PSIX Q1 2014 Earnings Review

Hi all,

Below are some notes from the PSIX Q1 2014 earnings release and conference call.

Anirban

-------------PSIX Q1 2014 Earnings Review-----------

Press release: http://investors.psiengines.com/releasedetail.cfm?ReleaseID=…

Stock price, financial data, and valuations (as of 5/11/2014)

Stock price: $74
Sales (TTM): $252M
EPS (TTM): $0.95
CFO (TTM): $15.4M

P/E: 77.9
P/S: 3.25
P/CFO: 53

Earnings highlights

  1. Q 2014 sales of $66,735,000, an increase of 27% from $52,576,000 in Q1 2013 and a 9% sequential increase from $61,500,000 in Q4 2013. Contributing to the sales increase was continued growth in the Company’s heavy-duty power generation systems, forklift and aftermarket sales.
  • Sales of heavy duty engines for oil & gas markets doubled YoY
  • Expanded relationship with Nacco and business expected to ramp-up during the year
  1. Operating income was $3,521,000, an increase of 14% from $3,080,000 in the first quarter of 2013. Operating margin of 5.3% in the current quarter compares to 5.9% in the comparable prior year period. Excluding transaction costs of $811,000 in the current quarter (acquisition of Professional Power Products), the operating margin was 6.5%.

  2. Net income for the first quarter of 2014, adjusted to remove the warrant revaluation impact and transaction costs was $2,628,000, or $0.24 per diluted common share. This compares to adjusted net income for the first quarter of 2013 of $1,919,000 or $0.21 per diluted common share, which is also adjusted to remove the warrant revaluation impact.

Conference Call Highlights

Conference call transcript: http://seekingalpha.com/article/2205493-power-solutions-inte…

Quotes from Seeking Alpha Transcripts

A) Oil & Gas end Market:

The PPPI acquisition should be a long-term win for PSI. The PPPI business is currently generating about $30 - $40M per year but management expects it to ramp-up to the $80M range in about two years or so. Pretty aggressive!

The oil and gas end market again drove sales growth. We sell our largest higher margin engines into this market and we expect growth to accelerate in the quarters ahead.

Because of the attractiveness of oil and gas, as well as other markets needing distributed power, we executed our first large acquisition which closed just after the end of the quarter. On April 1st, we announced the acquisition of Professional Power Products Incorporated, also known as PPPI.

PPPI designs and manufacturers large highly customized power generation systems. They integrate OEM engines with generators, containment structures and other equipment in order to produce a turnkey power source for large scale applications. Oil field power generation is one of their biggest markets along with industrial and technology uses. The systems they sell are sizable. The generators can supply between 1 and 9 megawatts, because of this scale we feel they’re complimentary to our existing genset customers and provide a world class product.

Historically 95% of PPPI’s genset engines ran on diesel. Within the last three months, their quoting activity for natural gas power gensets has surged with one-third of their quotes in Q1 for natural gas.

quarter-over-quarter the business doubled and we saw sequential growth in Q1 compared to our Q4. Margins continue to be strong. It’s our highest market category. I think as Gary alluded to, we doubled revenues last year from $30 million to $60 million, we’re targeting $90 million and believe that’s very doable this year. So we couldn’t be more excited and we’ve got some larger engine families coming on later in the year we believe that should accelerate that. And then we’ve got PPPI that potentially can play into that. So, we couldn’t be more enthused about the leg of our growth and it’s trending favourably.

B) On-road segment is expected to be a major growth driver in the second half of the decade; here the highlight is the deal with Capacity Trucks which is supply trucks to UPS.

Our approach is to enter long-term relationships with OEMs to understand their needs and develop engines specific to their market opportunity. In many of our ongoing development collaborations we will use our proprietary 8.8-liter engine as a base and design the parts and interfaces in order for it to drop into an existing chassis.
- One concrete example we can discuss is the supply deal we recently signed with Capacity Trucks. These are trunks for UPS, and they expect shipping in 2014.

There is now an agreement to supply an engine to a significant Chinese OEM, engine and transmission. So it’s a complete power train package, and that’s in China.

Revenues from Capacity Trucks and Chinese OEM should be coming through in 2015.

