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Executives

Richard J. Thompson - President and CEO

Gary R. Larsen - SVP, Finance, and CFO

Larry Clark - Investor Relations

Analysts

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

Joseph A. Maxa - Dougherty & Company LLC, Research Division

Scott Reynolds - Jefferies & Company

Joseph Osha - Bank of America Merrill Lynch

Zach Larkin - Stephens Inc.

Edwin Mok - Needham & Company, LLC, Research Division

Dale Pfau - Cantor Fitzgerald

Power-One, Inc. (PWER) Q4 2012 Earnings Conference Call January 31, 2013 5:00 PM ET

Operator

Good day, everyone, and welcome to the Power-One Incorporated Fourth Quarter 2012 Earnings Results Conference Call. This call is being recorded. At this time, for opening remarks and introduction, I'd like to turn the call over to Mr. Larry Clark, Investor Relations for Power-One. Mr. Clark, please go ahead, sir.

Larry Clark

Good afternoon, everyone. Thank you for joining us today to discuss Power-One’s 2012 fourth quarter and year-end results. Joining me today are Richard Thompson, Chief Executive Officer; and Gary Larsen, Chief Financial Officer.

By now, you should have received a copy of today’s press release. If not, it is available on the Company’s website at www.power-one.com. In addition, this quarter, we are including an accompanying slide presentation that you can refer to during the call. You can access these slides in the Investor Relations section of the website.

Before we begin, I’d like to remind you that this conference call may include forward-looking statements reflecting Power-One’s views of future events, projections or expectations. Any such forward-looking statements may deal with or include matters which involve risks and uncertainties. Power-One's actual results may differ materially from those results as discussed or information provided in the forward-looking statements. We refer you to the Company's reporting documents as filed with the SEC for a discussion of the risk factors that may have a material impact on results.

Today's call may also contain historical non-GAAP financial measures. Additionally, in adherence with Regulation FD we’ve opened up this call so that all interested investors are free to listen in. The press release and this conference call will be our only forum to answer questions regarding our estimated performance going forward. Consequently, should you have any questions regarding our business or financial matters with respect to the upcoming quarter, this is the time that we are able to respond to them.

I’ll now turn the call over to Richard Thompson, Power-One’s Chief Executive Officer. Please go ahead, Rich.

Richard J. Thompson

Thank you, Larry. Good afternoon. I’ll begin today’s call with a recap of our fourth quarter performance, including a review of some of our key operational highlights. I’ll then spend time providing our current outlook for the global PV market and our approach to its changing dynamics. After my remarks, Gary Larsen, our Chief Financial Officer, will discuss the key operating metrics and drivers for our Renewable Energy and Power Solutions business units and provide greater detail on the financial statements, including results for the quarter and first quarter guidance.

In the fourth quarter, we recorded total revenue of $192 million, down from $284 million in the third quarter. Our Renewable Energy SBU accounted for the revenue decline as we were impacted by weaker than expected demand in Germany and Italy, resulting from reductions in government and centers. Asia Pacific revenue was also down sequentially following a very strong seasonal third quarter in Australia. North America revenue increased based on continued healthy demand for our string inverters delivered to residential and commercial customers.

Our Power Solutions segment revenue was $68 million, up 1% sequentially and down 9% year-over-year. The Power business continues to be impacted by a slowdown in industry demand across several other Gen markets. Despite the lower-revenue in 2012, the Power team has done a good job of controlling cost and generating cash. For the quarter, we recorded an operating loss of $13 million. This was primarily the result of lower than expected volumes, competitive pricing pressure, and new product ramp up costs.

Let me take a few minutes to discuss each of these issues in more detail and outline actions we are taking to address that. First, the decline in demand in Europe was greater than expected and happened quite rapidly despite our flexible manufacturing cost structure, we couldn’t react quickly enough to a 32% sequential slowdown in sales and incurred unabsorbed fixed production costs in the quarter. In response to the changing dynamics in EMEA, we have right sized our manufacturing footprint to match the shifting demand environment without jeopardizing our ability to serve the region, when it resumes the growth trajectory.

Beginning in the fourth quarter and to the first quarter of 2013, we have reduced 300 temporary and permanent positions or 8% of our workforce to better align our cost structure with near term demand expectation.

Our business benefits from a fairly flexible manufacturing model, so we are confident that we are positioned to adjust both negative and positive changes in the market demand without major infrastructure consequences. Today we can operate successfully in our Italian plant for shipments of approximately 2.5 gigawatts all the way up to 4 gigawatts annually.

