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Power-One, Inc. (NASDAQ:PWER)

Q1 2010 Earnings Call Transcript

April 29, 2010 5:00 pm ET

Executives

Kevin Trosian – VP, IR

Richard Thompson – President and CEO

Linda Heller – SVP, Finance, Treasurer and CFO

Analysts

Stephen Ferranti – Stephens Incorporated

Bill Ong – Merriman

Colin Rusch – ThinkEquity

Joe Maxa – Dougherty & Company

Walter Nasdeo – Ardour Capital

Craig Irwin – Wedbush

Operator

Good day, everyone. And welcome to the Power-One Incorporated first quarter 2010 earnings results conference call. This call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Power-One's Vice President of Investor Relations, Mr. Kevin Trosian. Mr. Trosian, please go ahead, sir.

Kevin Trosian

Good afternoon, everyone. Thank you for joining us today to discuss Power-One's 2010 first quarter results. Joining me today are Richard Thompson, Chief Executive Officer; and Linda Heller, 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.

Before we begin, I would like to remind you that this conference call may contain forward-looking statements reflecting Power-One's use 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.

Additionally, in adherence with Regulation FD, we have 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 estimates of sales and profits or other financial matters for the upcoming quarter, as well as how they may affect our income statement models and balance sheet, this is the time that we are able to respond to these questions.

I will now turn the call over to Richard Thompson, the company's Chief Executive Officer. Please go ahead, Rich.

Richard Thompson

Thank you, Kevin. I will begin today's call with an overview of the company's first quarter performance and discuss how we are positioned for growth and profitability by taking global market share and increasing our margins. After my remarks, Linda Heller, our Chief Financial Officer, will provide greater detail on the financial results of the quarter and we will then take your questions.

Let me start by saying we are pleased with our first quarter results and operating performance, as we posted GAAP profitability for the second quarter in a row. As you can see from our published results, our renewable energy products continue to perform extremely well, accounting for $82 million or 54% of the company's revenue in the first quarter.

We expanded the sale of our inverters across a variety of regions, as we showed strong growth in China and Australia and are making solid inroads in the North American markets.

In the first quarter, Asia accounted for 11% of renewable energy products, versus a negligible amount in the first quarter of 2009. We experienced growing [ph] demand from Germany due to season shares [ph] speculation. However, we also saw increasing demand from other regions, indicating that demand is being driven by customer needs rather than solely by season shares.

While this is a positive for the industry and while power products were down sequentially due to component shortages and seasonality. The 90 and 180 day backlog increase versus last quarter indicating increased demand for this market as well.

Taking a look at our financial performance excluding one-time items, we expanded gross margins to 31% led by both volume and product. Topline growth and operating efficiencies drove EBITDA to $29 million and diluted earnings per share to $0.09 after adjusting for special items. Linda will add more financial details later in the call.

Overall, order volume for Power-One has increased dramatically as seen by our backlog and overall demand. We added a number of new customers, distributors and EPCs for renewable energy in the quarter.

Power conversion demand was strong for in production programs and standard products, although we suspect a large or high percentage was inventory replenishment versus demand expansion. Additionally, we closed three new digital license agreements in the quarter, as well as received court confirmation of our digital power IP in the case against Artesyn, Astec, and Emerson.

Looking specifically at renewable energy, sales reached 280 megawatts in the quarter, up from over 200 megawatts last quarter. We are experiencing strong demand across all of our string and central inverter products, with our three phase 2.5 kilowatt string inverter remaining our best selling product for commercial installations.

While the industry-wide demand is strong, we are winning orders from new distributors and APC. The Value Power-One inverters and their market leading harvesting yields are aligned and uptime.

Our technology, strategic marketing initiative and the quality of our products have all led to our recent market share gains. Further, we believe our wind products will provide another solid future revenue stream, as the introduction of wind inverters effectively doubled our total addressable market.

Given our results and expectations for future growth, we are making investments to capitalize on the opportunities available. In particular, we will continue investing in our go-to-market strategy. This includes adding personnel and engineers for both our power and renewable energy product lines.

Today, we have over 300 engineers in power and more than 100 in renewable energy. As these statistics indicate the revenue per engineer for renewable energy products is extremely high, as RE products are largely standard, requiring little modification, while approximately 45% of power products are custom requiring engineering investment for each product.

To accommodate our growth, we are recruiting approximately 100 engineers over the next 12 months for both renewable energy and power products. While we anticipate a modest rateable increase in operating expenses through 2010, we anticipate OpEx as a percentage of sales to be flat or show modest decrease.

Specific areas of focus for our R&D and sales and marketing initiatives include the introduction of our (inaudible) products in the U.S. inverter markets, 700 kilowatt and 1.4 megawatt liquid cooled inverters for large commercial and utility markets in 2011, and the introduction of our platinum front-end power products to meet the standard set by the climate savers computing initiative.

