputs, facilitating peak shaving, peak skimming and general resilience. As noted earlier, e-Bloc presents all these benefits in a compact outdoor competitive skid-mounted package. Our primary markets for e-Bloc are large multi-location businesses with a large physical footprint, such as retailers and supermarkets as well as critical power-sensitive facilities like data centers, water utilities, hospitals, senior living centers, and prisons, to name just a few. The distributed generation initiative is growing rapidly as end users want to better control their energy inputs, including solar and wind, reducing their carbon footprint, lowering their costs and ensuring a steady reliable supply. Large users of primary power like EV charging businesses are also understandably concerned about their ability for the current grid to continue to supply them with their ever-increasing power requirements today and in the future. Simply put, the market for e-Bloc is very strong and only getting stronger. Turning to our E-Boost Mobile charging platform. We continue to see increasing orders and ever-expanding use cases for our unique anytime, anywhere mobile EV charging solution. Our E-BOOST system is a sustainably powered propane-fueled high-speed charging system, providing the ultimate immobility and portability. As a reminder, the E-BOOST portfolio is comprised of several platforms. E-BOOST Mini is a skid-mounted version that provides high-capacity EV charging in the smallest footprint. It brings on-demand charging of EV vehicles to any location within a facility with just a forklift and anywhere else on board with the trailer. This gives an easy and convenient way for dealerships and electrical depots to charge their EVs. E-Boost G.O.A.T. generator on a truck is a truck-mounted option that brings quintessential mobility and high-capacity EV charging. It enables on-demand charging of EV vehicles at any convenient location, providing EV truck and car owners the convenience of dispatchable charging services and thereby eliminating any range anxiety. E-Boost Mobile is specifically a trailer-mounted solution that balances the need for mobility and higher capacity of EV charging with minimal effort and on short-term notice. E-Boost Mobile provides multiple options for towing and can be available at specific businesses, large sports and cultural events, or other gatherings to fulfill the elevated demand for high-speed charging. E-Boost Pod finally is the mostly stationary EV charging solution with customizable higher capacity and can be moved if necessary. The pod can provide high-speed DC fast charging to four or more vehicles simultaneously. Like all E-BOOST solutions, it can also service other power needs, especially in emergency situations such as a power outage. Serving as a backup power source and convenient power connectors and outlets are available on board. Today, target customers have included electric truck and bus manufacturers, their associated dealers, fleet management companies, package delivery providers, school bus operators and the like. We recently provided additional units to a large domestic manufacturer of electric trucks and buses, new units to one of the country's largest fleet management operators, and new units to a transportation authority controlling some of the nation's largest airports. Other active E-BOOST markets include the electric vertical take-off and landing aircraft or eVTOL market, which are the future of air taxis, eSports and E-off-road market for equipment, including things like e-boats, e-jetskis, electric snow mobiles, off-highway equipment, and construction equipment, anything that encompasses farming equipment, e-tractors, e-sprayers and so forth, all along the lines of charging infrastructure for these particular pieces of equipment. The National Electric Vehicle Infrastructure and NEVI program is also providing incentives and federal grant funding to U.S. companies that manufacture EV-charging stations or their components domestically in order to have a national charging network along our interstate highways. We expect the NEVI program to be a significant catalyst for us in 2024 and 2025 as state governments and authorities begin the funding and implementation of the NEVI program. Our E-BOOST solution is an especially appealing solution in rural and underserved parts of our nation's highways where permanent infrastructure solutions are just uneconomical. Unquestionably, sales of EV trucks, buses, and cars have significantly outpaced the charging infrastructure. This is particularly true in the industrial and commercial sectors where companies with fleets of EVs, trucks, buses, and warehouse equipment need to augment their charging infrastructure. Many organizations are moving quickly to add charging solutions for customers, employees, and company fleets. We have sold solutions directly to large EV car manufacturers to recharge vehicles as E-BOOST fills this unique niche. As a result, we expect E-BOOST to drive significant growth in profit generation for us in 2023 and beyond. With that, let me turn the call over to Walter, our CFO, to discuss our financial results of the first quarter.