Despite the near term weakness in both Germany and Italy we believe that demand in both countries will stabilize at some point in 2013 and then eventually recover to higher levels. However, there are other countries in EMEA that will experience increased solar demand. France, the U.K, Eastern Europe, South Africa and parts of the Middle East are all expected to show growth in PV installations in 2013 and beyond. We are established in a number of these countries and look forward to leveraging our strong market reputation as we penetrate others.

While the increased demand in the rest of EMEA won’t offset declines in Germany and Italy for 2013, we believe that the region in total will begin to grow again in 2014. With respect to the pricing environment, we experienced higher than anticipated price declines in the fourth quarter as we made earlier than expected price concessions in response to the competitive environment in Europe.

For the year our average pricing reductions on a like-for-like basis were down in the low-teens which was at the high-end of our revised expected range. We anticipate that inverter price erosion will be in the double-digit range for 2013, and we have factored that into our business model. We will respond to competitive pricing as and when required.

During the quarter we experienced higher manufacturing cost as a result of the production ramp up of our ULTRA product as we began shipping commercial units in Europe in our proprietorship in the United States. We plan to manufacture ULTRA in both locations in order to optimize cost and to better service our customers.

Given our ambitious plans for North America we are adjusting our manufacturing resources in the U.S. to align our cost structure with the expected string and utility grade inverter demand. In addition to rightsizing our variable cost we have launched major initiatives to improve our infield quality that will increase customer satisfaction and reduce overall cost to both manufacturing and service.

Let me now spend some time discussing our new products. First, as I mentioned the ULTRA our liquid cooled central inverter began shipping commercially in Europe and is now commissioned at large scale PV projects in Italy, Germany, Greece and the U.K. We are encouraged by the enthusiasm of some of the worlds largest EPCs for this product in both Europe and the U.S. and we already have received some meaningful orders in the U.S. we’re expected to deliver in the second quarter. We’re also in discussions with a number of our beta site participants who are all very positive on the product which could lead to 100s of megawatts in orders.

Second, our very successful TRIO family of 3-phase inverters designed for commercial rooftop applications has received certification to UL standards in the U.S. and will begin shipments in the first quarter. In 2012, we shipped nearly 1.3 gigawatts of our TRIO products in Europe representing nearly 53,000 units and 36% of total Company wide inverter volume. We look forward to a success in the U.S. as it is the first 1000 watts string inverter being offered in the market place. We're optimistic about the TRIO and the ULTRA will be as successful in the U.S. as they have been in Europe.

Finally we have begun producing our new micro-inverter and will shipping into the U.S. in the first quarter. Just to give you an indication of the demand for this product, our initial plant production for the quarter is already oversubscribed. I would like to briefly discuss the global market outlook for PV demand in North America and Asia Pacific.

In North America the market is expected to grow by over 40% in 2013, driven by the large commercial and utility segment, which is benefiting from state renewable portfolio standards and the continuation of the federal investment tax credit. North America is a very important growth market for Power-One, but we’re currently having approximately 20% market share in residential string inverters, but less than 10% of the overall market.

With the introduction of the ULTRA, TRIO and Micro product lines, we aim to double our North American market share in 2013. In Asia Pacific growth of PV installations is expected to be strong in 2013, primarily driven by China, Japan, India, and to a larger extend Australia. As we’ve mentioned before, each of these markets have unique characteristics and we’ve developed business models to be successful in each.

China’s expected growth in PV installations is being driven by the central government’s desire to support the domestic solar industry and a need to reduce the country’s carbon footprint, which is causing air quality issues in many regions. China is primarily a large scale commercial and utility inverter market made up of a number of small domestic inverter suppliers who compete on price. We will approach this market selectively by focusing on EPC and utility company.

We recently entered into a strategic alliance with Phono Solar, a subsidiary of the SUMEC Group, a $5 billion Chinese State owned industrial conglomerate. We believe that utilizing various business structure such as strategic alliances, joint venture and private-labeling relationships will enable Power-One to gain access in markets where relationships are critical.

Japan is also expected to experience very strong growth in the coming years as a result of the government’s efforts to diversify away from nuclear power. Japan has put in place under the world’s highest feed-in tariffs and the market is responding. We have mentioned before that the Japanese market is a relationship market and we’re applying to enter this market through strategic alliances.

In India, solar installations are expected to almost double in 2013 as the government continues to support pro-solar policies. 2012 was a disappointing year for us in India, particularly given our initial success in 2011. Despite issues of unstable grid conditions and bureaucratic delays in connecting systems to the grid, the long-term outlook for the country remains favorable, given the high cost of electricity, the need for more reliable grid and off grid distributed power, and the country’s higher radiation levels. India remains an important market for Power-One and we look forward to better success in 2013.

