Power Solutions International's (PSIX) CEO Gary Winemaster on Q1 2014 Results - Earnings Call Transcript

May. 8.14 | About: Power Solutions (PSIX)

Start Time: 17:07

End Time: 18:01

Power Solutions International, Inc. (NASDAQ:PSIX)

Q1 2014 Earnings Conference Call

May 8, 2014 05:00 PM ET

Executives

Gary Winemaster - Chairman, President and CEO

Eric Cohen - COO

Dan Gorey - CFO

Gary Dvorchak - IR

Analysts

Philip Shen - ROTH Capital Partners

Walter Liptak - Global Hunter Securities

Robert Brown - Lake Street Capital Markets

Eric Stine - Craig-Hallum Capital Group LLC

Alexander Potter - Piper Jaffray & Co.

Gregory McKinley - Dougherty and Company

Rudy Hokanson - Barrington Research

Ross Silver - Vista Partners

Operator

Good day and welcome to the Power Solutions International First Quarter 2014 Earnings Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Gary Dvorchak, Senior Vice President of ICR. Sir, you may begin.

Gary Dvorchak

Thank you, and good afternoon, everyone. We are pleased that you’re joining us for the Power Solutions International first quarter earnings conference call. Speaking on the call today are Gary Winemaster, Chairman and Chief Executive Officer; Eric Cohen, Chief Operating Officer; and Daniel Gorey, Chief Financial Officer.

By now everyone should have access to our press release that we announced today. If you have not received the press release, it is available on the Investor Relations portion of the PSI website at www.psiengines.com.

Before we begin, I’d like to remind you that the information in today’s press release and the remarks made by our executives on this call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on information currently available to us and involve risks and uncertainties that could cause our actual financial results, performance, prospects and opportunities to differ materially from those expressed in or implied by these statements. These risks and uncertainties include, but are not limited to, the factors identified in our news release and our filings with the SEC. You may access any of these filings at www.sec.gov.

Please also note that the information provided on this call should be considered current only as of today. Except as expressly required by the federal securities laws, we undertake no duty to update that information. Finally, I want to mention that a replay of this call can be accessed after the call ends and will be available for approximately one year.

And with that, I’d like to turn the call over to the company’s Chairman and CEO, Gary Winemaster. Gary?

Gary Winemaster

Thank you, Gary, and thank you everyone for joining the call. After I review the quarter, our COO, Eric Cohen will offer more detail on our operating highlights, and Dan Gorey, will discuss the details of our financial results. I will conclude the discussion of our outlook for growth.

It was gratifying to see the strong business momentum that we built in 2013 continue into this year. Our revenue and adjusted earnings exceeded our guidance and analysts expectations. And we executed on key initiatives that will further drive growth into the quarters ahead. The oil and gas end market again drove sales growth. We sell our largest higher margin engines into this market and we expect growth to accelerate in the quarters ahead.

The economics of using free flair gas for fuel combined with the encroaching environmental restrictions on flair gas gives us confidence that this growth will continue for years to come in the market. Because of the attractiveness of oil and gas, as well as other markets needing distributed power, we executed our first large acquisition which closed just after the end of the quarter. On April 1st, we announced the acquisition of Professional Power Products Incorporated, also known as PPPI.

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

PPPI has global reach with extensive customer base, which will enable us to penetrate new emerging markets around the world. Recent sales trends at PPPI demonstrate the strength of the secular trend towards natural gas and away from diesel as a primary fuel. Historically 95% of PPPI’s genset engines ran on diesel. Within the last three months, their quoting activity for natural gas power gensets has surged with one-third of their quotes in Q1 for natural gas.

Power Solutions expertise in natural gas power industrial applications was a natural fit for the trends PPPI saw developing before their eyes. In our other major future growth opportunities, on-road we continue to make progress. We remain optimistic, the on-road opportunity because we’re collaborating with at least a dozen potential OEM customers as they evaluate the market potential and product needs for alternatively fuel trucks and buses. Those collaborations take a lot of time and for competitive reasons should not be discussed.

We understand that our investors desire more concrete details, but our first priority has to be protecting our customer’s competitive position. Having said that, Eric will offer some detail on the developing partnerships that we demonstrate the scope of this opportunity for us.

