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Executives

John Bluth - SVP, IR

Sidney Hinton - CEO

Chris Hutter - CFO

Analysts

Eric Stine - Craig-Hallum Capital

Robert Stone - Cowen and Company

William Bremer - Maxim Group

Rob Brown - Lake Street Capital Markets

Matthew Paul - Sidoti

Joe Bess - Roth Capital Markets

PowerSecure International, Inc. (POWR) Q2 2013 Earnings Conference Call August 7, 2013 5:30 PM ET

Operator

Good day, ladies and gentlemen and welcome to the Second Quarter 2013 PowerSecure Conference Call. My name is Philip, and I will be your operator for today. At this time all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. John Bluth, Senior Vice President of Investor Relations and Corporate Communications. Please proceed sir.

John Bluth

Thanks very much Philip, and thank you all for joining us today, for our second quarter 2013 earnings call. Joining me on the call from PowerSecure management team are Sidney Hinton, our Chief Executive Officer and Chris Hutter, our Chief Financial Officer.

Before we begin, I want to remind you that during the course of the discussion today, we expect to make forward-looking statements under the Safe Harbor provisions of the federal securities laws. These are all statements other than historical facts, including statements concerning the future business, financial results and outlook of the company. Forward-looking statements are based on the current expectations and beliefs of management, but are not guarantees of future performance or events and they are subject to risks, uncertainties and other factors, including those discussed in the company's SEC filings, as well as on the call today and in the earnings release, which could cause actual results to differ materially from those projected or implied. The company assumes no duty to update any forward-looking statements.

Now, I would like to turn the call over to Sidney, who will provide a business overview, then Chris will walk you through our financial results and then we’ll open the call up to Q&A.

Sidney Hinton

Thank you, John, and thanks everyone for joining us today. Most of our audience, we can share by on the (inaudible) here, most of the audience is from the investment community, but we do have some utility partners and some customers that have joined the call. So before I address the investors, let me just speak briefly to the customers.

We appreciate very-very the opportunity to serve each of you, both you and your companies, and we are honored to serve you. We strive every day to earn your deepest respect, and again we appreciate the opportunity to serve you, and thanks for dialing in today to listen.

With that, let me move on to the rest of our comments to be directed to the investment community. Our second quarter results were the strongest results in the history of PowerSecure. We had all time record revenues, and despite growing revenues 85% year-over-year with organic growth, excluding the acquired businesses of -- right at 40%, the backlog has grown -- 48% to a record of $245 million. So we had record revenues of $85 million, and we are reporting a record backlog, much as we anticipated we would be doing, when we gathered on the same call 90 days ago. These results add to [what's better] than an exceptional 2013 and will position us well for the balance of the year, and continued growth.

As we look back over the past year, we have made three core strategic acquisitions, and as our second quarter results illustrate, all three of these acquisitions are performing and delivering exceptional value to both the top and the bottom lines. Let me just jump over those three acquisitions right quick.

First, our PowerSecure Solar business, which we acquired for approximately $4 million in June of 2012, delivered almost $4 million of revenue in the second quarter and remains on pace to generate $20 million of revenue in 2013. In May of this year, we took full ownership of PowerSecure Solar, so we will now capture a 100% of the upside in this growing business, and we have added some great capabilities that have enhanced our micro-grid and firm solar offerings. As we talked about those offerings on prior calls.

Moving to the ESCO business, which we acquired -- ESCO business, we acquired for $1.8 million in cash and 3.7 in working capital liabilities in March of this year. That business has been a great investment for us. It delivered $12.3 million of revenue in the second quarter, $1 million of operating income. The team is doing a fantastic job, building their sales pipeline, and converting the pipeline that we acquired. We acquired not just a book of business, the $30 million in contracts, we also acquired their entire pipeline.

The initial responses that we are seeing from our ESCO customers, is we begin to discuss the opportunities surrounding our DG and LED, which are key to growing our value proposition are very positive. And a thing I'd point out there, not just does it grow the value proposition for us, it grows it for our customers, because it will increase their savings as well. Before I move on, I just want to speak and address Jim and Eric and Dave and Matt, these guys have done an awesome job. They came over with this acquisition. They are doing a tremendous job. A great blessing to PowerSecure.

Moving on to the last acquisition, the last core acquisition, that's Solais, which we just acquired back in April. It's already delivering in value, and is delivering in faster than we thought. They contributed $1.5 million in our 2Q revenues. And the key point though, is the teams made rapid inroads into optimizing our manufacturing process for our own lighting portfolio. We expect to begin seeing the benefits of that manufacturing in the second half of this year, with the full benefits in 2014.

If you take out the additive effects of our solar, I mentioned it in my opening comment, but I just want to highlight it to you. We have 85% growth in revenue, and some people might say, well they bought that. No, we did acquire some of it, but we still had 40% growth in our own organic businesses. If you take out the Solar, ESCO, and Solais, our Q2 versus Q2 growth is a healthy 40% and our gross margins in that core business remain healthy at just over 30% this quarter. As we talked, we anticipated our gross margins would be slightly dilutive.

And why would it be dilutive? Coming into this quarter, we talked about, well the ESCO business is a lower margin business, our utility infrastructure is a lower margin business. Our Solar, is a lower margin business. Our utility infrastructure business is growing rapidly. All of those have the effect of blending together to mute down, particularly the $30 million backlog we purchased. It comes with the fixed cost structure, no real opportunity to improve margins. It's just going to average down our gross margin, which for this quarter was 28.3, and we expect that to be in that range.

I will point out though, on the gross margin is where we thought it would be. We do have multiple levers, I just want to highlight that, particularly to the analysts that are on the call, for expanding our gross margin. They include the manufacturing business that we anticipate from Solais, which will add 10 points to our overall LED, the entire LED business. We also expect to be able to lift our ESCO gross margins by, again, including our distributed generation and LED solutions.