In 2012 we had great success in the Australian market, where we more than doubled our revenue from the prior-year and now hold greater than 20% market share. The market has traditionally been a residential and small to medium commercial rooftop market that now it’s beginning to open up to a larger commercial and utility scale projects. We believe our ULTRA and our PLUS line of central inverters will sell well into this segment of the market and we look forward to another good year in Australia. In summary, we’re positioning our RE business to be a strong global competitor with a full compliment of product offerings and service capability in every key market around the world.

Before I turn the call over to Gary, I’d like to spend a few minutes discussing the outlook for our Power Solutions business. We just recorded our 9th consecutive quarter of profitability as the management team has made significant progress in operational performance over that time period, despite a very challenging revenue environment. We remain focused on our efforts to grow revenues in this business, primarily through new product introductions and share gain in selected strategic OEM accounts. We plan to increase our market share by – in existing markets by leveraging our strength in power density, power efficiency and rugged packaging.

We have launched new products aimed towards ruggedized industrial and transportation application and are continuing to develop products for customers in other end markets. We are also targeting new business in higher-margin and high-growth adjacent markets such as power conversion applications for a hybrid power system used in off-grid or poor grid environments as well as products used in heavy duty trucks, bus, off-road and military hybrid electric vehicles. These markets and applications are well aligned with our strategy and capability and should provide us with incremental growth going forward.

I would now like to turn the call over to Gary for a detailed discussion on the performance of each of our SBUs, our consolidated financials and guidance for the first quarter of 2013.

Gary R. Larsen

Thank you, Rich. Now I'd like to provide more details on our fourth quarter financial performance. During the fourth quarter of 2012, we recorded revenue of $192 million, coming in below the expected range discussed on our third quarter conference call. As Rich mentioned, this was driven by lower sequential revenue in our Renewable Energy SBU primarily from Europe and Asia Pacific partially offset by growth in North America RE revenue.

Consolidated gross margin for the fourth quarter was 13%, down from the 29% gross margin in the third quarter. Gross margin was negatively impacted by a number of factors, including lower pricing which reduced margin by approximately 2%, and manufacturing and efficiencies due to the lower volume which reduced margins by approximately 6%. The lower sales volume along with the reduction of $18 million of finished goods significantly lowered production levels in our factories with the resulting negative impact on absorption and efficiencies. In addition gross margins in the quarter were negatively impacted by ramp-up costs for new products, a two percentage point impact and an inventory adjustment charge which lowered margins by three percentage points.

Operating expenses were flat sequentially at $39 million for the quarter and up $1 million from the previous year’s quarter. The year-over-year increase reflects higher expenses in sales and marketing in support of our active new product introductions offset by moderately lower R&D as we remain focused on our spending in this area in 2012. As a result to the lower gross profit we generated a loss from operations for the fourth quarter of $13 million versus an operating profit of $43 million in the third quarter and $35 million in the fourth quarter of 2011.

Net loss attributable to common stockholders for the fourth quarter was $17 million or $0.14 per share. This quarters net loss included $7 million or approximately $0.04 per share loss on foreign exchange remeasurement related to the euro strength and versus the dollar late in the fourth quarter. Note that as we recorded a net loss in the fourth quarter, we were required to use our 120 million of basic shares in calculating earnings per share.

Our Renewable Energy SBU posted $123 million in revenue for the fourth quarter versus $216 million in the third quarter and $191 million in the fourth quarter of 2011. Loss from operations was $8 million reflecting the lower revenue and the unfavorable gross margin impacts earlier.

Our geographical revenue split in the fourth quarter reflects the revenue decline in both EMEA and Asia Pacific and is sequential on year-over-year growth in North America. EMEA represented 76% of RE revenue with 28% of total revenue coming from Italy, 17% from Germany and 31% from the rest of the region. Asia Pacific represented 9% of total RE revenue and North America was 15%. North America increased eight percentage points from the third quarter.

We shipped 628 megawatts in the fourth quarter down sequentially from 1007 megawatts shipped in the third quarter. We expected to experience lower volume in both the commercial and residential markets, but higher volume in our utility segment as we began shipping commercial volumes of our new ULTR product in Europe during the quarter. Our end-market split was 43% in the commercial sector, 31% for the utility sector and 26% for the residential sector.

Turning to the Power Solutions SBU, revenue for the fourth quarter was $68 million up $1 million from the third quarter and down $8 million from the fourth quarter of 2011. As Rich mentioned, we continued to experience customer caution in a number of our key end-markets. However, in the fourth quarter we experienced increased revenue on our Network Power Solution segment where we benefited from strong demand from a number of our telecom OEMs and integrators. In addition, we continue to see healthy demand in our Industrial and Transportation segment, where our products are having success in the rail, medical and military sectors.