Finally, I want to mention some progress in further strengthening our senior management team, which will enable us to pursue additional market opportunities outside the U.S. We announced in April that we hired two very talented gentlemen from our competitor fuel systems. Richard Nielsen is now our Executive Vice President of Global Business Development and will help PSI pursue new customers around the world. Peter Ridgen joins our team as the Senior Sales Manager for Asia and will help us finally develop markets that our JV MAT Holding is poised to start production in the near future.

Let me now turn the call over to our COO, Eric Cohen to discuss Q1 highlights. Eric?

Eric Cohen

Thank you, Gary. I want to offer more detail on several of our highest priority growth opportunities, then I will turn the call to Dan for financial details. Gary touched on the PPPI acquisition and how it opens a larger addressable market for us in global applications.

We see a number of additional benefits of combination as well. We expect to achieve a number of operating synergies such as savings from higher volume parts purchasing, exchanging ideas on operational best practices and broader sales opportunities for U.S. and overseas. They’ve already made introductions that should lead to significant sales for us and we can provide resources to help them further service their existing customer networks. We are excited about the possibilities for PPPI and PSI as a combined firm. PSI is learning a lot from PPPI about large systems and global markets. And PPPI is gaining from the extensive resources we’re contributing to their efforts.

Turning to on-road, which we expect to be a major driver of growth in the second half of the decade. Gary mentioned our development work. Our approach is to enter long-term relationships with OEMs to understand their needs and develop engines specific to their market opportunity. In many of our ongoing development collaborations we will use our proprietary 8.8-liter engine as a base and design the parts and interfaces in order for it to drop into an existing chassis.

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

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

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

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

Finally, let me mention the progress at our China JV with MAT Holdings. We continue to build our production capacity meeting installing equipment, hiring and training production workers and so forth. We achieved the milestone of preparing to shift our first customer order which will go next month. We expect additional Asian customer relationships to start being fulfilled from Dalian as we go through the year.

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

I will now turn the call over to our CFO, Dan Gorey to discuss our financial results in detail. Dan?

Dan Gorey

Thank you, Eric, and hello everyone. I’d like to review our operating results and financial condition in more detail and then return the call to Gary for our outlook. Here are the details of our first quarter 2014 financial performance.

Net sales for the first quarter were $66.7 million compared to $52.6 million last year. This represents a 27% year-over-year increase in revenue and 9% sequential growth. Sales growth in the quarter was due to growth in our heavy duty power generation systems for the oil and gas end market as well as growth in forklift and aftermarket sales.

Our gross margin for the first quarter was 17.9% compared to 17.4% in the first quarter last year. This increase was due to a favorable shift in mix to greater sales of our higher margin heavy duty engines.

Operating expenses which include research and development, selling and service and general and administrative costs came in at $8.4 million for the first quarter. This compares to $6.1 million in the first quarter last year. This quarter’s operating expenses include transaction costs of $811,000 related to the acquisition of Professional Power Products, which closed on April 1st.

Current quarter operating expenses excluding the transaction costs came in at $7.6 million. As a percentage of sales, operating expenses as adjusted were $11.4% of sales this quarter. This compares to last year’s 11.6% of sales and last quarter’s 12.8%.

Our R&D spending in the quarter was $3.6 million, up from $1.8 million in the first quarter of last year. We continue to make significant investments in R&D spending as we work on advanced technologies for future customer platforms including our on-road capabilities.

Selling expense in the current quarter was $1.8 million, consistent with last year. General and administrative expense adjusted for the transaction costs of $811,000 came in at $2.2 million. This is down slightly from $2.4 million in G&A last year.

Operating income for the first quarter was $3.5 million compared to $3.1 million last year. Adjusted for transaction cost, operating income was $4.3 million or 6.5% of sales compared to 5.9% in last year’s first quarter. Interest expense was $99,000 in the current quarter, compared to $194,000 last year due to a higher level of borrowings last year.

Other income and expense includes the revaluation of our warrant liability. As a reminder, our April 2011 private placement included warrants, the liability for which we are required to carry on our balance sheet at fair-value. Each quarter, the change in value must be run through the income statement. This is a non-cash item that for GAAP accounting purposes impacts the bottom-line. This quarter, we booked non-cash income of approximately $233,000 resulting from a decrease in the estimated fair-value of the warrant liability.

The value of these warrants will change regularly so you should expect to see valuation adjustments both positive and negative in future quarters. Therefore, we encourage investors to look at our results both with and without the warrant revaluation and assessing our performance on a quarterly basis.