We are also investing in our supply chain and manufacturing capabilities with the ship to power products produced in Italy to Slovakia, we have opened new floor space to maximize RE capacity and leverage plant costs and investments.

While we initially plan to be at 1.5 gigawatts by the second quarter this year, we have already reached 2 gigawatts of annual capacity, significantly beating our near-term capacity expansion plan. We anticipate reaching 3 gigawatts of annual capacity by the end of 2010.

Further, we are adding U.S. production capacity and a Canadian plant to meet renewable energy local content requirements and are currently in the site selection process. Our overall CapEx for the capacity expansion in 2010 is not expected to see $8 to $10 million. In addition to the $15 million planned company-wide already.

Further, while we are adding capacity, we are continuing to be focused on quality. We continue to make product quality, uptime and on time delivery a core focus for both power and RE, and are driving improving operating metrics across the company.

Turning to our supply chain, we are migrating our global supply chain to separately support power renewable energy products. Regarding components, we are actively managing our inventory to avoid stock outs of preferred parts.

We are eliminating sole or troubled sources and are moving our power product supply chain to China in order to be closer to and better manage our resources. While there are component shortages for both our product lines, we are actively working to mitigate any negative impact to meet demand needs. Further, with the recent volcanic activity in Iceland, we anticipate some logistical issues impacting production in the near-term.

Looking forward into 2010, our top strategic objective is to grow market share while expanding corporate profitability. In 2009, we were the fourth largest inverter company in the world, according to IMS research and achieved over 10% global market share in the fourth quarter.

With new product introduction, expanded R&D and a growing sales and service team, we expect to continue to grow faster than the market with both our renewable energy and traditional power conversion products.

Given the market outlook on solar and feed-in-tarriff, we know investors are seeking insight into the second half trends for global solar markets. Looking at our 180-day backlog, you can see they are taking orders into the third quarter and have good visibility into customer demand for our products.

We are confirming and reconfirming these orders, as well as, taking pre-payments from our new customers to mitigate risk. The proposed reduction in some European countries, we believe we are seeing some pull into the channel. That said, we see strong demand trends throughout 2010 and now into 2011.

Recent reports indicate that Germany alone installed 2.5 gigawatts in the fourth quarter with Italy more than doubling to 500 megawatts last year, with the potential to reach nearly a gigawatt in 2010.

Further, many analysts have raised estimates for global solar demand to exceed 12 gigawatts in 2010, leading to our expansion initiative to supply over 3 gigawatts of annual capacity by the end of the year.

In the first quarter, we shipped 280 megawatts versus 200 megawatts last quarter and anticipate making further inroads with leading global EPCs and distributors including Phoenix Solar, Sky Solar, (inaudible), PN Service and (inaudible) among others.

Our capacity expansion coupled with our 90 and 180-day backlogs should enable us to drive growth significantly above market expectations. Further our geographic expansion is paying dividends. We are taking strong orders from China and Australia, in addition to share gains and new regions in Europe.

While we anticipate price erosion in the future, we believe that product cost reductions as we scale operations will partially offset these price reductions. In 2010, look for us to grow market share, improve margins, invest in new and market-leading products and strengthen our balance sheet. I look forward to updating you on our progress at the end of next quarter.

I will now turn the call over to Linda for detailed discussion on our financials

Linda Heller

Thank you, Rich. Before I review the results in detail, I would like to highlight a few key metrics. First, Power-One achieved GAAP profitability for the second straight quarter, second, gross margin increased to 30%, third, we generated operating cash flow of $29 million, and last, we continue to manage our balance sheet through improved working capital management and bond repurchases.

Now I'd like to provide deeper insight into the details that drove our financial performance. During the first quarter of 2010, we recorded revenue of $152 million, an increase of 7% from fourth quarter 2009 revenue of $142 million. Renewable energy products were the main drivers of the sales increase, growing 20% sequentially.

Net income attributable to common stockholders for the first quarter was $3.8 million or $0.04 per diluted share, compared to $5.4 million or $0.05 per share for the fourth quarter of 2009.

We posted operating profit of approximately $21 million, which included $2.6 million in restructuring and related charges. Excluding these charges we would have recognized $24 million in operating profit or a 16% operating margin.

Analyzing the sales by market, renewable energy products accounted for 54% of total sales for the quarter, reaching $82 million. Sales of these products showed continued strength in Europe and solid growth in the Asia Pacific region.

Sales of our power conversion product which include network and telecom equipment, computer and office equipment and industrial markets were down sequentially due to seasonality and semiconductor component shortages that are affecting the industry.