Revenue from the Servers, Storage and Networking end market was 44% of the total Power Solutions segment revenue, while the Industrial market represented 40% and the Network Power Systems the remaining 16%. Regarding the regional sales breakdown, Asia Pacific accounted for 35% of revenue; North America, 35%; and EMEA, 30%. Power Solutions operating income for the quarter was $3 million, resulting in an operating margin of 4%.

Turning to the other income expense line, this has been volatile for Power-One over the last few quarters as a result of foreign exchange gains and losses. From a balance sheet remeasurement standpoint, Power-One is short euro, meaning that we record FX gains and other income when the euro weakens and losses when the euro strengthens. This reflect our currency exposures, including cash and inter-company balances denominated in U.S. dollars on the books of our European subsidiaries, which use the euro as their functional currency.

In the fourth quarter, we recorded a $7 million pre-tax foreign exchange loss as the euro strengthened late in the quarter. With concerns over the stability of the euro lessening, we’re evaluating options to reduce our short euro balance sheet position and lower our P&L exposure to remeasurement of the euro.

The fourth quarter effective tax rate was 17%, which was impacted by our inability to fully utilize our U.S. losses. I would note that forecasting the effective tax rate can be difficult when at or near break even. Although the Company maybe at a consolidated break even position, there maybe income in jurisdictions where we record tax expense while experiencing losses in jurisdictions where we cannot record a tax benefit. This can result in tax expense in a quarter, even when the consolidated income is at break even. As our earnings recover though, we expect our ETR to be in the mid 30% range as our profitability improves outside of Europe.

Moving to the balance sheet, our cash and investments balance was $266 million at year-end, an increase of $61 million since the beginning of the year. For the year, cash generated from operating activities was $91million, while capital expenditures were $31 million.

During the fourth quarter, cash used in operations was $20 million, but including that amount was $28 million tax payment in Italy for the second and larger installment on 2012 taxes. Excluding the Italian tax payment, cash flow from operations was positive in the quarter as we reduced our working capital balances.

As we’ve said before, we view our strong cash position as a competitive advantage in the marketplace as it enhances our bankability in the renewable energy market and provides our customers with confidence that we will be able to stand behind our long-term product warranties. We will continue to focus on conserving our cash as we react to the ongoing demand shifts in our end markets.

We recently renegotiated our $150 million revolving credit facility and has converted into an asset based line. The asset based line is sized $50 million, at a maturity of five-years and will primarily be used to fund domestic operations as needed. The line has limited financial covenants, which will provide us with greater flexibility going forward. As of year-end 2012, we had no outstanding borrowings on our credit facility.

Turning to working capital, days sales outstanding were 98 days, an increase of 18 days from the third quarter level. DSO was negatively impacted by the lower revenue and slower collections in Europe as our RE customers adjusted to a more difficult financing environment. Inventory was reduced by $27 million in the quarter, including an $18 million reduction in finished goods as we work down RE inventory built up in the third quarter. In addition, we wrote-off $6 million in excess and obsolete inventory as a result of our valuation of product transitions and the impact of recent demand changes.

In order to better align our global manufacturing cost structure with our projected demand, we have announced cost saving initiatives that involve permanent headcount. We expect that these actions should result in annual cost savings of over $6 million with a full impact being realized in the second quarter of 2013. The net impact on the first quarter will be limited due to the timing of the action and as the savings are being offset by severance related charges of approximately $800,000. While it is always difficult to implement headcount reductions, we believe that they’re necessary giving our expected geographical shift in production as a result of our expansion plans in North America and the lower demand in Europe. In addition to the headcount reduction actions, we have implemented cost control actions across the Company including limitations on discretionary spending.

To conclude, I would like to speak to you about our guidance for the first quarter of 2013. As demand in Germany and Italy is expected to remain subdued along with typical seasonality in most of our markets, our forecast for the first quarter revenue is a range of $175 million to $200 million.

In terms of gross margins while we do not provide specific targets or models, we anticipate margins for the first quarter will improve sequentially from the fourth quarter as a result of improved manufacturing efficiencies and reflecting some of the cost reduction initiatives that we have undertaken. We also expect operating expenses to be roughly flat versus the fourth quarter.

Operator, we are now ready to poll for questions.

Question-and-Answer Session

Operator

Yes sir. (Operator Instructions) Our first question comes from the line of Pavel Molchanov with Raymond James. Please go ahead, your line is open.

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

Hi, guys. On the gross margin guidance I realized you don’t want to get presumably too specific on this, but the inventory charge that you referenced as well as the onetime start up cost for the new ULTRA product line, backing those out your margin would be presumably at least 500 basis points higher I think based on those numbers you threw out in the commentary is that – just those two factors is that a reasonable assessment?