The GAAP fully diluted income per share was $0.19 in the current quarter compared to a loss of $0.32 a year-ago. Removing the effects of the warrant revaluation and transaction costs, our adjusted EPS was $0.24 in our current quarter. This compares to $0.21 in our first quarter last year.

Now let’s discuss the balance sheet and liquidity. Our balance sheet is solid with $87 million in working capital which includes about $4 million in cash. We have about $56 million in shareholders’ equity as of March 31. The credit facility had borrowings of $26 million as of quarter end. This leaves $49 million available. We are in good standing with the bank and then compliance with our covenants. We believe cash generated from operations as well as availability on our line of credit will be sufficient for all near-term operating and capital needs.

On April 1st, the Company closed on the acquisition of Professional Power Products. We acquired all of the outstanding stock for an initial cash purchase price of $46 million. In addition, we will issue to the sellers between $5 million and $15 million in our common stock based upon PPPI’s 2014 operating results.

In connection with the transaction and to facilitate the purchase, we entered into an amended and restated agreement with Wells Fargo, our Bank to increase our line of credit to $90 million.

That concludes my comments. Let me now turn the call back to Gary to discuss our outlook. Gary.

Gary Winemaster

Thanks, Dan. For some time we’ve been offering an outlook for 2014 revenue of $310 million to $330 million, which represents growth of 30% to 38%. Our strong start to year this quarter reinforces our confidence in that outlook. Oil and gas demand remains very strong and the NACCO material handling group deal is ramping.

Naturally the PPPI acquisition, we need to update the outlook to reflect their incremental revenue. PPPI is a $30 million to $40 million a year type business right now. We do expect growth over time and we think this can be an $80 million business in two years. However, as we integrate their operations now, we want to remain conservative as such our new outlook for the range of sales of at least $330 million to $360 million for 2014.

Now operator, let’s open the call to questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from Philip Shen from ROTH Capital Partners.

Philip Shen - ROTH Capital Partners

Hi guys. Thanks for taking my questions.

Eric Cohen

Hi Phil.

Gary Winemaster

Hi Phil.

Philip Shen - ROTH Capital Partners

I would like to start off with on the Power Systems Group, I was wondering if you could provide us the latest outlook for this business? Last quarter you talked about $75 million of revenues in ’14 especially with PPPI acquisition through the balance of the year, there is another $25 million to $30 million and what kind of revenues for this business can we see now in 2014?

Gary Winemaster

Phil you’re talking about the oil and gas opportunity?

Philip Shen - ROTH Capital Partners

I’m, yes.

Gary Winemaster

Okay. We gave guidance of $75 million last year for 2014. I think we feel very confident that that’s a $90 million opportunity for us this year. With the acquisition of PPPI, I think it’s very complimentary, it’s back on top of the business that we have today. And I think what we’re trying to do is integrate it into our business plan, I think we’re very confident that we will realize the same volumes that they had last year and I think going forward we feel very bullish that we will grow that business as I said to $80 million in the next two years.

Philip Shen - ROTH Capital Partners

Great. Thanks, Gary. In terms of the on-road business, I was wondering if you guys could provide a bit more color on the development activity. I know you can’t comment on the partners, but perhaps you can comment on the timing of potential partnerships and perhaps could we see something in 2014 or is it more likely a 2015 type event?

Eric Cohen

Yes, so I think we cancel, I think we’re going to see earlier than expected some revenue in 2014 that we alluded to one supply agreement right now with Capacity with the end customer being UPS. That’s exciting opportunity. On top of that there are some new opportunities that have joined our pipeline of projects that we’re working on. One thing we can also mention too is -- it wasn’t in our earlier comments was that there is now an agreement to supply an engine to a significant Chinese OEM, engine and transmission. So it’s a complete power train package, and that’s in China. And so that beyond just North America we see China is kind of starting to ramp up in terms of demand and opportunity. That would start to realize as well as North America in 2015 as well.

Philip Shen - ROTH Capital Partners

Wow, that’s great Eric. Can you give us a sense for the size of the revenue impact in ’14 from this partnership?

Eric Cohen

We are -- just for some competitive reasons our customers are working with doesn’t -- haven’t wanted us to share revenues, but I think as we get into number guidance, but as we get towards the end of 2014, we will be able to shed a little more light on what’s going on.