Walter Michalec, CFO

Thank you, Nathan, and good afternoon, everyone. As Nathan mentioned, Pioneer carried a strong momentum from the fourth quarter of last year into the first quarter of 2023, and this year is shaping up to be a record year for us, both in terms of revenue and profit. Pioneer's first quarter revenues were $8.5 million, up $2.1 million or 34% year-over-year. Revenue from our T&D Solutions segment, which manufactures our e-Bloc solution, increased 55% to $5.8 million when compared to $3.7 million during the same period last year. And our Critical Power segment, which integrates E-BOOST was up 4% to $2.7 million. Gross profit for the first quarter was $2.2 million or a 26% gross margin compared to a gross profit of $923,000 or a 14.5% gross margin during the first quarter of last year. The significant increase to our gross profit margin was primarily due to increased sales of our e-Bloc Power Systems, a favorable sales mix, and improved productivity from our manufacturing facility. Selling, general and administrative expenses of $2.2 million were 25% of revenues for the first quarter of 2023, an increase of 24% when compared to $1.7 million of selling, general and administrative expenses in the year-ago quarter. Approximately $150,000 of the quarterly SG&A was related to stock-based compensation. And SG&A also includes approximately $600,000 in incremental investments in sales, marketing, personnel, and prototypes for our E-BOOST solutions. This is intentional and targeted spend designed to drive demand for this new solution. We expect these investments to continue through 2023 as we build out this new ever-growing business line. Operating income for the first quarter of 2023 was $55,000, a positive swing of approximately $880,000 when compared to an operating loss of $823,000 during the first quarter of last year. Net income for the first quarter of 2023 was $122,000 or $0.01 per basic and diluted share, compared to a net loss of $740,000 or negative $0.08 per basic and diluted share during the first quarter of 2022. Turning to the balance sheet. We had $11.6 million of cash on hand and no bank debt at March 31, 2023 compared to $10.3 million of cash on hand at December 31, 2022. This represents cash per share of approximately $1.18 at March 31, 2023. Accordingly, we are confident that we are sufficiently capitalized to address our near-term investments and cash needs. As Nathan said, we expect to deliver continued growth in 2023 with margin expansion and positive net income. Based primarily on our backlog, as well as the significant and accelerating demand for our new solutions, we believe we can grow revenue by at least 50% in 2023 when compared to 2022. We also expect to generate positive full-year net income and earnings per share. This concludes my remarks. I now turn the call back to the operator for any questions.

Amit Dayal, Analyst

With respect to the guidance, Nathan, can we now expect sequentially stronger quarters through the rest of 2023?

Nathan Mazurek, Chairman and CEO

That's the expectation, correct, both in terms of revenue and in terms of EPS.

Amit Dayal, Analyst

Understood. And then can you give us maybe some granularity on what's in the backlog right now?

Nathan Mazurek, Chairman and CEO

Most of the backlog consists of the e-Bloc product. There are several large projects, though we don’t disclose customer details. One notable project is a large electric vehicle campus and manufacturing facility for a major car manufacturer in the southern United States, along with two water utility projects, one in California and another in a different location. Some projects have been highlighted separately, including a significant project for an aircraft manufacturer. The trend shows that these projects are becoming larger rather than being isolated cases. That’s what the backlog looks like this year.

Amit Dayal, Analyst

Understood. And then as you get to the $45 million, $50 million level of revenues, are we close to getting at full capacity now? How do we sort of grow from these levels in terms of capacity availability?

Nathan Mazurek, Chairman and CEO

We've been focused on this for the past month because, from our perspective, 2023 is finished. The facility in Los Angeles is fully booked. The challenge is figuring out how to increase output from the same facility next year. We plan to do this partly through product mix adjustments, and possibly by scaling back on some current operations. Our main value lies in engineering, wiring, testing, and assembly, and we may outsource some less critical tasks that we still handle today. We believe this could potentially increase our capacity by about 30% to 40% while operating on a single shift. So, our primary goal is to boost volume and profits in 2024 from that facility without incurring significant capital expenses.

Amit Dayal, Analyst

And just last one for me. The supply chain side, are you comfortable with how everything is set up for you to deliver against this outlook?

Nathan Mazurek, Chairman and CEO

So I would say that we're relatively comfortable. On the e-Bloc side, it's not as great as it used to be. It's not terrible anymore, and we're kind of all living with it. We're not into the crazy price increases anymore. It's very stable from that point of view. The lead times are manageable. Obviously, unless you're ordering exotic types of components of which you still have that. On the E-BOOST side, engines are still a problem. If they say 40 weeks, that means 52. So most engines are a year out. So we've been getting ahead of that by really ordering and holding inventory that we think we're going to use as the E-BOOST product continues to take root. And frankly, that without the inventory that we invested in already last year, we wouldn't be able to deliver anything this year. So we've been constantly re-upping ahead a little bit. We have the cash and we were able to use it. And obviously, we don't want to just keep inventory that doesn't do us any good either, but we try to be judicious about it and with all that and all the spending that we're doing below the line for primarily E-BOOST, I think the greatest testimonial test that the cash went up in the first quarter from the fourth quarter. So something is going right.