Gary R. Larsen

Well, Pavel, I guess, what I would say yeah, I mean, clearly we’re not expecting a repeat to the inventory charge in the first quarter, I mean, there will still be some ramp-up cost related to ULTRA that we’ll see in Q1 if that product gets put further along into production. So, that’s what I would take. In some of the other things we are expecting some improvement on the manufacturing efficiency side. Although the revenue guidance is similar to where we were in Q4, we will be helped by not burning inventory -- finished goods inventory to the extent that we did in Q4. As I said in my script we reduced finished goods by almost $18 million which took production out of the factories and had a pretty substantial impact on our absorption. So, we should pick-up some improved absorption in Q1 although we are still expecting some reduction in finished goods.

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

Okay. And then, in terms of mix, do you anticipate that the utility scale overweight is going to continue into 2013?

Richard J. Thompson

Yes. This is Rich Thompson. As we look at our mix of business, North America for us historically has been a commercial and residential market with the introduction of the ULTRA and the TRIO we expect to be in large commercial and change of mix substantially into utilities for North America. Likewise as mentioned in our commentary Australia is picking-up in the utility grade market, and our products particularly the ULTRA are already shipping into Europe. So, overall we believe in the long-term that utilities will start taking a larger part of our revenue stream.

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

All right. I appreciate it guys.

Richard J. Thompson

Okay. Thanks.

Operator

Thank you, sir. Our next question comes from the line of Joe Maxa with Dougherty & Company. Please go ahead; your line is open.

Joseph A. Maxa - Dougherty & Company LLC, Research Division

Thank you very much. So, Rich you talked about growth in North America a couple of -- it sounded like some larger orders that you are shipping for or will be shipping in Q2. Can you expand on that a bit?

Richard J. Thompson

Sure, Joe. Thanks for the question. In the ULTRA we’re really excited about, as we shared with you in the past, this is in beta site we've had now eight units with a few of the large EPCs, their comments have been very helpful to us in making sure the product has a broad appeal to the total marketplace. Let me just remind you a little bit about this unit, it’s 1.56 megawatt. It meets NEMA 4X standards, which means it’s hermitically sealed. It is a high voltage unit, 690 volts. This allows our customers to add lower cost switch gear and transformers and even a skid itself by its 98.7% maximum efficiency and this unit because our modular design as all of our other units, it has four MPPTs per megawatt. So it’s a great unit. We’re already manufacturing those units now Joe, and or to America. We expect to start shipping them towards the end of the quarter and we expect to continue to grow into Q2. So, great product, we’re really pleased with it and it’s an example, just today we received a 10 megawatt order for ULTRA products, which is a nice size order.

Additionally, we’re bringing the TRIO to market. It’s now UL certified, the TRIO is a product that we’ve already sold 53,000 units and what’s almost third of our revenue last year. TRIO is now ready for North America. What it brings to the market is some very good characteristics that the other competitors don’t enjoy. This unit is at a 1000 volts and that allows very low cost on the balance of the system. So the TRIO will be a great unit on the rooftop, you don’t have to bring a central inverter, you don’t need a hoist or crane to get it there. It’s an excellent product at entry point. So we would expect to grow the utility market. I think we will be off to a reasonable start this quarter. but I don’t think you will see it really tipping or changing the needle until the second quarter in North America, at least.

Joseph A. Maxa - Dougherty & Company LLC, Research Division

Thank you. A follow-up on the gross margins, where are you seeing – actually I want to talk more about pricing pressure, that means is it pretty uniform or are you seeing more in Europe and North Americas?

Richard J. Thompson

Yeah, good – another good question Joe. The pricing that we saw is pretty aggressive in Q4, which frankly baffled me as a businessman with the lower marketplace in megawatts available for the marketplace we thought people would be more rationale in their pricing. So in our mind some of the competitors in Europe responded very poorly with aggressive pricing. Obviously, we met that where needed in key locations with key customers and I suspect that’s going to be a limited reaction from the competition. Their balance sheet and certainly their P&Ls cant stand it as well as we can over the long run. So we saw price downs in Europe as we competed head on with some very desperate competitors. The U.S. pricing was more rationale than what we saw in Europe and Asia we didn’t have a very strong business in Asia, other than Australia and that market has been pretty stable price wise.

Operator

Thank you. Our next question comes from the line of Scott Reynolds with Jefferies. Please go ahead. Your line is open.

Scott Reynolds - Jefferies & Company

Hi. Thanks for taking my question. I was wondering what the progress of the share buyback program is and if you put that on hold, given some of the current dynamics and as we look out to 2Q with the recent cost programs is the Company going to be able to hit a cash breakeven target?

