Profire Energy Inc (PFIE) 2017 Q1 法說會逐字稿

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Profire Energy's fiscal first quarter ended March 31, 2017.

Joining us today is the President and CEO of Profire Energy, Brenton Hatch; and CFO, Ryan Oviatt. Before we begin today's call, I would like to take a moment to read the company's Safe Harbor statement.

Statements made during this call that are not historical are forward-looking statements. This call contains forward-looking statements including, but not limited to, statements regarding the company's ability to allocate resources to take advantage of opportunities; the company's R&D department being able to develop product in addition to its 3100 product; that future products will add significant value to the company; that the company will be able to timely deliver products with increased sales; the company's newly established sales vertical to support the 3100 product will be able to meet growth projections; the company focusing on reducing expenses, improving operational processes and making necessary investments; the company's belief that low oil prices and lack of drilling and well completions impact the company's ability to capture revenue; the company's ability to execute on its capital allocation plan; the company's ability to effectively manage costs; the company's intent to execute its share repurchase program and the company's ability to employ capital to generate meaningful returns in future periods. All such forward-looking statements are subject to uncertainty and changes in circumstances.

Forward-looking statements are not guarantees of future results or performance and involve risks, assumptions and uncertainties that could cause actual events or results to differ materially from the events or results described in or anticipated by the forward-looking statements. Factors that could materially affect such forward-looking statements include certain economic, business, public market and regulatory risks and factors identified in the company's periodic reports filed with the Securities and Exchange Commission.

All forward-looking statements are pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. All forward-looking statements are made only as of the date of this release and the company assumes no obligation to update forward-looking statements to reflect subsequent events or circumstances, except as required by law. Readers should not place undue reliance on these forward-looking statements.

I would like to remind everyone that this call is being recorded, and it will be available for replay through May 18, 2017, starting later this evening. It will be accessible via the link provided in today's press release as well as on the company's website at www.profireenergy.com.

Following the remarks by Mr. Hatch and Mr. Oviatt, we will open the call to your questions. As part of the question-and-answer session, Mr. Hatch and Oviatt will be joined by Profire Energy's VP of Sales, Cameron Tidball. Now I would like to turn the call over to the President and Chief Executive Officer of Profire Energy, Mr. Brenton Hatch.

Thank you very much. Good afternoon, everyone. Thanks for joining us today. We're excited to provide an update on our first fiscal quarter of 2017.

Our first quarter exceeded our expectations as we were able to see an increase in revenue and maintain our cost structure. As the oil and gas industry began to rebound, we were able to meet customer demand. The industry continues to show signs of improvement and we will allocate resources to take advantage of opportunities as they arise.

Some of the quarterly highlights include the fact that, with our increase in revenues, we were able to control costs and working capital to again generate positive cash flow, which Ryan will talk about later. During the industry downturn, we added many new customers, some of whom began purchasing significant quantities in the quarter. Throughout the quarter, we've seen growth in all basins in the U.S., but specifically, we've had a dramatic increase in activity in the Permian.

In the quarter ended September 30, 2016, we saw a 26% increase in quarter-over-quarter revenues. Then in the quarter ended December 31, 2016, revenues increased an additional 41%. As indicated in our previous earnings call, we had projected that our revenues would remain flat through the first 2 quarters of the fiscal year 2017; however, we accomplished a further 11% increase in this quarter. For the past 3 quarters now, we've been able to achieve double-digit increases.

The strength of our balance sheet has been a key enabler of the strategic accomplishments of Profire. We remain debt-free. We generated positive cash flow this quarter as we have on an annual basis for many years, including during the industry downturn. We've conducted a significant share buyback program and still had $21.7 million in cash and liquid investments at the quarter-end. We will continue to seek out opportunities that will drive long-term value for the company and our shareholders, while generating meaningful returns on capital.

We're investing in research and development to enhance the capabilities and applications of our 3100 product, our advanced combustion controller. We believe it will drive significant value for the company in the coming years. In an effort to remain a market leader and deliver reliable and innovative products to our customers, our R&D team is continually developing other products in addition to the 3100, that we believe will add significant future value to Profire. We're happy with the way our company is able to handle the ebbs and flows of the industry and believe that we can continue to augment our success.

I will now turn the call over to Ryan Oviatt, our CFO, to discuss the financial results for the quarter. Ryan?

Thanks, Brent.

Yesterday, after the market close, we filed our 10-Q with the SEC and discussed the quarter's highlights in a press release. As always, both of those documents are available on the Investors section of our website. The transcript of this call will be posted in the coming days.

In this quarter, we were able to see significant overall improvements when compared to the same quarter a year ago. Let's begin by looking at the income statement. In our first quarter of 2017, our total revenues increased to $7.8 million, a 72% increase over the same quarter a year ago. This increase is at least partially attributable to the industry recovery in the past 12 months and increased CapEx spending by oil and gas companies.