And I definitely want to point out, because I know our customers listen, that is not at their expense. We are integrating solutions that cost less and save more, but because we have intellectual property, and we are able to earn a return on that as well.

So that's two adders; the Solais benefits on manufacturing, the ESCO by integration, and then, the two other key wins are growing our own company-owned investments in generation, as well as the utilization of our power bloc technology in our distributed generation fleet that we provide to other customers. All of those are accretive to our gross margins. We also expect to continue to be able to deliver growth, strong operating margin and EBITDA growth.

In the second quarter, we reduced our operating expenses as a percentage of revenue, by 7.2 percentage points year-over-year, and expanded our operating margin to 5.6%, which represents our eighth consecutive quarter of year-over-year operating margin expansion, with each of these quarters expanding at least three percentage points. We are also on track to achieve over $20 million in EBITDA for the year, compared to $11 million in 2012.

Moving on, as we look at our 85% top line growth, we are encouraged by how broad based that growth is. 46% year-over-year growth in distributed generation, DG. 87% year-over-year growth in energy efficiency. 133% year-over-year growth in utility infrastructure revenues. And before I move on, let me call out to Ronnie and Nolan and Lamar, Ken, great team there in our utility services group. They are doing an amazing job of growing that business. 133% is all organic, they have done an amazing job.

Our distributed generation, I am going to speak of the three businesses and then turn it over to Chris. Our distributed generation continues to be driven by the hospital market, the industrial, the manufacturing projects, municipal installations, and additional deployments with our major grocery store customers, as well as contributions from Solar.

Our unique combination of best in class reliability performance and I would just point out, when we say best in class, it was highlighted at a major data center conference of how well our fleet performs, and the fact that it is best in class. For backup power, and the economic value we provide our customers, as well as our utilities from our peak-shaving, which are both enabled by our parallel switchgear and our deep understanding of utility tariffs. And I'd point out, what's proprietary is investors. What do we do is different (inaudible), is our own switchgear (inaudible), our own engine is made for us by Volvo. It's our own controls and it's our own proprietary monitoring system. It's a deep value add system.

As well as, I would point out, it is Interim Tier 4 compliant, for those of you who are up on the subject matter, and it has biofuel, which means basically we can burn, crank them on 100% diesel and then blend in up to 70% natural gas.

Moving on, let me talk about our utility infrastructure business, and the 133% year-over-year growth. It just tells you how strong the business is for us, and our prospects for this business, for continued growth look very-very good. We signaled to you on our last conference call in June, that we expected good things, and then we were blessed to announce the -- securing a $49 million three year contract renewal, both the renewal and expansion, with one of the largest investor on utilities in the country, and that business is now reflected in our backlog.

Staying on utility infrastructure, we have also continued to invest in our safety in that division. Specifically, we made an acquisition this past quarter of Powerline, which enhances our own in-house training, both from a productivity standpoint and a safety standpoint. I recently had the privilege to attend a companywide safety seminar in Texas, where all our general foremen were there, and they were led by the full time safety leadership team. It was rewarding to see the level of commitment throughout the company, to conducting our operations in a safe manner.

This is important when you think of safety. As investors, you might think of it, because it reduces our costs, and that's true. But much more importantly, it's important to our employees. It's important that we return our employees back to their homes in the same condition they left. It's also incredibly important to our customers. It's imperative that we operate on their systems in a safe manner. A manner that they can trust us to be out there, and candidly, it's our aspiration to be the best in the industry from a safety perspective.

Moving on, the same drivers for this business that we have seen over the past few quarters remain strong, with a combination of transmission and distribution work from an ever expanding list of large utilities, as well as expanding work assignments in the utilities we are already serving, as well as additional from other energy companies, i.e., non-utilities to build new TMD infrastructure to serve the shale gas operations, relative to the energy companies. We expect our utility infrastructure to remain very healthy throughout 2013 and 2014.

Moving on, as we look at the 87% year-over-year growth in energy efficiency. It's clear that our ESCO and Solais acquisitions have transformed this business for us. As I have noted, the manufacturing, sourcing capabilities Solais brings to our existing product line, will provide a significant margin lift to our existing product lines, and lower our COGs on new products, which enables us to accelerate our new product development cycle. Additional, Solais' LED lighting for department stores, adds a product set to our portfolio, and the new customer category. In fact in the second quarter, Solais did $1.5 million in those sales.

This revenue, combined with our existing efficient lights grocery store based lighting, and our aerial lighting for utilities, gave us total LED revenues of a little over $4 million for the quarter.

As we look forward to the second half of 2013, we expect to see our LED lighting revenues return to growth. We expect our efficient lights grocery store lighting revenues to remain solid, but we expect this to be more than offset by the additional Solais revenue, and our growing aerial light revenues. And we will begin to see the positive margin impact of Solais.

Before I move on, let me just point out; we have, we have talked about it, we have introduced and we are not telling what the product is, because it's a fairly customized [knit], but we have successfully introduced an LED -- a specialized LED lighting solution, and won our first major customer. We expect to begin realizing revenue on that in the fourth quarter. At this point, again, we are keeping it confidential. We will provide more details later. But we are very bullish on the impact that this product and this customer segment will have on our business.

Summarizing this year so far, we are very happy with the results. While we are very happy, we have got our foot on the gas to ensure our continued success in the second half of this year, and in 2014 and in 2015 and beyond, as we see exceptional growth opportunities all across our businesses. We just completed a detailed midyear quarterly business reviews, and the seeing our first picture of 2014, and I can tell you, as it comes under focus, it looks promising.

Our growing backlog, our record growing backlog provides us with strong confidence in the business going forward, and we are laser focused on continuing to deliver value, both for our customers and our shareholders.