Shawn Boyd, Analyst

Afternoon, you hear me okay?

Nathan Mazurek, Chairman and CEO

We can, Shawn.

Shawn Boyd, Analyst

Great. Just want to go back to that comment regarding the capacity expansion. If I heard it correctly, the optimization and the potential outsourcing of certain processes would add 30% to 50%, that's increasing the revenue capacity. So take your guidance from $42 million to $45 million and then add 30% to 50% beyond that. Is that the way we should think about it?

Nathan Mazurek, Chairman and CEO

Right. The first part of your statement is correct. The second part is a little inaccurate because that business doesn't represent 100% of our revenues. It represents, I don't know, 65% of our revenues. So however, that's an increase of that. On the E-BOOST side, the Minneapolis-based business, we're not really facing a capacity constraint right now. We hope that we do. That would be great to deal with that challenge on the E-BOOST side. But right now, we're able to service and for the balance of '23, we're confident we can get out of all the units that we need to get out this year.

Shawn Boyd, Analyst

Got it. Okay. Great point there. So this is on just the T&D Solutions side, that 30% to 50%...

Nathan Mazurek, Chairman and CEO

That Correct. Correct. Correct.

Shawn Boyd, Analyst

I understand your point about E-BOOST. To clarify, it generated a couple of million last year, and we're hoping for $3 million to $4 million this year.

Nathan Mazurek, Chairman and CEO

Correct, correct.

Shawn Boyd, Analyst

That clarifies things. Now, could you provide more detail on the main factors that will help maintain the gross margin at 26%, which is quite significant?

Nathan Mazurek, Chairman and CEO

Yes, it's all about the product mix. The more classic e-Bloc products we offer, the better the margins tend to be. However, sometimes these products are grouped with other types of equipment, which can hinder margin expansion. We are not managing to add enough value to achieve our target margins. So, it's almost entirely about the mix.

Shawn Boyd, Analyst

Okay. I would like to ask about the backlog, which stands at $37 million. You've mentioned that 2023 is largely booked, indicating that you have a plan for how to deliver it. Is most of the remaining business at this kind of margin? Can we maintain that 26% margin in the fourth quarter?

Nathan Mazurek, Chairman and CEO

Yes, we would love to aim for that. It never works out exactly as we hope, but those are the gross margins we are targeting. When we have the right mix and scale, we can achieve those margins. Higher volumes benefit us in terms of productivity and purchase price. That's our plan and expectation moving forward.

Shawn Boyd, Analyst

Got it. Okay. And just one last thing for me for now is the order cadence. If I’m looking at this correctly, implied orders were $8 million to $9 million in the quarter, which is down after a strong fourth quarter. Can you talk about whether this is usually how it works, where you ramp up throughout the year and then see a drop in March before ramping up again? Any insights you can provide on the general order cadence for your business would be helpful.

Nathan Mazurek, Chairman and CEO

Yes. The projects and jobs are increasing in size. From a timing perspective, we have paused on announcing large orders since the second quarter. You will need to wait until the end of the second quarter to see how the backlog changes, along with the book-to-bill ratio and revenues. The dynamic right now is extremely active, but due to the size of the orders, any significant change, like one coming in on April 15, can have a major impact. However, the order cadence remains strong.

Unidentified Analyst, Private Investor

My question has to do with the SG&A expenses from the first quarter 2022 to 2023 Q1. What were the factors or what contributed to the increase from the $1.7 million to the $2.2 million quarter-over-quarter?

Walter Michalec, CFO

Sure, I can address that, Jonathan. The $2.2 million increase was primarily due to our ongoing investments in the E-BOOST and e-Bloc initiatives, which accounted for about $600,000 in the quarter. If we exclude these investments, which will continue throughout 2023 but are expected to normalize as we scale up, SG&A would actually show a decrease in the first quarter.

Unidentified Analyst, Private Investor

You also said in your remarks earlier that in 2022, you had employee stock-based compensation that was expensed in 2022. Do we see that kind of expense is going to take place in 2023? And is that part of the Q1 SG&A number?

Walter Michalec, CFO

Yes, my comment was that approximately $150,000 of the current quarter's SG&A is related to stock-based compensation. Both quarters had similar amounts, with Q1 of 2023 at about $150,000 and Q1 of 2022 at roughly $60,000.

Unidentified Analyst, Private Investor

Do we see the SG&A expenses going forward in 2023 to be comparable to the quarters in 2022?