Gary R. Larsen

Yes, Scott, it’s Gary. I will just talk about the share buyback program. So we did, our previous time had expired back in September and then in October we put a new plan in place. So we did not take any action on that in the fourth quarter, somewhat as we were keeping an eye on cash considering some of the issues around demand. So looking into this year we just – as I said in my script we – we’ve amended our credit line, now to go in a asset back loan. There had been – the previous restrictions in the prior line around share buyback were being part of fixed charges, which will be subjected to certain ratio. So that’s not the case at this point. So we do have more flexibility to do that. The one issue we’ve had as we talked before, a lot of our cash is overseas and to bring that back has some minor unfavorable tax consequences. So all that said, I mean we’re -- the program is still active. We’ll consider the cash needs that we have, but we’ll also -- the stock price has gotten attractive from our view, and then we’ll look to buy opportunistically if we feel that’s appropriate.

So talking to your other point, for the second quarter. So, as I said we took -- we’re taking some headcount production actions which a good chunk of that is those savings due to the timing of when those actions are being taken place in Q1, and then also the severance cost associated with that. We’re not going to have the full impact of those cost reductions in Q1. We will see the full impact of those in Q2. That’s talking specifically just under the headcount reduction actions. As I’m also talking about we’ve taken a wide variety of kind of cost control actions throughout the Company considering where the slowness, slowdown in demand. We’ve scaled back some of our growth programs to be in line with that. So, we will have a lower breakeven point going into the second quarter in both our RE and power businesses. And we’re looking that with Q2 normally being a seasonally stronger quarter, with the lower cost structure we would hope that would put us into a point where we would be above breakeven and certainly be above cash breakeven.

Scott Reynolds - Jefferies & Company

All right. And then I was hoping for an update on the Arizona facility. How progress is going there?

Richard J. Thompson

The Arizona facility is in line to ship TRIOs; we’re actually bringing in inventory. We’ve made some units that went to beta sites already. They’ll be manufacturing units fully by the end of the quarter. They’ll also be doing the ULTRA product. The ULTRA product again, same MO. They have already assembled some samples, some beta samples and they’ll go into full production towards the end of the quarter. A lot of the inventory that’s assigned to the RE business is in readiness for the launch of the ULTRA.

The cost structure at that factory is better. The on-time delivery is excellent. They’re meeting certainly on string inverters within 48 to 72 hours. They’re shipping central inverters within a week which is well within industry standards. So, the factor is performing well. We still need to squeeze some cost out of it. It's only operating at about 30% to 40% of practical capacity. So, as you can tell we’re not absorbing our fixed cost where it can add appreciable margin to us.

We expect that will fix itself over time. The management team there is in place, a complete new management team. They’re operating well and they’ve made changes to the factory. They’re employing lean methodology to reduce cost, get better quality and meet customer demand. So, we’re pleased at the direction of that factory and we think it's going to be additive to the Company going forward. It's important to us because as you know we do have NOLs available to us in North America, and the sooner we can get to profitability a Phoenix minus our corporate cost to show profit that will also benefit our tax line.

Operator

Thank you. Our next question comes from the line of Joseph Osha with Bank of America Merrill Lynch. Please go ahead, your line is open.

Joseph Osha - Bank of America Merrill Lynch

Hi, it's Joe Osha. Your comments about pricing interested me, and so far as you’re looking for continued double-digit ASP declines. It seems like a lot of that must have come from this extraordinary drawdown in Europe. Have you taken the decision as an organization to be more aggressive in pricing than you have been in the past?

Richard J. Thompson

As you probably know, we are already in most instances lower than our competition. So as we react to price it has a different impact on our operation P&L. We expect to make competition as I said that’s always been our philosophy. We will meet comp where required. We have already taken our first round of price declines or reductions. We have offered them to our larger customer already in the fourth quarter. So that is already out, the price sheets are out. We are negotiating long-term contracts based on those price sheets. So we feel that the first round is over. We expect pricing to continue to be an issue as the total market this year is only expected to grow from about 31.5 gigawatts to only 33 to 34 gigawatts. So there will be continued price competition. Our units are designed to be profitable, if these lower price margins will have to get the volume up. So, we feel comfortable where we’re at we think that for the full-year price declines will likely be in the low double-digits.

Joseph Osha - Bank of America Merrill Lynch

Okay. Thanks. And as a follow-up, can you comment competitively on what you’re seeing in the residential market from Micro-inverters, do you think that can be an important product for you this year?