Before I turn the call over to Chris to walk through our record financial performance and our record backlog in more detail, I'd also like to point out, as you may have seen in the press release just a few minute ago, that we are very excited to be transferring our common stock listing to the New York Stock Exchange, and we expect to do that on August 28. I want to thank and acknowledge our long time partners at NASDAQ for their many years of support, great people, and I would also like to thank the New York Stock Exchange and just say, we look forward to joining the family of the New York Stock Exchange. And the motivation there is, that's where our utility clients are, is on that exchange.

Again, thank you and congratulations to our employees who are listening on the great quarter. With that, Chris?

Chris Hutter

Great. Thanks Sidney. I am going to focus my comments in several areas. I will discuss the highlights of the P&L, including trends in our revenue, our gross margin and our operating expenses. I will also break down the backlog, so you can get a feel for our revenues are likely to be realized in the upcoming quarters, and I will review our key balance sheet metrics, our cash, our debt and our CapEx.

I will start with an overview of our results. As you heard from Sidney, our trends of strong revenue growth, increasing bottom line leverage, efficient cost management and balance sheet strength all continued in the second quarter, and we continue to replenish and expand our backlog, which gives us excellent visibility into the coming quarters, and the trajectory of our business.

The headline for the quarter from a top line perspective, is that our business showed excellent growth, and essentially doubled year-over-year. Specifically, our total revenue for the first quarter was a record $70.2 million, compared to $37.9 million last year, which is year-over-year growth of 85.4%.

In terms of our revenue performance by product and service area, we provide as we usually do, a revenue chart in our earnings release, which breaks out the revenue and growth in each of those product and service areas. I would just point out here, that we saw substantial growth across all three areas. With year-over-year DG growth of 46.1%, energy efficiency growth of 87.1%, and utility infrastructure growth of 133%.

About half of our total growth was from business lines that were in place a year ago, with organic growth being 39.5% year-over-year and about half came from acquisitions, as our acquisitions of PowerSecure Solar, ESCO and Solais contributed an additional $14.8 million of revenue during the second quarter of 2013.

Our revenues grew twice as fast as our operating expenses, including the incremental OpEx we took on from the acquisitions, which resulted in substantial reductions in operating expenses as a percentage of revenue. Specifically, our operating expenses decreased 7.2 percentage points year-over-year, and this drove another 3.3 percentage year-over-year expansion in our operating margins, to 4.9%, and excluding $452,000 of acquisition expenses, our operating margin was 5.6% as Sidney noted.

Our operating margin expansion is right in line with our strategic plan of achieving three to four percentage points of expansion annually, as we continue to target our mid-teens operating margin level by 2015. Also I would just reinforce and reiterate, that you can take a look at our last eight quarters of operating margin, to see that we have ranged from 3.2 percentage points to 6.7 percentage points of operating margin year-over-year expansion in each of those last eight quarters. So we continue to be very consistent in our progress on this key metric.

In the second quarter, EBITDA was $5.9 million, again more than double the EBITDA that we generated in the second quarter of 2012, and I would point everyone to the earnings release for the detailed calculation of this measurement.

As Sidney described, our gross margin for the quarter came in at the high 20s range that we expected, at 28.3%, as we blend in some of lower margin ESCO and solar revenues in particular.

As we build on our exceptional growth in the first half of the year, and look into the second half, where we expect to continue to show very strong top line growth, we expect our gross margin to remain at levels similar to this quarter, plus or minus a little, possibly a little more minus than plus in the next couple of quarters, depending on the mix and the continued growth profile of some of our lower margin utility infrastructure, ESCO, and solar businesses. We do expect continued revenue growth in each of these business, and the outlook is strong for the second half of the year and beyond.

Strategically, we expect to lift our gross margin levels over time, as we work to, one bring our higher margin DG and LED solutions through our new ESCO channel as we've discussed. Two, continue to build our high margin DG recurring revenue business. Three, increase the percentage of our turnkey DG revenue mix that incorporates our proprietary power block systems; and four, as we begin to capture the manufacturing efficiencies in our LED business that we expect to realize with our Solais acquisition as the catalyst there.

Our operating expenses in the second quarter were $16.4 million. This represents an absolute increase of $4.8 million, which was higher than we anticipated, but so were the revenues, and frankly the revenues were even reached upper than we thought. And the increase in the operating expenses consisted primarily of $2.7 million of incremental operating expenses in the second quarter related to our PowerSecure Solar, our Solais and our ESCO acquisitions.

In addition, we incurred a $0.5 million, $452,000 to be exact in acquisition transition costs, compared to under $100,000 a year ago in the second quarter, and the remaining year-over-year increase in our operating expenses, primarily due to an increase in selling expenses related to our significantly higher revenue and backlog, depreciation from our investments in company-owned DG systems; the utility infrastructure equipment purchases, and increases in personnel and equipment, to drive and support our growth. The increases in personnel and equipment also include expenses to strengthen the safety resources and programs that Sidney discussed.

Because of our scaling revenues and assisted by the cost reduction programs we implemented in the second half of 2012, we expect to see continued reductions in operating expenses as a percentage of revenue, which is the key driver of our anticipated operating margin expansion.

On an absolute basis, we expect our operating expenses to remain in this $15.5 million range per quarter in the second half of 2013, as the second quarter really represents a full boarding of those -- of the operating expenses related to the acquisitions.

Our recent acquisitions also provide opportunities to further leverage the profitability of our operations, including significant near and midterm opportunities to increase the operating margins at our energy efficiency product and service lines. This includes the manufacturing and sourcing synergies from Solais, which we have described, and other cost reduction opportunities.