Walter Michalec, CFO

For the most part, I would say yes, but our goal is to take control over SG&A, do more of a scrub and see where we can save on costs as well. But relatively speaking, we don't expect any significant swings up or down.

Unidentified Analyst, Private Investor

My question is about your Los Angeles factory that makes the e-Bloc, which is fully booked for the year, and your e-Bloc sales appear to be the fastest growing. After you implement your plans to outsource some simpler tasks, are you planning to increase production or build another factory? Do you have those plans in place yet, or will you only take orders that can be fulfilled in Los Angeles?

Nathan Mazurek, Chairman and CEO

Yes, we face this challenge every day, and it's a significant one to have. Our primary objective is to sustain growth in 2024, which goes beyond just manufacturing; we need to engineer effectively and manage complex projects that our customers require. It's crucial to have the right team in place as well. If we fail to consistently provide exceptional solutions, our growth will be limited, and we won't have many opportunities in this market. The key first step is to find ways to ensure reasonable and exciting growth in 2024. Then we need to decide whether to expand, whether that means assembly only or something more. We aim to provide the best solutions. The value we bring lies in our engineering capabilities, custom bus work, and the intricate wiring and testing involved in many units. If we're not focusing on these areas, it raises questions about what we are doing for our customers. Other functions like manufacturing back pans, end walls, and corner posts are less critical but still necessary. Currently, we handle all of these tasks. Any expansion we consider will concentrate on facilities that add value to our process. Additionally, such expansion doesn't have to be limited to Los Angeles.

Unidentified Analyst, Private Investor

No, no worries. So is e-Bloc customer engineered for each piece?

Nathan Mazurek, Chairman and CEO

Every use case is different, and every customer has unique needs. For instance, if you're a supermarket chain, many of your requirements might overlap. However, even within that category, there will be differences based on the store's size, the type of services they utilize, and their specific preferences, such as whether solar power is suitable or if they have a gas line. In summary, each project is tailored to the client, yet there are commonalities, particularly among clients in similar sectors. For example, no two water utilities or hospitals are the same, and the same goes for senior living centers. Thus, there's not much that can be standardized.

Unidentified Analyst, Private Investor

Okay. Well, good to see you have some kind of technological multiple...

Nathan Mazurek, Chairman and CEO

Our backlog currently shows no additional stores, as none have been announced yet. We anticipate that once they have received all the units and are comfortable with the data, we will see progress. This is a significant step for them, and we hope not to hear any issues, which would indicate everything is functioning smoothly. Typically, we only receive feedback when there are complaints, so we do expect more units to be rolled out. There have been discussions among their engineers but none of that is expected to occur in 2023. Even if something is released tomorrow, it would likely be addressed in 2024 due to their internal submission processes.

Unidentified Analyst, Private Investor

So 1,000 stores, if I take the average that you sold on the initial order was just about $200,000 per unit per store. So 1,000 stores, you're talking about a $200 million opportunity?

Nathan Mazurek, Chairman and CEO

Correct. And obviously, those prices would be higher over time as things tend to go up. I mean they don't typically go down, but that's correct. In a realistic time frame is they laid out internally that they were going to do this in five years. The first part of the order is any indication, five really means it's going to be spread out over ten years.

Unidentified Analyst, Private Investor

Yes. Nathan, thank you for the good quarter. My congratulations on that.

Nathan Mazurek, Chairman and CEO

Thank you, Ray.

Unidentified Analyst, Private Investor

I heard you mention the supply of propane engines needed for generation. Is there any interaction between e-Bloc and E-BOOST regarding the engines, and do you have any further comments on their availability? Thanks again for a good quarter, and congratulations.

Nathan Mazurek, Chairman and CEO

Yes. Thank you, Ray, and I'll thank you on the call here. I'll thank you separately for only me sending me interesting information and making me stay on my technological toes as far as what other technologies and processes might be out there that might help pioneer. So thank you for that, Ray. Yes, there's not a lot of interaction. I always expect it to be more. There's not a lot of interaction between or cross-selling or cross-technological pollination between e-Bloc and E-BOOST. On the e-Bloc side, we don't furnish the engines on the particular job. We're kind of agnostic as to what the user wants to use. They're using engines, they're using one, they're using three, they're using ten. I don't care. It only determines the size of the project for us. On E-BOOST, of course, we are using an engine. We're adding an alternator and a controller and the charger and the tanks and mechanically doing it in a way fitting it in a way for the customer's application. So the engines do affect us there. That's the heart of what's going on. Everything else is frankly passive or dump on the E-BOOST. The engine is the one generating the power.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Nathan Mazurek, for any closing remarks.

Nathan Mazurek, Chairman and CEO

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

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.