C) Forklift products

remember the JV in China was really set up to address our forklift OEMs. We currently supply the Chinese OEM, forklift OEMs product for the export market. They wanted us to allow getting into domestic solutions. And so since we’re buying that the base Mitsubishi engine in China we set up the JV really to support the Chinese material handling OEMs. And so that’s really the first direction for the JV. And at the same time, the purpose is really to eliminate some cost in freight rather than bring the engines back and then ship them all the way back. It allows us to be competitive in that domestic market and provide a more sophisticated solution.

Probably start recording revenues in late 2014 or early 2015.

Summary

It seems like business as usual at PSI. They are progressing well and their PPI acquisition should meaningfully add to the top and bottom-line. Looking forward, one could expect the Oil & Gas revenues (the higher margin sales) to accelerate, forklifts to provide meaning revenue and on-road to provide some more.

I think management is providing conservative guidance! Management was previously guiding 2014 at $310M to $330M. With the PPPI acquisition (which currently brings about $30 - $40M/year), they upped revenue guidance to $330M to $360M. I think this is conservative but let’s take the mid-point of $345M. At the mid-point we would see about 45% YoY growth in revenues (FY 2013 was $238M). Of course, the growth expectations are baked into the stock price but I do think this one will be a good one to hold on for a few years.

6 Likes

Thanks Anirban,

Let me add that it’s important to realize that PSIX’s Net Income (earnings) was actually up by 37% but they have 20% or so more stock due to a stock offering, so that their earnings per share was only up 14%. However they are growing much faster than 14%.

Saul

Some quotes from the Conference Call (paraphrased at times):

Our revenue and adjusted earnings exceeded our guidance and analysts expectations.

The oil and gas end-market again drove sales growth. We sell our largest higher margin engines into this market and we expect growth to accelerate in the quarters ahead.

Because of the attractiveness of oil and gas, as well as other markets needing distributed power, we executed our first large acquisition which closed just after the end of the quarter. Professional Power Products also known as PPPI.

PPPI designs and manufacturers large highly customized power generation systems. They integrate OEM engines with generators in order to produce a turnkey power source for large scale applications. Oil field power generation is one of their biggest markets along with industrial and technology uses. The systems they sell are sizable. Because of this scale we feel they’re complimentary to our existing products and provide a world class product themselves.

PPPI has global reach with an extensive customer base, which will enable us to penetrate new emerging markets around the world. Historically 95% of PPPI’s genset engines ran on diesel. Within the last three months, their quoting activity for natural gas power has surged, to one-third of their quotes.

In our other major future growth opportunities, on-road we continue to make progress. We remain optimistic about the on-road opportunity because we’re collaborating with at least a dozen potential OEM customers as they evaluate the market potential and product needs for alternatively fuel trucks and buses. Those collaborations take a lot of time and for competitive reasons should not be discussed.

Our engines typically already meet the customer specs for power and torque, and emission certification is a key value added as this frees the customer from having to do that lengthy testing, because our engines run on a variety of fuels, our customers can consider propane as alternative to CNG and LNG.

Furthermore, because of this flexibility within a single engine design, our customers can avoid the cost of multiple designs for different engines that are fuel specific. One concrete example we can discuss is the supply deal we recently signed with Capacity Trucks. Capacity will use our 8.8-liter propane engine in trucks to be supplied to UPS. We expect to start shipping into this program in 2014. (This is the first on-road sale they’ve acknowledged!!!)

Speaking to the value of emission certification, our 8.8-liter propane is now EPA certified to meet all emissions requirements. The 8.8-liter natural gas version has passed all testing in an EPA approved facility and all the paper work has been submitted to EPA and CARB. We expect certification for the 8.8 nat gas engine in the near future.

Keep in mind that because we hold the certification for the engine, however our OEM customers that utilize the 8.8 will automatically avoid emissions testing. This is a huge advantage for them to get to market more quickly and inexpensively.

Finally, let me mention the progress at our China JV with MAT Holdings. We continue to build our production capacity, installing equipment, hiring and training production workers and so forth. Our first customer order will go next month. We expect additional Asian customer orders to start being fulfilled from Dalian throughout the year.

We are excited about our prospects to further penetrate the fast growing Asian markets which are at least 25% larger than the North American markets. With production in China and new senior sales staff in the region, we’re well positioned to grow in that region in the years ahead.

6 Likes

Nice job Anirban. Thanks

Andy

Thanks Saul, have you been adding to this?

Andy