Philip Shen - ROTH Capital Partners

Great. One more for me and I will jump back in queue. You had a nice acquisition with PPPI, what else is brewing out there on the acquisition front? I know you can’t share any names or details, but perhaps you can give us a small window into what might be next kind of thing?

Gary Winemaster

Yes, so we’re always looking at acquisitions. I think our philosophy is that you should always be evaluating make versus buy or what you can acquire versus grow organically. And so I think there are multiple opportunities that we’re looking at and it’s really more to find right now about what strategically fits in with something that can -- it could grow our customer base or support our existing customer base. We somehow leverage can take their technology and leverage into what we’re doing. So I think everything we’re looking at is very synergistic and complimentary. Obviously, we can’t share anymore on specific details, but we’re actively looking still.

Philip Shen - ROTH Capital Partners

Great. Thanks, Eric and thank you Gary as well.

Gary Winemaster

Thanks, Phil.

Operator

We will now go to Walter Liptak from Global Hunter.

Walter Liptak - Global Hunter Securities

Hi. Thanks. Good afternoon, everybody.

Gary Winemaster

Good afternoon.

Walter Liptak - Global Hunter Securities

I wanted to ask about just the way the quarter trending and it sounds like the O&G accelerated was it -- accelerating throughout the quarter and how are things trending as you get into the second quarter for I guess the business overall, but specifically the O&G markets?

Dan Gorey

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

Gary Winemaster

And I would also like to add that we just recently received probably one of the largest drop in orders in the oil and gas space that we’ve had in the history of the company. So, I think that the market is aware of the quality of the product that we’re providing and I think that it's responding very favorably to some of the new innovations that we’re providing in the market place.

Walter Liptak - Global Hunter Securities

Okay, yes that sounds great. I wonder about the -- the growth rate was a little bit better than I expected for core V6, are you expecting revenue growth in total to be, to accelerate?

Gary Winemaster

Yes, I mean, if we look at where we are, and I think when we talk about some of the guidance for ’14 still are very bullish and it's tracking as we thought. When we look out to what we see for ’15, I mean we will eventually give guidance for ’15, but ’15 is more -- I believe will be more exciting than ’14. We’ve got some very long-term programs that have been -- we have been working on that will be realized next year and will give us every indication that things will continue.

Walter Liptak - Global Hunter Securities

Okay. And I guess what I am trying to get at is, with the guidance it sounds like you're being conservative with the revenue numbers and with the PPPI revenue coming in. Is there anything that cannibalizes revenue on the acquisition or is it just purely being conservative and not taking up the revenue guidance by 30% to 40%?

Gary Winemaster

No, it's nothing that cannibalizes. It's actually just the opposite, it's very synergistic. The fact has been as I alluded to there has been some new opportunities on the engine side they have introduced to us and we’ve introduced some new customers to them, so if anything it's ramping. But I think as you know with almost any acquisition there’s a period of integration, and so what we’re trying to do is just be conservative knowing that during that period of integration that it might not be operating as efficiently as you can, so just trying to be conservative during that integration period.

Walter Liptak - Global Hunter Securities

Okay, got it. And then a last one, I guess Dan would be for you, the G&A declined to $2.2 million excluding those deal related charges. Is that -- was there anything one time in there or are we operating now in a lower run rate of G&A?

Dan Gorey

I think we had some things that played in our favor. Having said that I think we -- it was a combination of things. I mean we tightened our belts a little bit, we’ve in-sourced legal to a certain extent that saved us money, share based payments went down, some consulting went down. Some of it was timing and somewhat a little unusual. I mean I don’t know that we are to particularly ascribe at $2.2 million run rate to G&A. Having said that, I think we’re making progress in, again in tightening our belts and as I think we’ve discussed before G&A along with selling are two categories that have really matured. So, there’s no great expectation we’re going to be expanding much, it's just watching the pocket book. So, it did come in fairly favorable this year, but I think we’re going to see improvement over the run rate that we saw last year.

Walter Liptak - Global Hunter Securities

Okay. Thanks guys.

Operator

Our next question will come from Robert Brown from Lake Street Capital Markets.

Robert Brown - Lake Street Capital Markets

Good afternoon.

Gary Winemaster

Hi, Rob.

Eric Cohen

Hi, Rob.