We are executing on these opportunities and initiatives to accelerate the realization of their benefits, and we expect these actions to resolve a charge of between $2 million and $4 million during the second half of 2013. We are not honing in the timing of that really in any more detail, it's just -- as we have onboarded Solais and begun to develop strategies around their execution and our leader at Solais is working through those now, it has just become apparent, that we have got some opportunities to accelerate some of those benefits, and whether that happens in the third quarter or the fourth quarter of 2013, we don't know the exact timing, but we think the number is somewhere between $2 million and $4 million.

As we called out for you on our last quarter, and as I just mentioned in my description of our operating expenses, we did have $452,000 of transaction expenses related to Solais in 2Q. We have adjusted those numbers in our non-GAAP calcs and you can see that disclosure in our press release, in the back of that.

Diluted GAAP earnings per share from continued operations increased $0.11 in the second quarter, compared to $0.09 than a year ago second quarter. Our non-GAAP EPS tripled to $0.12 in the second quarter of this year, from $0.04 in the second quarter of last year. And last year, while you may recall, had a $1.4 million stub gain from the sale of our water security unit that we sold in 2011, but the ESCO was released and we recognized that stub gain in the second quarter of 2012, and so that's also part of that non-GAAP reconciliation, its taking out the income from last year related to that.

Now, turning to our revenue backlog; as of today, our backlog stands at a record $245 million, which is an all time record. It compares to $206 million at the time of our last earnings release, and compares to $166 million a year ago. So obviously, major progress and expansion on our backlog.

As we described in our earnings released, we break down our backlog into three categories; our near term backlog for project based work, that includes order for DG, utility infrastructure and energy efficiency products that we expect to recognize over the course of the next three quarters. Our longer term project base work that we anticipate will be recognized fairly evenly from the second quarter of 2014 through 2015, and long term recurring revenues that we expect, related to DG projects that we own, that we expect to recognize over the next seven to 10 years.

If you look at our backlog number of $245 million, $131 million of that is near term backlog, which stayed very consistent to the previous quarter. Specifically, we estimate that 50% of this near term backlog will be recognized in the third quarter of this year. 37.5% will be recognized in the fourth quarter, and 12.5% will be recognized in the first quarter of 2012. Of course, projects can and do move in both directions, but these are our current estimates.

The next component, longer term backlog, which includes longer term project based work that we anticipate will be recognized fairly evenly from the second quarter of 2014, through the end of 2015, currently stands at $45 million; and the last component is our $69 million of long term recurring revenues.

A simple formula to use our backlog is the basis to model our revenues over the next three quarters, is to take our near term project based backlog, the $131 million number and spread it to those percentages I just described. 50%, 37.5% and 12.5% over the next three quarters, at approximately $6 million in revenue in each of those quarters, to account for recurring and other regular revenues that we do not include in that project based backlog, and lastly layer in and make assumptions about additional project sales you expect we will make and complete between now and the period you are estimating, to add to that quarterly revenue.

Obviously, the window of selling time impact of upcoming quarters increases, the further out you are projecting; and so you should have bigger numbers in there, the further out you go in terms of this additional revenue. If you apply this approach, you will see why we feel very good about the direction of our business.

Turning to our balance sheet; our cash balance at the end of the second quarter was $26.7 million. In the quarter, we invested $2.5 million in CapEx, $1.2 million in that was deployed systems to support our PowerSecure owned recurring revenue DG projects, and the remaining $1.3 million was primarily used to purchase equipment for our growing utility infrastructure business. We continue to anticipate CapEx in the $8 million range for the full year 2013.

We have zero drawn on our $20 million revolving credit facility, and $27.2 million in term debt outstanding, that includes the new $25 million facility that we took out in June, at very favorable terms, and I'd also add that we successfully entered in the swaps on that facility, that lock our interest rate at 3.73%. So we are obviously really pleased with that low cost of debt.

In addition to this low interest debt, our strong business performance and EBITDA growth, our strong balance sheet provides the company with flexibility for further investments in company owned projects, acquisitions and additional utility infrastructure equipment, and of course working capital, which -- we used some working capital this past quarter as well, to support the excellent growth.

This quarter was an excellent quarter all around, and we continue to feel very good about how our business is progressing.

Now operator, if you'd like to start the Q&A, we are all set for that. Thanks.

Question-and-Answer Session

Operator

All right. (Operator Instructions). And your first question comes from the line of Eric Stine from Craig-Hallum. Please proceed.

Eric Stine - Craig-Hallum Capital

Hi everyone. Congrats on the quarter.

Sidney Hinton

Thanks Eric.

Chris Hutter

Thanks Eric.

Eric Stine - Craig-Hallum Capital

Looking to start utility infrastructure, wow, I mean, in the past, I know you have kind of talked about this as a 40% grower, obviously that's kind of out the window. But just wondering how you can -- or your thoughts on managing the growth? I know that in eh past, getting equipment has been a limiting factor, and just how you think about your ability to do that going forward, and what the growth could be in that segment this year, and into next year?

Sidney Hinton

Well, we are very bullish on it. I would say, the limiting factors continue to be -- I'd say three things. First, is equipment, second is training qualified people and then third is the ability to operate that equipment and manage those people in a safe manner. We owe that to our customers, we owe that to our employees, and that's the reason we made the investment in Powerline, 100% was, we view that as a potential limiting factor and we want to be preemptive in addressing it. I would say that, we are making headway on the equipment we believe. We have -- you wouldn't believe -- well you would believe, given our past growth, the opportunities are in front of us, and we know that we got to get ahead of it on equipment, and we got to get ahead of it on people, and we are working diligently to do that. But those would be the two biggest issues to get them, then get them on staff to get them productive. But we have done a great job serving the utilities our team has there, and to continue to win opportunities to serve more within the utilities, and to serve more utilities. It's really exciting. Great, great business here.

Eric Stine - Craig-Hallum Capital

Just along those lines, can you just give an update, maybe the number of customers, utility customers that you are doing business with, whether that has expanded. And also, I don't know if you are willing to provide the number of oil and gas customers that you are working for?

