Pioneer Power Solutions Inc. (NASDAQ:PPSI) CEO Nathan Mazurek once again had a chance to speak with GeoInvesting, elaborating a bit more on his background. He also reflected on 2016 and and how in 2017, PPSI will introduce new product mixes into the company’s offering. Mr. Mazurek finally touches upon the margin profiles of various parts of PPSI’s business.
Nathan Mazurek on Personal/Company Background
Okay, I was actually a lawyer in New York City, a very young lawyer working for a large firm in New York City, and a classmate of mine told me about this electrical equipment, a components business that was being sold. Actually, his great uncle was the trustee, it was an antitrust action and one thing led to the other, and I ended up buying a small circuit breaker business in Albemarle, North Carolina, and that really became the beginning of my wonderful journey in the electrical equipment industry.
That business, luckily enough, became very successful, but many, many other businesses at that time in standard, what we would call today, standard electrical type products, load centers, metering, safety switches and the like, other kinds of equipment, mostly through electrical distribution through large chains like Lowe’s and Home Depot, then graduated to more sophisticated equipment, to capacitors, to transformers, to switch gear.
And indeed, Pioneer, the business that we’re running today, was a business that I bought from Schneider in 1995. It was a small pole-mounted transformer business in Quebec in 1994. In 1995, Schneider decided to sell their transformer businesses worldwide, it was a slower growth business than they anticipated. Moving forward and the resident of Schneider called me because we dealt with each other from a components and parts point of view, thought that I might be interested and indeed that worked out when we bought the pioneer business in February of 1995.
The original business was twelve million dollars a year. Eighty percent of our sales went to one customer – we maybe made a few hundred thousand bucks at the end of the day, definitely less than a quarter of a million dollars in profit. By the time we took that business public in a reverse merger in December of 2009, the business was averaging between forty and fifth million dollars a year. We had not made a pole-mounted transformer in more than ten years, and the businesses were close to ten million dollars for the year of 2009. So there was a huge evolution. We like to say, we evolve and that really, what the experience with that business really became, the recipe for everything that we do at pioneer, we kept going up the value chain, we kept trying to apply the same labor and overhead to a more sophisticated solution that was within our grasp that was within our confidence for the customers. So, over the years, we went from pole mounts to pad mounts, to larger pad mounts, to more sophisticated transformers with the same people. We have fifty people in the shop today. We had fifty people in 1995. Some of them are the same. But you know, we were able to grow the revenue, grow the earnings exponentially, by constantly going up the chain and trying to come up with a more sophisticated solution, so that’s the quick background.
Reflecting On 2016
We didn’t announce our fourth quarter yet. That’s probably March tenth to twelfth. I don’t remember exactly when we’re delivering that for the public. For the first three quarters, it was an excellent year, back on track, sales were up, EBITDA is extremely positive. Through the first three quarters, we were definitely on track to meet the mid-range sort of the guidance that we put out. We believe that we confirmed it at the end of the third quarter, we have no reason to believe that that will not be the case.
We put out guidance for 2017, up in revenue as well, and significantly up in EBITDA. We’re very confident. About seventy percent of our business is a backlog type business, project oriented business, for those parts of our business that have that, you know, we are looking, we have a pretty good lookout towards everything going on throughout 2017. The first half of the year has unfolded, especially from an order point of view, very much in line with our expectations, so we’re feeling very, very confident about that. We’re trying to build on the successes of 2016. We don’t like to say it too often, but from an investor point of view, revenue in sixteen and in seventeen has not been the challenge for our business. The challenge is putting our resources [to work] and using all our capital, human and financial, in the highest and best way, to reward the stakeholders.
PPSI Product Mix For 2017
We’re of course moving the product mix, at least, that’s our goal. We move the product mix in the ways that we are more rewarded and our shareholders are more rewarded.
On the switch gear side, which is probably our single largest operating challenge going forward into 2017, we think from the backlog that they have and the orders in house and the way 2017 is unfolding, will be in stark contrast to what happened in 2015 even to 2016. So, the type of product that we are focused on delivering is more sophisticated, more in the way of distributed energy type of equipment, whether it be more custom transfer switches, more paralleling switch gear, more custom powerhouse work, where we are rewarded for our efforts in line, you know, in a more appropriate way, as opposed to some more of the standard, more of the RFQ bid type work that the business had taken. That’s going to, I don’t know if they’re sales, we’d definitely sacrifice sales for margin, but the key is the type of product and the types of solution we’re delivering.
Service, we were rewarded and our shareholders were rewarded greatly during 2016, we’re pushing the service end of our businesses as hard as we can, and we’re trying to grow in a deliberate and thoughtful manner, so that we could do more there, and our dry type business will again continue to grow again with their margins ticking up as we continue to push that business to the more sophisticated part of the solution we can offer.
PPSI Margin Profiles
That’s a great question. So, service packets of different products from different businesses, probably the best for us we achieve is about a fifty percent gross margin. Service is clearly there, not in all service cases, but in a lot of it. You can make a lot more blanket statements about it. You know, within our liquid-filled transformer business, we have parts and various types of units that get that kind of margin, not that many. Within the dry type business, we have pockets, especially if they’re speaking more to power quality and harmonics, we’re able to achieve that, and the lowest would be products or systems that we are still producing and delivering that bring us close to zero gross margin. Clearly, those, unless there’s an unbelievably valid and strategic reason for us to do that, we are trying to avoid that at all costs.
See more on Pioneer Power Solutions here.