Sales of the network and telecom equipment sector generated $27 million or 18% of sales in the first quarter, down from $34 million or 24% of sales in the fourth quarter of last year. The decrease was primarily attributable to component shortages causing delinquencies.

Sales in the industrial market increased approximately 15% sequentially to $18 million or 12% of sales primarily related to last time buys due to the closure of our Dominican facility. Computer and office sales grew 9% sequentially to $20 million or 13% of sales due to strength in the storage market.

Revenue related to other represented sales declined to $5.3 million versus the fourth quarter at $6.7 million. No single customer accounted for 10% of revenue.

Sales by geography demonstrated strong growth in Asia, driven by both renewable energy and power products sales. Europe accounted for 62% of total sales in the first quarter reaching $95 million up from $91 million in the fourth quarter of 2009.

In North America, revenues stayed flat at $25 million. Asia revenue reached $32 million increasing by $5 million versus the fourth quarter of 2009. RE product sales grew by more than 50% from last quarter in Asia with particular strength in China and Australia, while European sales grew 17% sequentially. Emerging areas where we are gaining traction include Turkey, India, the U.S. and the U.K.

Sales of the OEM channel remain constant with fourth quarter revenue at $93 million. As a percentage of sales OEM sales were 61% in the first quarter versus approximately 65% last quarter.

Sales to the distributors increased by over $10 million to $58 million driven by sales of renewable energy products. Service providers were approximately 1% of sales.

As Rich mentioned, we saw dramatic increase in the renewable energy products backlog with a modest uptick for our power products. 90-day backlog increased $84 million sequentially to $205 million in the first quarter.

With a 90-day backlog for renewable energy products reached $142 million while the backlog for power products was $63 million. The 180-day backlog also showed sizable gain. Total 180-day backlog reached $398 million with renewable energy posting $303 million and power $95 million.

Given the increase in the backlog in bookings, we believe it is important to explain how to interpret these numbers. First backlog indicates orders on the book expected to ship in either the 90-day or 180-day timeframe, while renewable energy is traditionally been a turn business, lead times have extended.

Lead times in power have also extended to 16 to 18 weeks versus a more traditional eight to 10 weeks. And renewable energy lead times have extended to eight to 10 weeks from a standard of four to six weeks.

As supplier capacity comes online we expect these to decrease. That said, we are seeing better visibility into our distributors and order patterns as the industry matures increasing our ability to forecast capacity and component needs.

As expected, as our backlog increased so did the book-to-bill ratio. The book-to-bill ratio reached 2.97 versus 1.88 last quarter. Renewable energy products posted at 4.32 book-to-bill and power products reported a book-to-bill of 1.39.

The market for power products with sales down modestly for the quarter showed increasing 90 and 180-day backlog. Net bookings for the quarter of $453 million showed strong quarter-over-quarter improvement, compared to the last fourth quarter 2009 bookings of $267 million.

Total gross margins for the first quarter improved to 30%, compared to 28.9% last quarter and 14.2% for the year ago quarter. Better product mix, factory efficiencies and increased volume all contributed to the improvement, which was somewhat offset by higher labor costs and freight, excluding one-time items of $1.6 million related to our restructuring, gross margin reached 31%.

We believe we can still improve our gross margins overtime due to efficiencies from the closure of the Dominican Republic facility, a continued rationalization of our supply chain and product mix.

Operating expenses of $25 million for the quarter decreased as a percentage of revenue, totaling 16% of sales, as compared to 20% in the fourth quarter of 2009. We anticipate increase sales and marketing, and R&D expenses to invest in future growth and spending will modestly accelerate these areas in 2010. Headcount increased by 139 employees to 3481 from 3342 last quarter.

As much as on our last earnings call in January, we repurchased $4.5 million in face value of the 8% senior secured convertible notes due in 2013, which resulted in a net loss of $5.7 million in Q1 2010, decreasing diluted shares by $2.25 million.

We have the right to call the remaining $34 million outstanding on our 8% note if the stock price goes above $3.50. In the future, we will continue to evaluate methods to decrease solutions.

Interest expense of $2 million included interest and amortization of related costs from convertible debt outstanding. We recorded accretion in dividends of approximately $0.8 million related to the preferred stock issued to Silver Lake Sumeru.

Other expenses at $4.9 million was primarily due to a loss on the repurchase of the 8% note partially offset by a gain from changes in the market value of the embedded derivatives related to the security issues to Silver Lake Sumeru.

The first quarter consolidated tax provision was $9.7 million related primarily to tax on profit generated from certain European locations. Taxes were higher as we generated revenue and high rate jurisdictions where we do not have significant net operating losses or NOLs. We anticipate the expansion we have planned in North America, as well as, a number of our strategic initiatives will help utilize our U.S. NOLs and further reduce our tax burden.