Robert Brown - Lake Street Capital Markets

I just wanted to follow-up; you talked about this for before, but the Perkins business coming in later in the year, the higher horsepower products. Could you just give a sense in the oil and gas market what that addresses and what areas that can [ph] [keep it] growing over the …?

Gary Winemaster

Yes what it addresses is it's really a pull from our customer. So our customers have been very pleased with our initial product line which goes up to 22 liters and 430 kilowatts on a standby basis. And then what they start asking for is larger applications and larger sizes and more power. And so, really the Perkins relationship addresses the needs and the ask from our customers, and so that fills into a product range all the way up to over 1 megawatt. And the first target market for that is primarily power generation. However that’s a really long runway for us, but with that there are some other opportunities in some adjacent markets for that product.

Robert Brown - Lake Street Capital Markets

Thank you. And your new China program that you’re talking about, would this be manufactured in your new China facility the JV there, or will this be U.S. product shipped to China?

Gary Winemaster

Yes, if we’re talking about the on-road opportunity this would be U.S. product get shipped to a Chinese OEM.

Robert Brown - Lake Street Capital Markets

Okay. And then lastly, on the outlook, what's sort of the NACCO business that’s implied in your new outlook. How much of the business there or how much is NACCO in that, if you could break it out?

Gary Winemaster

Rob, I would have to say that we’re not in a position to talk about customer specific volumes and revenues. I would say that we are a strong partner with NACCO and that we have been given the 1-8 ton lift truck business and we value their partnership and their privacy. So, I think it's difficult for us to say anything regarding your question.

Robert Brown - Lake Street Capital Markets

Okay, no problem. I understand. Thank you.

Operator

(Operator Instructions) We will now go to Eric Stine from Craig-Hallum.

Eric Stine - Craig-Hallum Capital Group LLC

Hi, everyone, nice quarter.

Gary Winemaster

Thank you.

Eric Cohen

Thanks, Eric.

Eric Stine - Craig-Hallum Capital Group LLC

Maybe just starting on PPPI, I mean I know there’s going to be a little bit of integration, but talking about it longer term, just can you talk about some of the synergies you’re seeing whether it, the impact for how soon can see things from bringing them to your CAT relationships or just other synergies, that would be helpful.

Gary Winemaster

Yes, so maybe I will bifurcate it into kind of top-line and then bottom line. So, on the revenue side of the synergies what we’re seeing is they -- as I’ve mentioned before they have got really contacts and relationships around the world in some of those global opportunities they are bringing over to us, and these are entities that are looking for engines or looking for our solutions, so that’s been helpful. At the same time we have relationships with the CAT or GE or other areas that we could bring to them to bear. And so, I think on a revenue side that’s been very helpful. On the cost side we have really deep purchasing in volume penetration right now, and so we’re getting I think we’re buying probably just as best as anyone out there on the engine side and for some of our components, and a very strong purchasing team and so we’re able to take some of the parts that they are buying and components, combine it with our purchasing leverage and just really drive down some bottom line savings on cost. On top of that, there are some best practices that we’re learning from them and they’re learning from us on the operation side which helps to improve the bottom line there. In terms of when we would expect to see these, as these opportunities mature, we would expect to see toward the end of this year both some cost utilizations as well as some new sales arriving from these synergies.

Eric Stine - Craig-Hallum Capital Group LLC

Got it, it's great. Maybe just shifting to oil and gas, and I know this is kind of tough to comment, just any thoughts you in the past called out some of the customers that are adopting your solutions, just thought how early you're into their footprint. And then secondarily, I know you’ve talked in the past about timing of CID2 certification, and just curious what that, what you feel that does to your market opportunity?

Eric Cohen

Okay, so if you look at where we’re on the adoption, I think we’re early in the runway. If you look at our volume although it's ramping it's probably around 3000 units a year on the heavy duty engine side of things. There is one million wells out there and each, it's a little under a 1:1 ratio for engines to well. So, if you look at the TAM, the total addressable market for engines in the oil and gas space it's immense and we’re just at a very early runway of opportunity for us. And so, we think we have a long way to go. In terms of your later question it does -- with that type of certification, spark resistant it does open up some opportunities for us. And again that’s been pulled by our customers asking for us to bring them those solutions on the Doosan line.