Sidney Hinton

I would say that the number of customers we are providing to in both of those segments has expanded. I would say our growth is driven by our expansion of serving our existing customers. In other words, that's the fruit we are eating today. But we are blessed to see Ronnie and his team do an unbelievable job out, working with customers. Our references are through the roof, and that has blessed us. One is the opportunity to serve even more customers. Hopefully that's helpful.

Chris Hutter

Eric, I would just add, the thrust to the revenue and the revenue growth are those core investor on utilities. The incremental revenue, that's just added to that growth, has enhanced that growth is from the large energy companies.

Eric Stine - Craig-Hallum Capital

But, I mean, just an idea -- and I know you maybe don't want to provide too many details, but I mean, is this still -- with the energy companies, is it still just a handful, and you think that this can be more than a handful over time?

Sidney Hinton

I wouldn't say more than a handful, it might be, but it's a tremendous amount of opportunity out there to serve. I mean, our people have done a phenomenal job doing that.

Eric Stine - Craig-Hallum Capital

Okay. So similar dynamic that where you can expand within their operations?

Sidney Hinton

Oh yes. Yeah.

Eric Stine - Craig-Hallum Capital

Okay. Maybe next one for me, just on the large project opportunity side. I know you have talked about this more and more in the last few calls, and you announced one of them in the last few months. But just, what you are seeing in terms of the large project opportunities out there, is it skewed towards a specific segment, or is it across the whole -- all the business lines?

Sidney Hinton

Well I would tell you, first, it's definitely across all the business lines. Maybe a slight skewing. The biggest opportunities are in utility infrastructure, just because that's the biggest spend, those customers are committed to spend in a lot of money. So your pipeline is bigger there, with some really big opportunities. But we are seeing it across all the businesses. In general, I would say, the pipeline -- our backlog is at a record, and I would say the pipeline is at a record too. Just in terms of quality and breadth and quantity, we are in a really good spot. Chris, any color you would add to that?

Chris Hutter

Maybe just one. The other piece of color there would be the ESCO pipeline continues to look very promising, and we continue to feel very good about that. You may remember, when we bought the business, we really did, we said, hey look -- we think we know the book of business we are buying, and we are optimistic that there is a pipeline behind that, and last quarter, we gave this -- I think some more confidence that we felt good about that. I would just say, now having the business for, I guess six months -- five, six months now, we continue to be very encouraged by that pipeline as well.

Sidney Hinton

One thing I would add to Chris's point on the ESCO stuff is that, the customers we are serving, they are the super ESCOs and that we have been well received by them. We are very clear in our ambition in that business. We have no aspiration to become one of them. We want to serve them. We totally respect their balance sheet. We totally respect their customer acquisition process. We want to be the fulfillment arm. We want to be the people that bring the technology that enable them to increase the savings of their customers, and then the skill set to implement those. We are very-very focused. We want to serve them, and it has resonated well with them. We have no ambitions to step up and step into their shoes.

Eric Stine - Craig-Hallum Capital

I think when you made that acquisition, I think you said the pipeline was about $75 million. So fair to say, it has expanded nicely from there?

Sidney Hinton

I would say it has expanded, and we liked the quality of the expansion and the margin. It's not a high margin business, it's a tough business, but we like very much how it looks and sits.

Eric Stine - Craig-Hallum Capital

Okay. Understood. Thanks a lot.

Sidney Hinton

Thank you, Eric.

Operator

Your next question comes from the line of Rob Stone with Cowen and Company. Please proceed.

Robert Stone - Cowen and Company

Hi guys. Lots of moving parts and good stuff going on. I would raise the question of constraints again. You saw the infrastructure besides equipment and people. As you think about your business overall, and the other things you are doing, do you see other constraints, capital facilities, where are you bumping up against the walls of what it (inaudible)?

Sidney Hinton

I would say, I mean, it's a great question Rob. The first place, I would say the biggest constraint we face outside of those two would be in our LED with Solais. And just that there is a bandwidth of engineering expertise to reengineer the manufacturing process, and push those savings through. The savings are there. They are frustrated they are not moving faster, and we are excited at what they have done, and how well they have done. But I would say, that's certainly a restraint that we can only put so many of our products, have them reengineered and go through the new manufacturing process.

The savings, we want to do it. You want us to do it, our customers want us to do it. That's just a -- the bottle is only so -- neck is so wide, and we go to push it all through there. That's a restraint. And I would say, looking at our DG business, we are just expanding. We just took on a new facility. In fact, we are moving into it this week and we took possession of this week, but we are doing that to give ourselves bandwidth around our switchgear. It's our core competency in the distributed generation world, and it gives us the facilities and space to be able to grow that. I would say, maybe the next (inaudible), we dodged it by being really productive, but would be on the generation side. Actually manufacturing our own generators, just the physical space to shift work and so forth. That was not restraining, it doesn't really scare me in the real term. I look and I pray for the day when it's a problem. I can't wait for the earnings call and say, dang, we would have done better and so you will be happy, and every investor on this call will be happy. Those would be the two I would point to.

Robert Stone - Cowen and Company

Okay. A couple of follow-ups prompted by your response. One, on the LED manufacturing improvements, can you provide a little more color in terms of what drives that? Do you need to invest some CapEx, is it a process change, equipment change, and how long does that take?

Sidney Hinton

It's a host of things. First of all, most of our production had been -- some of it we did in-house, but most of it, 85-90% of our product had been outsourced to Asia through a third party broker, that we had no contact with the end manufacturer. We have now cut that process out. We have some captive manufacturers, and it's just that whole process of getting up to speed on that, testing to make sure -- the last thing we want is the customer to get a less quality than they have been getting. Now we want to give them the better quality solution. We have been giving great quality, and we want to do even better.