Looking at our restructuring we are still on track to shut down the Dominican Republic facility at the end of this quarter. We anticipate a cash usage of approximately $6 to $7 million related to the closure and anticipate we will start realizing the annual cost savings in the third quarter.

We reached the balance sheet; our cash balance grew to $101 million from $90 million in the fourth quarter of 2009. During the first quarter cash generated from operating activity reached $29 million and we reduced total debt by $4.5 million. This is the fifth straight quarter generating cash from operations due to improved working capital management and profitability.

Accounts receivable increased by $1 to $121 million while accounts receivable rose slightly DSO decreased by five days to 72 days as a result of increased sales, improved credit management and better collections. Accounts payable increased by $12 million due to increases in material purchases to meet demand as DPO increased by seven days.

Consistent with our operating targets, we remain focused on managing inventory. We increased total inventory by $4 million to $77 million at the end of Q1 with an increase due to demand requirements. Day's inventory outstanding however stayed flat ending Q1 at 66 days and annual inventory turned to 5.5.

We are excited with the progress we have made on our operating metrics and the profitable growth opportunities we have in front of us. We will continue to work on growing our topline and improving our operating efficiency as we work to generate increased cash flow. Further, we are committed to reducing our share count and are actively evaluating strategies to create value for our shareholders.

Finally, on April 26th our S4 registration statement became effective. In addition to the election of our board members and an expansion of our equity pool, we are proposing the adoption of a reorganization plan to protect Power-One's NOLs.

We are doing this because we’ve over $300 million of NOLs in the United States that could be limited under U.S. tax rules regarding changes ownership. This would reduce the value to the company and its shareholders.

Management recommends a yes vote on these proposals. We encourage you to review the S4 posted in the Investor Relations section of our website and with the SEC. Consistent with prior quarters, we will not be providing formal guidance for future earnings at this time.

We will now be happy to take your questions. Kevin?

Kevin Trosian

Thanks, Linda. Operator, will you please begin polling for questions?

Question-and-Answer Session

Operator

Yes, sir. (Operator Instructions)

Kevin Trosian

While the operator is polling for questions, I'd like to update you on a few upcoming events. We will be presenting at the following five conferences this quarter. JMP Securities Research Conference on May 11th, Barclay's Capital Global Warming Solutions and Clean Technology Conference on May 19th, Credit Suisse Future of Energy Conference on June 2nd, UBS Global Technology and Services Conference on June 9th and Lazard Capital Markets Annual Alternative Energy Investor Summit on June 10th.

Operator, we are ready for the first question.

Operator

Our first question comes from Stephen Ferranti of Stephens Incorporated.

Stephen Ferranti – Stephens Incorporated

Thanks. Good afternoon. And great job this quarter, guys. Good results there.

Richard Thompson

Thank you, Steve.

Stephen Ferranti – Stephens Incorporated

You know, just looking at the 90-day backlog and the renewable business and some of the metrics you threw out Rich in terms of available capacity, it would appear you're at or near capacity going into the second quarter here.

Can you give us some sense in terms of how, your capacity adds will play out year over the remainder of the year toward that 3-gigawatt target?

Richard Thompson

Sure. I'd be glad to. As we said in our comments, we are at about 1.5 gigawatts. We actually have exceeded our expectations and are closing into 2. That's largely in our Italian factory which services Europe, which is our largest market.

But also for seeds for us our product into Asia region, particularly Australia, China and Korea and as well into North America. So, as you know, Steve, we commissioned a new plant for both power and renewable energy in Shenzhen in the city of GongMing that factory will be up by the end of this quarter. It will largely produce initially commercial inverters and then before the end of the year string inverters.

Secondly, we're in the process of site selection for a factory in the U.S. We hope to have that ready by the end of the year. So we'll have 3 gigawatts by the end of the year roughly two of those will be in Europe and the other gigawatt will be in China.

Stephen Ferranti – Stephens Incorporated

Okay. That's helpful. And, if we look at, I guess the bigger demand picture here and some of the puts and takes in the second half of the year. If you were to rank some of the growth opportunities that you have on the horizon in terms of China beginning to ramp, North America being an opportunity, the wind opportunity.

If you put those into context for us in terms of, which you think might be maybe the biggest opportunity for the second half and sort of timing along those lines/

Richard Thompson

Sure. As we said before, we are delivering into China today for PB. We have a large share of that market. We are also planning to ship to Australia. We now service them out of our Italian plant. We'd like to do that out of China. That factory will be contributing revenue to us this year. I won't give you a forecast, as always. But as you put your numbers, you saw where we did roughly 40 megawatts out of China or 50 actually, through 2009, and in the first quarter we did well in China, also.