Eric Stine - Craig-Hallum Capital Group LLC

Got it, maybe last one for me, just an update I think well in the past you start to disclose the number in any potential size maybe that’s too much detail, but just other forklift customers beyond the natural contract and is things like those are likely late ’14, 2015 events?

Eric Cohen

Well, Eric I think we currently have relationships with the three largest and probably most of the top-10 forklift manufacturers in China, the three largest in Korea. So, I would say that we are working hard to win their business. Some of those like Hyundai are currently in production, but we are very confident that those other companies that we have relationships with will come over to the products that we have. As they expand, we’ve talked about what we do organically and one of the strengths of our company is because we touch so many different players in each segment of these market places, the organic opportunity for us to hit our guidance numbers is really without developing a lot of new customers, it's expanding inside of those customers. And with the products that we have we feel we have an advantage over our competitors, and I think we’ll realize that in 2014. And there will be more press releases as the year comes to an end.

Eric Stine - Craig-Hallum Capital Group LLC

Got it. Is it safe to say the new hires that you mentioned previously are helping hand in that lift? Thanks a lot.

Eric Cohen

They’re working. Thank you.

Operator

We’ll now go to Alex Potter from Piper Jaffray.

Alexander Potter - Piper Jaffray & Co.

Hi, guys. I was wondering if you could just disclose first of all the total number of engines you sold in the quarter, and if you’re willing to have a little guess at the number of engines you think you’re going to sell for the whole year.

Gary Winemaster

Alex, I don’t have that data in front of me, and we typically don’t disclose the unit engine sales by quarter.

Alexander Potter - Piper Jaffray & Co.

Okay, fair enough. How about this one, how many Perkins engines you think you’re going to sell this year. You think you’ll get meaningful volume there, is that something you might be willing to disclose or probably guess that?

Eric Cohen

Well, historically we have had a long long-term relationship. Are you talking about the Perkins gas or Perkins diesel?

Alexander Potter - Piper Jaffray & Co.

Yes, you can just do Perkins gas right now.

Eric Cohen

Okay. Those products, I mean we are in development. The 600 KW unit will be the first one that comes out, and then at the end of the year we will have the 1.2 megawatt units available for sale. So, I think that we’re going to obviously place some prototypes. We have two units that are going into enclosures on the large product which are already sold to customers. So, I think we’ll go out as we did with the Doosan product and make sure that it's applied properly and it meets out expectations. I think the reason that we’ve had such good success with the Doosan product is we made sure that it was right before ramped up and we’ll do the same thing with the Perkins product. We are very confident. It's going to be a great part of our product line, and I think that, the initial indications in the testing is that it's achieved and exceeded some of our expectation. So, we’re bullish but I really can’t say how many units we’re going to sell in that 23-61 liter business.

Alexander Potter - Piper Jaffray & Co.

Okay, fair enough. And I was wondering if you could comment a little bit on gross margin also, it was up year-over-year, down on a sequential basis presumably that, the results of the NACCO contracts or NACCO volume ramping up and that from a mix shift standpoint kind of pulling margins down, I guess the question are, a; is that an accurate assessment and b; should we expect that spend to kind of continue and have kind of a downward trend in the gross margin over the next couple of quarters or do you think that [ph] [probably should] put out??

Eric Cohen

As we discussed I think on our Q4 call, Alex I mean -- first of all let me just say that our high margin categories like oil and gas continues to perform very well and those margins are holding up well. I think we’ve discussed it in the past that material handling business tends to be a little bit lower in gross margins than some of our other business and particularly with respect to a new sizable order you wouldn’t have the maturity of the supply chain that you would need in order to really achieve the kind of targeted margins we’re looking for. We’ve got one of the best procurement guys we think in the business that is absolutely all over, in any all existing business but particularly new business where you’ve got again, you got prototype parts and you’ve got low quantity components that you’ve been acquiring. So, we’re busy improving margins and would expect to see improvement in those margins throughout the year. And it's the way that this business operates and it isn't that the business doesn’t make sense, it makes immense sense and it's very lucrative, but that’s the name of the game. It starts a bit lower and you work your way up.

Alexander Potter - Piper Jaffray & Co.

Okay. Very good, thanks a lot.

Eric Cohen

Thank you.

Gary Winemaster

Thanks, Eric.

Operator

Our next question comes from Greg McKinley from Dougherty.