But it's just being very-very methodical about that transition. Don't get into rush, to get the improvement in gross margin and sacrifice the quality. Don't sacrifice the experience from the customer standpoint. But that's the -- what we are wrestling with. Then the engineering to understand, well, if we did XYZ slightly different in Solais, we already had great engineering that Solais brings tremendous engineering and expertise to the [current] addition to the manufacturing. So when we had to prioritize, which progress are we pushing through first. Obviously, we put the products that we had the most volume with, and then candidly, we then prioritized once we went past the most volume, we went to the products that we saw the most potential with, but we couldn't get to the cost points we needed to, under our traditional approach. While the cost points were mainly aggressive to industries, kind of set those, but this gives us the ability to be viable. That's how we have set the priorities and those are the restraints. I hope that color helps, Rob.

Robert Stone - Cowen and Company

Yes it does. Another question related to -- you talked about long term gross margin drivers and one area was your company-owned investments in DG. How big is that opportunity, how do you ultimately think about putting more assets on your balance sheet, versus turnover type business?

Sidney Hinton

We love putting more on our balance sheet, and candidly this debt facility in the line -- the overall environment, relative to debt being so cheap. It [incense] us to grow that. Our challenge is grow that business without cannibalizing our turnkey sale. We need the turnkey sale to generate the EPS today, that you and the other investors want. But at the same time, candidly our analysis says truthfully, that for every dollar we invest in that, as long as we are not cannibalizing our own business, we are generating $2.85 of equity value to the shareholder. We are focused on doing it. It's just finding ways to market it, where you are not cannibalizing your existing sales.

Robert Stone - Cowen and Company

Okay. And a couple of quick housekeeping questions for Chris. One is, how much -- if you are able to say, how much of the backlog does ESCO account for?

Chris Hutter

I will give you an estimate. It's probably right at $15 million, it would be my guess.

Robert Stone - Cowen and Company

Okay. And headcount at the end of the quarter was?

Chris Hutter

Do we know the exact number, John?

John Bluth

750.

Chris Hutter

Yes, around 750.

Robert Stone - Cowen and Company

Okay. Are the cost reductions, you talked about sort of $2 million to $4 million charge and opportunity for synergies. Is that driven by people, facilities, where do you see the costs coming out?

Chris Hutter

Both of those, people, facilities, but also inventory. We are taking a look at all those operations. Part of our approach is making sure that we are focused on those products that have the greatest opportunity. And so to the extent that we have got some products that haven't quite taken off the way we anticipate, or as we look out over the course of the next 12 months, we think they are not going to do what we want them to do, then we may discontinue some of those products. So really it's a combination of inventory. Facilities are possible, again, as we look to Asia to outsource even more of what we already have, and then we will look for some synergies on the people side as well.

Robert Stone - Cowen and Company

Great. Thanks very much for taking my questions.

Sidney Hinton

Yes sir.

Chris Hutter

Thank you, Rob.

Operator

Your next question comes from the line of William Bremer from Maxim Group. Please proceed.

William Bremer - Maxim Group

Congratulations gentlemen.

Sidney Hinton

Thank you, Bill.

Chris Hutter

Thanks Bill.

Sidney Hinton

The transformation continues.

Sidney Hinton

Yes sir.

William Bremer - Maxim Group

All right. Let's first start out. Would you mind providing us an update on your international prospects?

Sidney Hinton

You're a good sleuth there on us, Bill.

Chris Hutter

That includes Canada.

Sidney Hinton

We don't want to provide any updates, if you don't mind. No offense, but, I mean, obviously we are chasing stuff. But we don't have an upward track record to know what we will close and won't. So I don't want anyone to speculate. I remember a couple of years ago, speculating on something that didn't close, and I just learned that we chase it, and by God's bless and grace, if we bag it, we will deliver it, and we will report it. And congratulations to you. You did obviously -- I was shocked that you note, but kudos to you.

William Bremer - Maxim Group

Excellent, thank you. If possible, can you see it potentially closing in the back half?

Sidney Hinton

It could close and we can get orders in the back half. But I would also tell you, it could -- we are just not skilled at evaluating the decision making process. Clearly, we are very good at discerning and telling, we have won someone's heart. That's really how we've always gauged when we went to business. If we went to (inaudible), we are confident we will win the business. The thing that their national community brings is funding.

It's very easy to understand the funding process, if you are dealing with a privately owned entity. It's easy for us to understand the funding process in the United States. We are dealing with state or federal or municipal customer. It's a little harder in some of the international communities, because of who the source of funds come from, how is it being funded? Is there some type of guarantee by some other government? We definitely hear the words, and we are very encouraged by the words we hear, and we know that they are heartfelt.

What we don't know is the -- how does that translate to action.

Chris Hutter

For everybody on the call, I don't want to make this a mystery session. Here is the deal. We are chasing something as an opportunity. We don't, at this point, really know how to size it, and we don't know the probabilities around it, and we are not going to. But essentially, there was some PR that was done in conjunction with our visit to this particular location, which is outside the U.S. borders. It involves basically some solar and some DG and some other capabilities.

Sidney Hinton

ST&D.

Chris Hutter

T&D too, thank you. It went across the wire. So those of you, you can go online, you could do prior (inaudible) in solar, and I am sure you can find it. But we are not talking about it. It really is just one of those things that -- it falls in the category of the stuff we are working on, that we are not ready to talk about.

William Bremer - Maxim Group

All right gentlemen. Well, best of luck on that. Let's go into the segments a little bit now. Utility infrastructure, did I hear you correctly that gross margins were over 30% this quarter?

Sidney Hinton

No. What you heard over 30% was the core business. Our overall core business, the non-acquired businesses. Our blended gross margin for the company was 28.3, but if you look at our distributed generation, the blend of it, our LED business and our utility infrastructure, those margins were slightly over 30% gross.

Chris Hutter

And as you know, we don't break those out individually.