Richard J. Thompson

Well, I don’t know about this year. Certainly, it’s going to be an important product, but please remember that the share of that market is minor. And next year the total markets around 33 to 34 gigawatts, the Micro-inverter market is only around 600 megawatts. So, it’s a very small market. There is very few competitors. As I was sharing earlier, our Micro unit, we’re certainly very pleased with the beta testing. We were already over allocated for Q1 from our production plan. The unit versus competition, you can go under our website, compare it to others, you’re going to see a unit that has higher efficiency, you’re going to see a unit that has more flexibility, we go all the way from 200 watts to 300 watts. Our unit has a lower total cost of ownership and it has very high MPPT tracking accuracy. There is no electrolytics. So we think we’re offering – we know we’re bringing to market a better offering with longer staying power it has as I said no electrolytic capacitors, it’s certainly been designed to have a very long life. So, we’re pleased with our offering. We will be glad to compete with others in the market and so far as I mentioned our beta customers have rewarded us with some very nice orders.

Operator

Thank you. Our next question comes from the line of Zach Larkin with Stephens. Please go ahead. Your line is open.

Zach Larkin - Stephens Inc.

Hey, good afternoon gentlemen. Thanks for taking my call.

Richard J. Thompson

Hey, Zach.

Zach Larkin - Stephens Inc.

Hey. First off, Rich, I wonder if maybe you can talk a little bit more about China. Its good to heard about the strategic partnerships that you’re looking at, obviously China is going to be an increasingly important geography, but as we look through 2013 and kind of your goals to continue penetrating and gaining share in that market, what are some of the road signs we should look for, from Power-One to indicate that we’re actually making the headways that need to happen as we go through the year?

Richard J. Thompson

Well, as you know Zach, the market is scheduled to grow to 6 gigawatts next year in China. Part of the market is certainly protected for Chinese owned companies. We are trying to enter this as we noted in our comments for EPCs and other utility relationships. I believe that the only really tell you’re going to get is when we talk about it in our comments following the quarter. They’re very – usually we don’t announce the contract wins in this arena. Most of our customers don’t allow us to do that. So I think you’re going to have to unfortunately look at it in the rear view mirror and we will discuss it as we move throughout the year.

Zach Larkin - Stephens Inc.

That’s fair. And then maybe turning to Power Solutions, I know everyone likes to talk about renewables. But great to see a 9th quarter of profitability, but I think there is obviously a potential to see that profitability increase. How much of that is going to be – to get those operating margins up higher, just a share – kind of volume in sales growth number versus kind of increased efficiencies within the unit?

Richard J. Thompson

Okay. Very good question. Thanks for asking about the Power business. The Power team has done an excellent job. They’re very well disciplined team. They’re using lean techniques, following pace. They certainly got in the cost out of the business. Their breakeven point as you can tell is substantially lower than what the revenue stream was this quarter and we feel though that they are the key to our success and the power business is revenue. We have to get revenue from new products. We have products introduced in Q4, some high-power DC products, and you’ll see new products both embedded products and in high-power products that go into industrial markets.

We believe the levering of this unit is going to be exceptional. As revenues rise, I think you’re going to see some margins albeit it's small revenue. And you’ll see some margins that are – we’ll basically compete with the best in class in this industry. So, we’re pleased with the units. We’re pleased with the direction the management has taken us, and we believe that little revenues kind of go a long way in this business.

Operator

Thank you. (Operator Instructions) Our next question in queue comes from the line of Edwin Mok with Needham & Company. Please go ahead, your line is open.

Edwin Mok - Needham & Company, LLC, Research Division

Hi, thanks for taking my question. So, the first question I have is on the guidance; just to be clear, if I hear correctly you’re basically saying that you already took the ASP hit and therefore ASP won't decline that much, but if I look at sequentially on the first quarter you’re guiding for a pretty small decline. So, why are you performing better than what you have seen seasonally and just volume has already took a big hit or can you help us with that? I’ve just got a question on guidance, relative volume and ASP.

Richard J. Thompson

Okay, great. Thank you, Edwin. As you look at our guidance it's 175 to 200. You can suspect there is probably some conservative bent, after missing a quarter. It's something that we’re not used to, and that we don’t especially relish. So we believe our guidance is a pretty wide range. It’s well over 10% from bottom to top. As we look at the business we’re starting to fill the quarter nicely. As you mentioned it is a seasonal quarter. We entered Q1 with very light backlog in both businesses as occurs every year, and through the first month of the first quarter we’re pleased with the fill ratio that we’re seeing. We’re seeing Europe wake back up on the RE side. We’re getting some nice orders, as I mentioned in North America, and the power business is starting to see some livelihood if you like in the industrial market and some pickup with individual customers in server, store and networking.

So with that we believe that our guidance is -- well it's generous. I think we’ll certainly be -- or we plan to be within that guidance. As Gary mentioned we have taken some steps to reduce our variable cost and to eliminate or at least to lay some discretionary cost, I am keeping an eye on that. And as you mentioned rightfully that we have taken the hits on a lot of the pricing already in the RE business and that business we shouldn’t expect further price down this quarter, particularly with new products coming to market as you know they’re priced for the entry and there aren’t -- you don’t have to give up price concessions until later in the year. So, all in all I appreciate your question on volume. Hopefully we've danced around it enough, but still got you comfortable with the range and we expect to see some growth in margins this quarter.