The U.S., we expect actually North America, let's not call it U.S. We expect to service product will do high level assembly toward the fourth quarter. We'll do that with components from our Italian factory. We'll be up for full production in the first quarter of ‘11. Full production to us means we will also be pop populating boards in the U.S.

So at the beginning of the year -- the new year, we would hope that to go back to our gain share strategy of having only 85% of our capacity filled each quarter. Right now we are above that number. It's not a strategy that we endorse but we must service our customers. We do have a bit of capacity that we can use in Q2 to service the needs of certain customers and we expect that to expand in Q3. But all in all, capacity is tied, marrying the great demand that we're seeing in PB.

Looking into wind, as you know, wind is a design and it has to be married with a specific turbine. Our product does with a turbine manufactured today. It's being field tested and we hope to see revenue for those turbines sometime in 2011. Don't expect to see any appreciable revenue from our wind products this year.

Stephen Ferranti – Stephens Incorporated

Okay. So sounds like really China would be the biggest opportunity looking into the second half then?

Richard Thompson

Right. I'd say China and Australia.

Stephen Ferranti – Stephens Incorporated

Yeah.

Richard Thompson

Australia's been very active. They've done a great job. Our organization has. Our customers have reacted well to our string inverters that go into those markets. The string inverters, services both commercial applications and residential applications.

Stephen Ferranti – Stephens Incorporated

Okay. Great. And then last one for me, if you could maybe just talk us through your go-to-market strategy in, I guess broadly Asia, but China more specifically and any -- how you think your new product introductions will help you accelerate traction there?

Richard Thompson

Okay. Great. Go-to-market for us, as you know, we go through three separate channels. We sell to installers who deliver product to residences. We sell to distributors who go to commercial sites and we sell directly to utilities.

The China market is largely a central inverter market. That means you're selling to the utilities and OEMs who service the utilities. We're entering that market with more direct sales resources. We have both FAEs and sales engineers on the ground and we expect to continue to expand those resources.

Likewise we are covering Australia with direct sales force in Australia and likewise, we are selling to Korea out of China. We expect to have resources in that region as well very soon.

So expanding go-to-market, we are also going to expand our marketing reach. We've been not very active on getting the message out to our customer base and potential customer base on the merits of our products. We do that by -- in this industry by attending all of the industry shows where you show your products and we'll also be doing some advertising and perhaps even co-op with some distributors as we enter those markets.

So lots of opportunities for us in Asia and likewise as we enter the U.S., we're submitting relationships now and we'll take the same tact highly visible selling the feature of our products and the benefits to our customers.

Stephen Ferranti – Stephens Incorporated

Okay. And then the China, the -- I guess new development, specifically addressing the China market will be available sometime second half, correct?

Richard Thompson

That's correct. So what you're referring to or what Steve's referring to is, the new product is 250 kilowatts and 500 kilowatts a feature set designed specifically for China, their grid and their price point needs. Those products will be in early Q3 of this year and will be producing them from the very beginning from our China facility.

So we are very excited about it, the designs are in progress near completion actually now and we are developing our supply chain to support those products and we have a dedicated team for renewable manufacturing now in place in GongMing.

Stephen Ferranti – Stephens Incorporated

Sounds great. That's it for me. Thanks, guys

Richard Thompson

Great. Thank you, Steve.

Operator

Thank you. Our next question comes from Bill Ong of Merriman.

Bill Ong – Merriman

Yes. Hi. Congratulations another solid quarter there.

Richard Thompson

Thank you, Bill.

Bill Ong – Merriman

My question is on the wind product. Is it easier or more difficult to get design into wind energy versus solar and maybe talk about some of the advantages or disadvantages of staying in the wind market versus the solar market?

Richard Thompson

Okay. Well, Bill, wind market, as you know, is quite a bit larger than the solar market. It's actually like 10X, the solar market on installed base. It is growing at a rate of about 15% to 16% a year cager versus the 40% plus cager in the solar market. So wind is a more established market. It's had great parity on cost already.

Our products are then sold to largely the OEMs or and married with the turbines. It’s a long sale. It's a design end to marry an inverter with the rectifier and the turbine. So there's specific engineering that takes place.

And, as you know, this is a risk adverse customer base and our products are very important to their success, so we have to prove it with test data. Usually a design cycle could take actually longer than a year. In some cases it could take 18 months to two years and the process of developing a turbine and us marrying our inverter to that turbine, so quite a long sales cycle.

Although, once you're designed in, you have a long, long run. The life of a specific turbine is more like six to 10 years on the sales side of it. So it gives us a long run on return for engineering dollar as well.

Bill Ong – Merriman

That’s great. And then my second question, given that you repurchased some convertible notes. How should we model fully dilute share count in your June quarter is $158.3 million shares still appropriate or should it be lower, maybe some insight there/

Linda Heller

Could you repeat the last part of your question?