William Bremer - Maxim Group

Okay. All right. So let's get into some of the backlog. Is it safe to assume that the backlog pricing is getting better on certain segments? I do realize that we have gone into some segments that have a little bit lower margins? I am talking of the legacy business. Is that -- are those prices there getting better year-over-year?

Sidney Hinton

I wouldn't say they are getting better year-over-year. I'd say that because you have environmental -- hell, they get higher, but is complying with the environmental regulations in our DG business. I think you really want to know if our margin is getting better or not, and I would say our margins are remaining -- we are meeting our targets when we price. Candidly, we price business, so that we want, and we don't price so that we will win it. There is a big difference, besides the business and the company. We don't the company on a quarterly basis. We run it minute by minute, with a long term perspective when we report it quarterly. The same with pricing. We price as though we want the business, not to try to win against somebody else, and that we have maintained our pricing standards.

William Bremer - Maxim Group

Within the utility infrastructure segment, the $30 million outstanding. I mean, I remember, many years ago, following your company and $30 million was pretty much the quarterly run rate, okay. So congrats there, way to go Ronnie and his team there. Can you help me a little bit there in terms of, what made up that? Can we break down a little bit in some type of projects, or get a sense of what type of work was actually done throughout the quarter there?

Sidney Hinton

In general, I would say that -- I mean, if you just try to picture of what our world looks like, a -- 40-40-20. 40% distribution, 40% transmission and 20% substation, is a pretty good proxy. This quarter may be slightly, but overall that's what it has been running.

William Bremer - Maxim Group

Then Chris, one for you, and this is my final. You mentioned something real quick, and I am sorry if I missed it, the $2 million to $4 million in the back half of 2013, can you explain that a little bit?

Chris Hutter

If you remember, really the fundamental reason that we bought Solais, was to help us streamline and get those margins up at our existing LED businesses, and as Solais has integrated itself, and as our leader there has begun to develop his plans. We have got some opportunities to accelerate the realization of those savings, both at the COGS line, as we have already discussed, but also at the G&A line. And we are anticipating that given the pace, which we are attacking that, that we could have -- there is likely to be a charge in our second half of between $2 million and $4 million. And again, that would be inventory, that would be facilities, that would be some severance, but it is really around transferring as much of that manufacturing, as you possibly can to China, through our own channels, and streamlining those operations overall.

William Bremer - Maxim Group

And that is not included in the 15.5?

Chris Hutter

Correct.

William Bremer - Maxim Group

Got it. Okay. Thank you gentlemen.

Chris Hutter

Thank you, Bill.

Operator

And your next question comes from the line of Rob Brown from Lake Street Capital Markets. Please proceed.

Rob Brown - Lake Street Capital Markets

Good afternoon.

Sidney Hinton

Hey Rob.

Chris Hutter

Hey Rob.

Rob Brown - Lake Street Capital Markets

Great answer again on growth this quarter, but to kind of step back, what's sort of your view on kind of the mid-term growth rate, that this current kind of business should be able to do, in the next two to three years?

Chris Hutter

We still like that mid 20s. That 26% compound growth. We have been really consistent with that, I don't know, for three or four years now, and we know -- look, in any particular quarter, it can obviously bounce around on us, because of the -- it's just the nature of our business. But if you look over time, it's a pretty good organic growth rate.

Now we have accelerated that with the acquisitions, of course, the organic this quarter was 39.5, so it was obviously higher than that 26% compound growth rate target. But I still like that number, Rob.

Rob Brown - Lake Street Capital Markets

Okay, that's great. Then Sidney, you talked about the new product, the LED business and what it is. But could you give us a sense of kind of what size the market addresses, how big a product will that be over the next bit of time here?

Sidney Hinton

You know, I would look at the product and guess that it has the potential to be a, I don't know $3 million to $4 million, $5 million a quarter product for a season during change outs, and that season might be, I don't know, three or four years. But -- perpetuity entered as well. So very defined segment of the market. We have been well received within and in fact they have helped create the light. Their fingerprints are all over it. They are the ones who came up with a lot of the ideas, and we were blessed to have the engineers and designers who could do it and implement. Sorry for the vagueness, hopefully that helps.

Rob Brown - Lake Street Capital Markets

That's perfect. Thank you.

Sidney Hinton

Yes sir.

Operator

(Operator Instructions). And your next question comes from the line of Matthew Paul from Sidoti. Please proceed.

Matthew Paul - Sidoti

Hi guys. Congrats on the quarter. As a follow-up to the growth in the company-owned generators, I think I saw $1.2 million was invested. Can you give us an idea of how large the increase to your fleet was, any sort of percentage?

Chris Hutter

I want to be careful, we are not going to give our sort of costs for either way, but it was a handful of sites.

Matthew Paul - Sidoti

As a follow-up to that question, has your market strategy changed in regards to pricing it to your customers?

Sidney Hinton

No.

Chris Hutter

Not to (inaudible).

Sidney Hinton

We are all constantly evaluating it, but no.

Matthew Paul - Sidoti

Okay. Last question is, Sidney you commented during the call about continued softness from your grocery store customers. Could you shed a little color and tell us if you think there may be a turnaround by the end of the year, maybe even further out?

Sidney Hinton

Yeah, we are definitely optimistic there will be a turnaround. We have great relations with others. Our product is not being replaced by someone else, this is just a capital expenditure they are not making now, and we remain optimistic that we will see a turn. But we chose -- we have been thinking we would see the turn now, and we chose to go ahead, and not say that intentionally this time, just because it's -- we just can't be confident enough that it's there. I mean, we have got good sales through the balance of the year, but we sure would love to see those capital purchases pick back up. It's obviously very accretive to us, when they do, because they are purely on the increment. Is that helpful?

Matthew Paul - Sidoti

Okay guys, that's all I had.