Edwin Mok - Needham & Company, LLC, Research Division

That sounds great. Actually that was great color. So Rich, I have a follow-up question now regarding your ULTRA product. You sound pretty excited about it. I hear in North America it sounds like you guys have some new orders around that as well. How is that product -- how is the progress of that product in other part of the world?

Richard J. Thompson

We’re doing well. As we mentioned we sold it in Italy, Germany, U.K, Greece; so it's being well received. The unit is very robust and we expect as the year goes on, the winter season is over in Europe, but we expect that product to be as successful as our others. North America we are really excited about it. Remember we've had this product in beta testing now; we've had eight units in beta testing with two of the largest EPCs in the world. They certainly have done us, I would say, I guess a favor by their rugged testing and they were through both in the lab and in the field and that’s certainly given us more confidence. As I said, it allowed us to add a couple of features that weren’t in our design, original design that will make it more attractive to customers like this. So, we believe this product will allow us to compete in the utility market. We haven’t had an offering until the ULTRA came on and that’s a growth in North American market where we’re pleased to have the opportunity to compete in that space.

Operator

Thank you. And we do have time for one final question here. Our final question will come from the line of Dale Pfau with Cantor Fitzgerald. Please go ahead. Your line is open.

Dale Pfau - Cantor Fitzgerald

Great. Thank you very much for taking my question, gentlemen. When we look at the U.S. versus Europe, historically the pricing on the commercial inverters has been a little more aggressive in the U.S. than in Europe. Could you talk about the pricing you’re seeing with the two and where do you think your margins, when you can get your factory up to a reasonable utilization? How do you think the margins in steady state between your European and U.S. on the utility scale commercial are going to look?

Richard J. Thompson

Well, you’re right on the pricing. The pricing in the U.S. is a bit more aggressive. Our unit is designed to be successful at the price points in front of us in the U.S. We do need to get the factory at better utilization. Margins will start picking up as we get between the 60% and 85% of practical. I don’t think you’re going to see it before we get there. The units are designed – the pricing will lead us to differing margins that we usually don’t disclose the margins on individual product lines, but you’re right to assume with higher pricing in Europe the profitability would be a bit better there.

I will also mention our European factory has lower fixed cost because of the age of the factory versus the U.S. factory, that’s always one thing to keep in mind as we do absorption on products. So, that does lend to a higher gross margin on those products in Europe and in North America. But all in all, we think this will be a successful product line. It offers a great LCOE for our customers at the 690 volts as I mentioned, allows them to use standard transformers and other secondary products like stations and switch gear, that lower costs – lowers our initial investment. The product is also designed for easy service that makes it more robust in the LCOE calculation. And our products you can replace a drawer without shutting down the entire unit. That gives us a huge advantage if we encounter any kind of issues in the field. So all in all, we’re really enthusiastic about this product, our customers are and we think it will certainly take us to a new playing field in North America this year.

Dale Pfau - Cantor Fitzgerald

And as a follow up, could you talk about where you expect your margins to be on your Micro-inverter product?

Richard J. Thompson

We didn’t disclose margins. What we have disclosed is, we believe our products are – will be favorably priced in the marketplace. We believe that our total Micro-inverter plus the cost of installation, the tubing and the cabling will be at a lower cost point than competitive products and that will give us certainly a competitive market edge. We believe that our cost structure when we had a reasonable volume will certainly give us handsome margins.

Dale Pfau - Cantor Fitzgerald

Great. Thank you very much.

Richard J. Thompson

You’re welcome.

Operator

Thank you, sir. And presenters, at this time I’d like to turn the floor back over to you for any additional or closing remarks.

Richard J. Thompson

All right. First of all as we stated in the past, Power-One is well positioned to manage through volatile market conditions, given our strong balance sheet, efficient cost structure and competitively priced products. We talked a bit about each of those today. Additionally our Power Solution business contributes relatively consistent base of revenue that compliments our solar business.

We are certainly excited about our future as innovative, renewable energy products such as ULTRA, TRIO, and Micro and new high efficiency, high density power solution platforms enter the marketplace. Early customer reactions to those products are more than encouraging and we fully expect to gain share in all of our markets going forward. Thank you all for your participation in today’s call and your continued interest in Power-One.

Operator

Thank you, presenter. Ladies and gentlemen, this does conclude today's conference. Thank you for your participation and have a wonderful day. Attendees, you may disconnect at this time.

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