Gregory McKinley - Dougherty and Company

Yes, thank you. Could you comment on your PPPI acquisition, so these are gensets that are going to be of larger scale than the customer base you typically sell your engines into, who would be the engine supplier for these gensets and is there any opportunity for you then to work with, is there any synergy to working with a new engine OEM or is that maybe not the case here?

Gary Winemaster

You’re absolutely correct; they do supply a market that’s larger than the existing customer base. And typically they will work with people like Caterpillar or GE or you can comment other engine manufacturers, and they’re open the way PPPI is positioned is what they do is essentially do integration. But they’ll work with an OEM or that OEMs dealer and take their engine, help to integrate it with the generator and add some electronics, things like switch, gear and other components, and sometimes put it in a closure around or sometimes not and maybe add a fuel tank to it or not. So, they’ll kind of integrate a complete system. And so they’re very open and thrived with working with really any OEM around the world that produces engines. And so that’s their model.

Eric Cohen

And I think Greg it really is a neutral position. We are not competitive with the suppliers or those engines. Really it's supporting them, giving them what is recognized as a world class product in a very specialized application.

Gregory McKinley - Dougherty and Company

Yes, okay. Thank you, and then maybe on your heavy duty segment for a second -- 21 or 22-61 liter segment. As your customers evaluate your solutions versus others, what are the other options out there in the market or is this market really a lower volume highly engineered product that hasn’t drawn either the engineering or technical advancement to be able to produce the product like you’re currently offering?

Gary Dvorchak

Well if we look at the product that we have today from 8-22 liter, I think one of the things that makes it ideal is that, it has the ability to run on wellhead gas. It has the ability to have explosion proof technicians. It has a lot of different components that I think are -- the customer is able to order those from us, would rather than have to up-fit that stuff in the field. I think we should give them a mature developed product that suits their applications and it doesn’t require after treatment or aftermarket add-ons to address those application requirements.

Gregory McKinley - Dougherty and Company

Okay, so that’s helpful. So generally speaking on an OEM basis, you don’t really see customized product rolling out to production line it requires some sort of up-fit in the field?

Gary Dvorchak

Historically that’s what we’ve seen. And I think that’s why we have been advantaged and that why we’ve had so many of the big oil companies working with their service providers to specify our engines.

Gregory McKinley - Dougherty and Company

Okay, thank you. And then, lastly Dan maybe just talk a little bit about how you’re looking at R&D investments as the year progresses versus maybe some of the levels we saw last year please.

Dan Gorey

Sure. I think I’ve talked a little bit about selling in G&A which we believe are much more mature and probably we will see potentially some margin expansion down the road as a result of those categories being much more fixed. I think when we’re talking about R&D it's a little different. I think it's running somewhere around 5% to 6% of revenue. I would expect it to kind of fall within that range in order to continue to grow the business as we have grown it and to continue to grow it to our expectations and our shareholders. We’re going to need to make significant investments. My sense is now that it's in that range that we’re talking about, that we ran -- we’ve run over the last couple of quarters.

Gregory McKinley - Dougherty and Company

Okay. Thank you.

Dan Gorey

You are welcome.

Gary Dvorchak

Thanks, Greg.

Operator

(Operator Instructions) We will now go to Rudy Hokanson from Barrington Research.

Rudy Hokanson - Barrington Research

Thank you. My question’s have to do with PPPI and that is, is it while you have a number of synergies and you’re sharing, is it essentially being allowed to standalone with its facility and its management team and run along aside of PSIX or is there more nuts and bolts integration in terms of any movement of facilities or personal?

Gary Dvorchak

It's been run as a standalone and so we have the trust and confidence with the management there, and the senior management is all staying on. And so, the relationship though is that where they can support us and add resources in synergies they do and there is some direct areas where we can help to support them and add resources we do it there. But on a day to day operation they’re really running as a standalone and we expect them to continue to remain where they are with their employees and continue to grow the business. One way to look at it is, when we went to this acquisition with the senior team there we napped out ahead of time where the opportunities were, and so together we started the acquisition and then you kind of call the play in role running it right now, and so they know what they need to do and where they have to support them and make sure they’re successful.

Rudy Hokanson - Barrington Research

So, if you decide to go with larger engines over as they’re already international for instance with the joint venture in China would they then be overseeing something there or is there nothing in the plans for getting into that part of the market yet?