In looking at the industry as a whole, uncertainty continues around OPEC production decisions and the U.S. shale production. The rig count in the U.S. has continued to increase during 2017, while the rig count in Canada has declined over the last couple of months, primarily due to the annual spring break up cycle. The number of drilled, but uncompleted wells, has increased recently, which some speculate is due to the lack of required completion equipment.

Recent studies have shown that the breakeven price for U.S. shale producers has dropped on average to $35 per barrel. Overall, we believe these industry trends will have a positive impact for Profire and our customers in the coming quarters.

Now moving on -- our gross profit increased to $4.4 million or 56% of total revenues as compared to $2.3 million or 51% of total revenues in the same quarter last year. Gross profit remains strong, but varies a little each quarter due to the sales product mix for the period. Total operating expenses increased slightly to $3.3 million from $3 million in the same year-ago quarter. This increase in operating expenses is primarily due to a onetime expense in connection with the retirement of our former CTO. In the absence of this nonrecurring charge, operating expenses would have been slightly lower than the year-ago quarter and consistent with our final quarter of last year.

Operating expenses for general and administrative increased 10%, R&D increased 29% and depreciation increased 5% as compared to the same quarter a year ago. Our cost-cutting initiatives, combined with ongoing cost management, make it possible for us to respond to market demand, while maintaining profit margins. Profire remains committed to product development and technology; therefore, we continue to invest heavily in research and development.

Total other income during the period was roughly $28,000, the majority of which was attributable to interest income. Our net income was $600,000 or $0.01 per diluted share compared to a loss of $765,000 or a loss of $0.01 per diluted share in the same year-ago quarter. As noted earlier, during the quarter, we recognized a onetime expense related to the retirement package offer to our former CTO. Without this nonrecurring expense, we would have recognized net income of approximately $885,000 or $0.02 per diluted share.

Cash and liquid investments totaled $21.7 million as compared to $20 million at the end of the previous quarter and $21.3 million a year ago. In the past year, we've been actively repurchasing our own stock as part of our previously communicated capital allocation strategy. Under this program, as of May 5, 2017, we have purchased 3.4 million shares of Profire stock for $4.3 million. Despite the challenging industry circumstances of the past year, we've been able to fund these stock purchasers through operating cash flows. Generating positive cash flows will continue to be a key area of focus for the company.

Working capital management also remains a strong focus for the company. Inventory levels have increased slightly from the previous quarter. As a result of our vendors' increased lead times, we've strategically purchased inventory to ensure we can meet our sales projections in the coming quarters. Despite the fact that we increased sales by double digits in each of the past 3 quarters, our accounts receivable has decreased in the current period through the continued collection efforts. We have reduced AR over 90 days old from 32% a year ago, to only 13% now.

We will continue to strategically allocate capital according to the plan we have previously communicated. We will focus on the preservation of cash, new product development, potential acquisition of adjacent technologies, continuing our stock repurchase program and seeking out other value creation opportunities. These actions will allow us to continue to serve our customers, while bringing new products to market quickly and efficiently and increase value for shareholders.

The cost and company structures we now have are fairly scalable. With a substantial increase in revenues of 72% over the prior year and 11% over the prior quarter, our operating cost structure has remained relatively flat when you exclude onetime items. Through strategic inventory purchasing and the efforts of experienced sales and operations teams, we expect to continue to respond in a timely way to increase sales as the industry recovery strengthens. We remain committed to managing our costs, but we will not forgo investments that have significant long-term benefits for the company as we plan for the future.

With that, thanks, and I'll send it back to you, Brent.

Thanks, Ryan.

As Ryan has highlighted, we continue to generate positive cash flows from operations and continue our investment in higher interest income opportunities. During this quarter, we continued our stock repurchase program.

Throughout the quarter, we hired needed personnel in our operations department as well as in R&D to allow us to fulfill orders and to fully explore opportunities. Our increased investment in R&D is largely focused on supporting our 3100 product. We believe that the 3100 controller sales will increase in the coming quarters.

The 3100 allows us to work in much larger projects than we were previously able. In order to support the growth and demand for the 3100, we recently created a new sales and support vertical. These larger 3100 projects include engineering, design, a longer sales process and more complex installations. With this specifically dedicated work force, we feel we'll be able to effectively execute our growth projections for the 3100.

Despite the recent dip in commodity prices, many analysts believe prices will average from the low to mid-50s range throughout the end of the year. We remain cautiously optimistic that this is the case and that this will continue to drive an increase in our sales.

We remain a market leader in the burner management industry and are positioning ourselves for continued growth. Our cash position allows us to remain flexible and make strategic investments both internally and externally. We are dedicated to serving our current customer base and are focused mainly on providing solutions within the oil and gas industry. We are looking into the possibility of expanding into other industries with the ongoing development of the 3100.