Bill Ong – Merriman

Yeah. How should we model fully diluted share count in the June quarter and beyond since you did some share repurchasing, if that's appropriate?

Linda Heller

Yeah. At this point, what we would suggest, we do have the right to call the bonds in June. And as well, without the bond market, you would have fully diluted shares, which would have been $157 million.

Bill Ong – Merriman

Okay. Great. Thank you. Nice job, everyone.

Richard Thompson

Thanks, Bill.

Operator

Thank you. Our next question comes from Colin Rusch of ThinkEquity.

Colin Rusch – ThinkEquity

Congratulations, guys. Can you talk about pricing dynamics for the inverters given the shortage of supply, have you been able to raise prices and if you could talk about that on a geographic breakdown?

Richard Thompson

Yeah. On pricing, while certainly demand is outstripping supply, we haven't seen much movement in price. We haven't had to resist any price down requests. As you know, our products are a bit value featured versus competition. But we haven't been raising the prices. We have a large backlog, we of course will honor the pricing in that backlog and we'll certainly look at demand going forward. So I thank you for your suggestion. We were already taking a look at pricing.

As the industry goes forward over the next couple years the projections that we've seen are typical of general electronics on the inverter side, pricing declines of 4% to 6% a year. And that's what we're prepared to address to our cost down actions and our supply chain and manufacturing efficiency.

Colin Rusch – ThinkEquity

Then can you talk in a bit more detail about the components that are in short supply right now and how that's getting addressed in a bit more detail?

Richard Thompson

Okay. Great. The components and short supply are largely in our power division. Mostly it's silicon DSP chipsets, moss sets, some magnetics that are used in our products and some other cores in the renewable energy area. We've actually been more fortunate in renewable energy. We've been able to secure our supply chain as being a very large participant now, over 10% of market share. We do get attention of our suppliers and we have always been taking a forward look on the material chain there. We have orders that go out throughout the year on components for renewable energy and now already into 2011.

On the power side, it's a little bit different of a story. It's a much broader product family set. That brings us many different components and vendors. As I said, it's power semi guides that are basically giving us more of a fit. We're working proactively with them and our goal is to service our customer. We have extraordinary expediting fees in this quarter and we expect some in the future quarters. Many of which we share with our customers. Others are our burden. So we're, it's a difficult supply chain today. We don’t -- we see some components abating but for most parts we expect Q2 to be very difficult.

Colin Rusch – ThinkEquity

Great. And specifically in capacitors because we're hearing that's one area that there's a tremendous lead time. Is there any possibility for you to be able to change the types of capacitors within the inverters and still be able to ship a reasonably comparable product?

Richard Thompson

Yeah. The capacitors are a problem certainly for power but less so in renewable energy. Many of our products as you know are designed without capacitors. So renewable is less pressure. I think we're with the general population on power products. I'm sure there are other scale players, much larger than us, that are getting their fair share as well as on components.

So I think the industry lead times have extended tremendously through Q4 and into now Q1 depending on product line some are abating quicker than others depending on the components on that particular board.

Colin Rusch – ThinkEquity

Perfect. Thanks…

Richard Thompson

So I, yeah…

Colin Rusch – ThinkEquity

And then, the EBITDA is I think very impressive at this point. I mean, do you have any plans for that cash to reduce share count and can you talk about how you're thinking about the outstanding shares and kind of the fully diluted when you look at all the converts out there. How you might address reducing the share count?

Richard Thompson

Yeah, Colin. That's a tough issue. We created, if you take out one-time items some $28 million on a run rate of EBITDA in the quarter. So that's into the $110 to $120 range. And it's, as you mentioned, quite strong. Our cash is over $100 million.

I think if you look at the current liabilities, you'll see that accounts payable are up, obviously that's our receivable cycle is less than our payable cycle. So we are actually generating cash.

But we want to make sure having just come from a period, this not too long ago, I can remember 12 months ago, we were sweating cash. You will see us be conservative on the balance sheet because of our growth initiatives. As for the dilution, why don't I let Linda tackle that one?

Linda Heller

We'll continue to do that. I think to add to Rich's comments. We do first and foremost want to put our cash toward our growth business, as he indicated in our comments. We do have CapEx that we plan to do above what we had communicated in our 10-K, so that we can expand our factories.

Second of all, we are going to have to make an investment in working capital to fund the demands, the demands as we are seeing it. So after that, we will continue to look at that in our cash position after we make those investments and look for ways, we have repurchased bonds in the past and we will evaluate the best methods for going forward.

Colin Rusch – ThinkEquity

Great. Thanks so much, and again, congratulations.

Operator

Our next question comes from Joe Maxa of Dougherty & Company.