Chris Hutter

Thanks Matt.

Matthew Paul - Sidoti

Thank you.

Operator

Your next question comes from the line of Philip Shen from Roth Capital Markets. Please proceed.

Joe Bess - Roth Capital Markets

Hey guys, this is Joe Bess asking questions for Phil.

Chris Hutter

Hey Joe.

Joe Bess - Roth Capital Markets

So when we think about DG business, are you able to tell us how much you put in place on a megawatt basis, and how that compares year-over-year?

Chris Hutter

We don't keep those measurements, but there was certainly growth, and I would say broadly, that growth would have pretty much matched the revenue growth.

Joe Bess - Roth Capital Markets

Okay.

Sidney Hinton

If it doesn't match, it'd be within 5%. I mean, it's a little higher on a per KW basis because of some environmental Interim Tier 4 (inaudible). But overall Chris is right, it should be very close.

Joe Bess - Roth Capital Markets

Got you. Then seeing about the opportunity for cross selling at ESCO, what are some of the hurdles that are in place, that you guys need to clear in order to just break through into this market with your DG and some of your LED products?

Sidney Hinton

Mainly on knowledge, well there is two different answers. Knowledge on both, but the person on DG is on knowledge and understanding. That's understanding their customers, so that we can communicate to the ESCOs, how these tariffs work. These are great expansions of their product solutions. It's something that makes a lot of sense.

They are customers with light backup generation. Their customers have tariffs available. It's just something they have not traditionally been familiar with, and candidly, it's something we have been reluctant to educate too clearly, because we didn't want to create competition. Our acquisition of the ESCO team and their deep relationships helps us get comfortable on the (inaudible) trading competition, and now it's just a barrier to get in there and explain, so that their sales force can recognize the opportunities. That's the real leverage, is increasing the number of people, who are looking for the opportunities.

On the LED, I would say its two-fold. The first is, getting our products remanufactured, so our cost points are low enough that we can price in a way that's highly attractive to the ESCOs. That's number one. Then number two is expanding the product, so that we meet the niches that those ESCOs need. If you think about what they are doing in schools, so they need fluorescent tube replacements. They need a two by two light replacement. They need a wall pack replacement on the outside. They need a screw and bulb replacement. Some of those products aren't our traditional products, and candidly, we are searching the globe, talking with some really impressive people about their products, and licensing, as well as doing our own. Those are the key two things we need to do on the front side, and then it's out there, educating them, of what we can do to serve them.

Joe Bess - Roth Capital Markets

Okay. Then a follow-up on the DG side is that, would you anticipate at this point in time, that this would be more of a company-owned or customer-owned, just something that you would be replacing, based around how you guys are viewing --

Sidney Hinton

Definitely I will see that as a customer owned. I cannot see a scenario partnering with an ESCO that they would want us on it. They may own it, but now I think -- they would want to earn those returns. That's the real enabler over there. They can take a project, say a $5 million project for a school system, and turn it into a $7.5 million, with good payback.

Joe Bess - Roth Capital Markets

Okay, great. I might have missed it, could you give a little bit more color behind some of the trends that you guys are seeing in distribution and transmission for the utility infrastructure business, and kind of what your outlook is. Should it stay relatively similar to what you guys are seeing right now in the next year or so?

Sidney Hinton

Yeah, we think so. I mean, the vibes we are seeing, the capital we see, utilities allocating. I will say that, clearly the utilities, particularly in the southern half of the country, their summers have been relatively mild, so their revenues will be all -- that will affect some expenditures, but mainly that affects O&M versus capital, and a lot of our -- we do some O&M work, but most of it is capital based. And you will certainly see, I mean, I almost guarantee you will see some crews get released at our peers. We just don't do a lot of that work, but people that have crews doing O&M work for big investment of utilities, is they have already been released (inaudible) they will start seeing a release this year. But for the stuff we do, capital expenditures, we see a real commitment to upgrades of systems with lot of capital expenditures -- they have great -- utilities are amazingly reliable in general, but they have deferred some capital expenditures, and we see them making those capital expenditures to harden them up. With more and more focus on renewables, it broadens the need for transmission to tie it in. It looks like a really robust market for the next 24 to 36 months. Not that there is anything that would stop it then. It's just -- I feel stupid to say anything longer than that.

Joe Bess - Roth Capital Markets

Right yeah. Then, just a little bit more on the backlog Chris, thanks for giving the number behind the ESCO business. But will you give us what organic backlog growth would have been in the quarter?

Chris Hutter

Yeah. You know what, all the solar is revenue we sold, so I call that organic. The ESCO, they would only be $15 million.

Sidney Hinton

And we don't have any backlog from Solais.

Chris Hutter

And nothing from Solais. That's all basically pipeline turns business. So I mean, you can take out $15 million and the rest of it is organic.

Joe Bess - Roth Capital Markets

Great. Thank you guys.

Chris Hutter

Very good.

Sidney Hinton

Yes sir. Thank you.

Operator

Ladies and gentlemen, this will conclude the question-and-answer portion of today's conference. I would now like to turn the call over to Sidney Hinton, for closing remarks.

Sidney Hinton

Well thanks again for everybody for joining us. The message I'd like to leave with, three key points; the first one is record. We had a record quarter on revenues, $70 million. We had a record on backlog, $245 million. The second message is acquisitions. We are very excited about the acquisitions that we made. We are very pleased with how they have performed. We applaud the management teams, leadership teams, that we are blessed to acquiring to lead those businesses. The ESCO is doing great. The Solar is doing great, and the Solais acquisition is doing great. Then the third point is our core business is incredibly healthy. 40% growth from the sales standpoint in this quarter spread across the core. We are really bullish on the business.

With that, thank you all for spending the time to get updated by us this evening. We appreciate it. Good night.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation and you may now disconnect. Have a wonderful day.

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