Gary Dvorchak

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

Rudy Hokanson - Barrington Research

Thank you. As China comes about, at what point and this I guess is for Dan. At what point will you be having an equity line and how do you expect that to start fitting into forecasts for 2014 or 2015, if you’re going to be starting to have some results in 2014?

Dan Gorey

Yes, I mean I think and Eric may want to comment on this. I think we’re on track to be recording some revenue. We’ve already shipped some initial products. Right now it's largely not material at least as of the close of the first quarter, but there will be -- as this reaches materiality I mean we will probably breakout a separate line item related to our investment in the trend in JV.

Rudy Hokanson - Barrington Research

Okay. Thank you and those are my questions.

Dan Gorey

Thank you.

Gary Dvorchak

Thank you.

Operator

Our next question comes from Ross Silver from Vista Partners.

Ross Silver - Vista Partners

Hi, guys congratulations on a great quarter.

Gary Dvorchak

Thank you.

Eric Cohen

Thank you.

Ross Silver - Vista Partners

So, just a question as it relates to competition within the oil and gas segment. Could you just talk a little bit about that and maybe provide sort of rough sketch of the current penetration rate of natural gas engines on some of these rigs that are in the field currently and where that may go?

Eric Cohen

Yes, so I think the penetration rate as I alluded to is still fairly small. It's a very large market place. And as such, I think there’s going to be niches where various people compete and can take large parts of the market. One thing that kind of differentiates us from the competition is, the other large engine systems typically you’ve got to that Gary will field certify. So I mean, so the factory produces an engine, it goes to a site and then it's up to that site to get certification, and that incurs time and expense and delay. And then if they need to move it to a new site you have to kind of recertify for that site. We’re really out there with a more unique solution in our power range which is really to, we provide a pre-certified engine, so you can actually get our engine at the site and it's already certified and you can kind of plug it in and you’re ready to go. And so that type of environment there is very little or there is not much I know of direct competition.

Ross Silver - Vista Partners

Okay. Yes, all the other questions I had asked have been answered. So, thank you (indiscernible) answered. Thank you.

Eric Cohen

Okay. Thank you.

Operator

We will now go to Greg McKinley from Dougherty.

Gregory McKinley - Dougherty and Company

Yes, just one follow up on the larger engine manufacturers that would supply engines into the PPPI gensets, is there an opportunity there for PSI to collaborate with them to have power generation presence or engine presence in that offering in addition to the genset control solutions you’re going to bring with PPPI, am I thinking about that correctly or ...

Eric Cohen

Yes, it's really a different market, where PPPI plays it's at a different power level and for different applications than our existing customer base. So just for an example, they might take a locomotive engine and integrate that into a system that produces anywhere from up to 5 megawatts or maybe put them together up to 9 and 10 megawatts and that might be used to power an island or for peak shading in some application in the world.

Gregory McKinley - Dougherty and Company

Okay.

Eric Cohen

So they’re really integrating almost miniature power plants and it’s a much different model and kind of this end markets than what we play with our engine, which is that -- which are much smaller.

Gary Winemaster

Also Greg, I mean with all the customers that we sell to in all the different markets, we’ve been able to remain neutral. I think this is a similar situation where we’ve some great customers that are being packed -- having packing done by PPPI and the ability to stay neutral and support their requirements is really the strength of the company, and the confidence that those companies have that it is a neutral position.

Gregory McKinley - Dougherty and Company

Yes. Okay, all right. Thank you.

Gary Winemaster

Thank you.

Operator

(Operator Instructions) And it appears there are no further questions. I’ll turn the conference back over to our presenters for any additional or closing remarks.

Gary Winemaster

Okay. Before we close, I want to mention several upcoming conference appearances. On Monday May 19, Eric will present and host meetings at the Westlake Securities, Emerging Use of Natural Gas Conference, in New York. On Thursday May 22, Eric and Dan will host meetings at the Barrington Research Spring Conference, here in Chicago. On Wednesday May 28, we will have two simultaneous appearances. Dan and I will present and host meetings at the Craig-Hallum Conference, in Minneapolis, while Eric will host meetings and appear on a Panel at the FBR Energy Technology Summit, New York.

So with that, this concludes our call. Thank you for your interest in Power Solutions International. We look forward to our next conference call with you in August when we report our second quarter results. Thank you.

Operator

This concludes today’s presentation. Thank you for your participation.

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