Joe Maxa – Dougherty & Company

Thank you. I just wanted to talk a little more on the U.S. market. When do you anticipate to have your new products for the utility grade or the utility market available?

Richard Thompson

Okay. Great. One of the products that we're bringing into market is called Nema 3R which is an outdoor cabinet. It's a 300-plus megawatt unit. It's quite a beast. We have one here now for customers to view. That product should be qualified by the end of this quarter.

We already have a sales force in place for renewable energy and some field engineers in the U.S. We are expanding now on a daily basis and we are also putting our service into place. So, we're making a lot of progress. You'll see the products in the second half of the year as we go forward.

Joe Maxa – Dougherty & Company

And what is your capacity expansion for the U.S.? Is it planned? How big a plant do you expect to put up here?

Richard Thompson

Well, the -- we're going to put more than just a high level assembly plant in the U.S. Right now our plans include engineering laboratory and facilities. It includes a prototype lab, so we don't disturb the production facility and what we're going to, initially we hadn't contemplated but we’re now seriously thinking about putting surface mount back into the U.S. Sounds a little strange, but we're willing to invest in manufacturing in the U.S.

We expect initially our plant to be about a gigawatt and those should be in toward the end of this year, first quarter of next year. Little bit of hedging there while the equipment is not hard to get, putting a very professional management team in and manufacturing management team, the human capital side of the factory will take a little longer. So we would expect to be in production early next year.

Joe Maxa – Dougherty & Company

And then can you give us similar comments on what you were thinking on regarding Ontario?

Richard Thompson

Well, Ontario, we're looking at high level assembly initially. That would certainly meet the local content criteria. And we'll have to see how robust that market is, whether we put in a similar size factory in Ontario.

I would suspect we'll do high level assembly initially it will be seated from Europe until we get our U.S. plant and we'll use high level assembly test to burn in. Those resources are not very difficult although it does take a certain technical skill.

Joe Maxa – Dougherty & Company

Okay. And then, Linda, can you give us help with a little more on the tax side, what we should be thinking about Q2, given the large revenue type of rate, I know it's high jurisdiction, what rate should we be thinking about?

Linda Heller

It would be --we will encounter the same issue in Q2 for us. Sales, you look at the backlog are in similar jurisdictions. However, please keep in mind that we had restructuring the bond market that should be taken out of that rate. So it would be similar if you back that out of this rate.

Joe Maxa – Dougherty & Company

Okay. All right. Thank you.

Operator

Thank you. Our next question comes from Walter Nasdeo of Ardour Capital.

Walter Nasdeo – Ardour Capital

Good afternoon.

Richard Thompson

Hi, Walter

Walter Nasdeo – Ardour Capital

Hi. I know you've spoken kind of at length on your capacity situation, how you're growing it out. If I may, I'd like to kind of get just a little bit more clarity on how you're looking to step this up. If you're going to end this year at around 3 gigawatts, what's the next kind of group of capacity expansion you're looking at into next year and the year after that and as the pricing of the build out should start to come down a little bit I would assume, what is your expectation on capital expenditures around that growth then?

Richard Thompson

Okay. Great. I'm not going to give you too much of forward look. I think that would be very close to a forecast if you know how many gigawatts we plan over the next several years. I don't want to give the competition view either. I would just say, entering this year at 10% plan, we’re number, I'm sorry, 10% of market share, we're number four in the industry in PB.

We also have the wind play. We'll be at 3 gigawatts at the end of this year. You would suspect that would continue to grow. We would have to add more roof in Europe particularly. Our factory in Valdarno, Italy, which is doing an excellent job of ramping up capacity does have some physical limitations to it. Plus for enterprise risk we wouldn't probably put too much more expansion in that plant.

So you would see us with a plant again somewhere else in Europe. As you know, we already manufacture in Slovakia so to leverage the backend part of the manufacturing process that would be certainly a site we would consider expanding.

As China, as we expand in China, there's lots of opportunities there. We are in a pricy district in Shenzhen. Not pricey as in materials but for people. It's important to us because of the technical resources we're adding to the company. So you'll see, you probably see us expand there. And in the U.S. as I mentioned, we're in site selection. You can imagine that means southwest for a company who is largely in PV and in wind both of those quarters work well for us.

So those are kind of our expansions. CapEx is running like 3% or so depending on what your forecast for revenue is. I believe that with growth we expect and that you've seen in the backlog, it will be in that 3% to 5% CapEx range. We cannot buy facilities. We tend to lease them on long-term and leases with some flexibility after five and 10 years. So most of our CapEx goes to infrastructure, surface mount equipment, burn in and test

Walter Nasdeo – Ardour Capital

Got it. Okay. Thank you. That was helpful. Also, early on you mentioned that you're now kind of looking to bring on about 100 engineers going forward. Can you give me any indication of what the geographic dispersion of that is going to be?

Richard Thompson

Well that's a pretty ambitious plan. Our folks are working on it now, all of our engineering senior managers. We would ideally like to put engineers in each factory site. We have proven out overtime that it's important to have your design engineers close to the factory for a smoother MPI or new product introduction process. And it's actually recommended as part of the pace, project and cycle time excellence that we follow. So you would expect to see engineers across the geographic, North America, Asia and Europe certainly.

Additionally on engineers, power engineers we would like to get closer to our factories as well. That would mean more hires in places like Slovakia and China as well. So across the board it's an ambitious plan. We would love to have those engineers sooner than later but recruiting senior engineers both mechanical and electrical is a big challenge.

Walter Nasdeo – Ardour Capital

Okay. That's very helpful. I appreciate it.

Richard Thompson

Okay. Thank you.

Walter Nasdeo – Ardour Capital

All right.

Operator

Thank you. Our next question comes from Craig Irwin of Wedbush. Mr. Irwin, your line is open; please make sure your line is unmuted on your end. Since we are stuck with the line, again…

Craig Irwin – Wedbush

Hi.

Operator

(Operator Instructions) Mr. Irwin, your line is open.

Craig Irwin – Wedbush

Thank you. First, Rich, I wanted to say congratulations on the impressive turnaround at Power-One. The renewables business has really taken-off for you guys.

Actually, my question is about the power side of the business. This side of the business has been contracting for the last few years. And you've really shown a lot of traction in improving the overall profitability.

But what sort of priorities do you maintain for growing this business now that you've got things stabilized? Is this something that you want to see substantially larger than where you are now or is this something that could continue to shrink overtime and free-up working capital for the rest of the business?

Richard Thompson

Well, Craig, that's interesting comments. As you know, we are in the middle of our restructuring. The cornerstone will be to close the DR plant, which will increase profitability and power significantly. The DR plant was dedicated to power conversion manufacturing alone.

We are, as we've done in the renewable energy business, we are investing heavily in new product introductions across the board. I'll be the first to admit that when we started this process some two years ago our product line was tired.

We are now in the process of bringing out neutral topologies into our standard products which means DC to DC. We're also designing to platinum on the AC to DC front ends. Those products will hopefully be announced very soon.

And we're spending quite a bit of engineering in network power systems, which is in telecom. We have some very interesting products that will soon be announced that actually marry some technology from power and renewable energy.

So we're expanding our product set. We believe we can grow faster than the market. Having said that, we still are executing our other initiatives, that was basically a give to some focus marketplaces or we call it protect the revenue stream.

As you know, Craig, it included pairing from industries that weren't compatible with what we felt are skill set is. So that will continue through 2010 where we'll have relationships with customers and industries that aren't our main focus. We will exit those relationships. So, we have to grow revenues significantly to keep our head above water and power, and that's what we're aiming to do with our new product introductions.

Craig Irwin – Wedbush

Okay. And then, my second question was about the gross margins, very impressive gross margins above 30%, first time the Magnatec acquisition and on a very, very different product mix.

I know your largest public competitor in the renewable space does have higher margins substantially higher than 30%. But where do you think the company's overall margins can head over the quarter. Is this something you think you can approach the 40%s Power-One achieved several years ago or is this something that is more than likely to settle in the mid 30%s?

Richard Thompson

I won't give you too much of a forecast there. But as we talked about the closure of DR, adds $3 million gross margin each quarter. That will begin in Q3. We expect a full quarter in Q4. So on that business alone, that's quite a few points of margin.

Renewable energy, our margins are very satisfactory as we tell most people we don't think we're disadvantaged to the industry on our margin profile and renewable energy. So you can go do the math yourself if you like.

So I think that we’ve a lot of opportunities to improve margins. It will continue to take us until next 12 to 18 months and perhaps even beyond to get to those numbers you're suggesting. That would mean a very strong gross margin on power products and continued strong gross margin on renewable energy.

Craig Irwin – Wedbush

Thanks. Congratulations on the progress.

Richard Thompson

Great. Thank you, Craig.

Operator

Thank you. That does conclude the Q&A portion of our call. I'd like to turn the call back over to Mr. Rich Thompson for any closing remarks

Richard Thompson

Great. Thank you very much. I thank you for your participation in our business and taking time from your day to spend with us and look forward to seeing you throughout the quarter at the events Kevin outlined to you and talk to you at the end of the June quarter. Thank you very much. And we appreciate your support.

Operator

Ladies and gentlemen, that does conclude your Q1 2010 Power-One conference call. At this point you may disconnect your lines. Thank you and have a great day.

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Source: Power-One, Inc. Q1 2010 Earnings Call Transcript
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