Thank you for investing and showing interest in Profire. We remain passionate about our products and our customers and plan to see Profire return to and exceed our historic revenue levels as the market recovers. Now with that, I will open the call up to questions. Operator, would you please provide the appropriate instructions so that we can get the Q&A started?

(Operator Instructions) Our first question is from the line of Rob Brown with Lake Street Capital.

On kind of the industry demand trends and recovery, how has that continued on more recently with kind of the volatility in commodity prices, and in general, sort of what's your view on any pent-up demand out there?

We have seen, of course, the prices bounce up and down with oil, but we have not -- and we've monitored this pretty carefully -- we've not seen any significant difference in the interest of our customers in purchasing. Orders are still coming in as we would expect and hope. Capital budget seem to be there as I'd indicated in my previous comments. Most of the shale producers are on average making money at the -- or breaking even at the $35 level and some even less than that. And so as it bounces in these high 40s and low 50s, we haven't seen a significant change at all in possibilities for ourselves.

Okay, great. And then on the 3100 business, that's developing nicely. Could you give us a sense of how much that is today of the business and maybe a longer-term view of what the 3100 business kind of can become as it plays out?

That we, of course, have been watching this with great interest ourselves. Cam, you've been actively involved in the 60 or so projects, I guess, we've been involved in, in this past year. Do you want to address this?

Yes, for sure. As you alluded to in your comments, in the script there, we -- these projects are bigger, they take longer -- the sales cycle is longer. And you mentioned as well for the call -- everyone on the call, we have recently created a new vertical, a sales vertical which will be exclusively focused on 3100 business development.

So far that -- we've seen some -- obviously some great interest. We know that the product is desired. That sales cycle, of course, though will be longer. We're already working on projects into 2018. And so we will see some ebbs and flows up and down quarters with the 3100. But as we continue to build a backlog of projects, which is our desire, we're going to be able to realize a lot more with respect to the 3100. So still revenues are up and down for quarter. But interest continues to go up and increase as we get out to more and more customers that can use this product on some projects we just, quite frankly, could never do before.

Cam, I might add to that, that the sales vertical that we have created includes more than just salespeople, and you might speak to that as well, some of these other -- because these are engineered products, some of these other people that are required in this.

Yes, we've brought in, prior to this as well, project management arm R&D support as well as commissioning experts. The project management arm was brought from external, from a highly reputable company; the sales arm was grown from within, from someone that we strategically hired 2 years ago, knowing this product was in the mix. And then from a perspective of technical documentation, and all those things that are required and that we can charge for on these projects, we've put those in place. And so we're going to be able to execute on these projects much quicker than our competitors, at least that's our belief, and show that nimbleness that Profire's always shown in our niche market.

(Operator Instructions) The next question comes from the line of Joseph Reagor with Roth Capital.

Couple of things. I guess, first, you didn't mention much about the chemical management system arm of the sales. Can you give kind of -- I mean, historically, you've been giving, kind of, a rough estimate on percentage of sales or what that represented; can you guys provide that again?

Sure. Ryan, do you want to address that one?

Yes. So certainly that one again has been a very small contributor to sales at this point. In Q1, numbers were down from what we've seen in the past. But Cam can speak probably a little bit more on some of the opportunities that we're still working on there. Overall, it represented less than 2% of total revenue in Q1. Cam, do you want to comment about the other opportunities on the CMS side?

Yes, for sure. Both Ryan and Brent's comments are exact, in that we haven't realized the revenue from direct CMS. However, it's -- again, it's one of the easiest meetings to get, and what it's turned into, especially in the midstream space, is allowing us to get on to sites where, oh, look at that piece of equipment there, that could use a 3100 or a BMS upgrade. So it has spurred a lot of other business for Profire, which is hard to quantify, but is definitely noticeable from our end and our sales people. So they still continue to get those meetings.

We have some significant opportunities that we hope can bear fruit. We're still working with some major exploration companies on some pilot units and trialing things out. We've had some success there. Again, it's one of those things in the chemical world, they've got their budgets in place. And it's -- unless a company is incenting people to save money there, they're not looking in that spot. So we know we have case studies, we've done well with people. So it's just finding those right customers. We're very excited and hope to have something in this quarter with a couple majors still.

And then, Q1 was above your expectations by a pretty good percentage basis. And Q2 rig count looks like it's up from Q1 average, 50 to 100 rigs already. Do you guys think Q2 is capable of reaching the same level as Q1 or are you guys holding back on that a little because you were saying some of the drilled-but-uncompleted wells inventories are increasing?

That's a great question. We wish we had the capacity to really see what the future holds. But yes, our expectations are very -- we're very optimistic. We feel like there's a lot of interest out there in the products we have and this new 3100 project, as Cam said, some of the work that we're doing now won't necessarily be seen in this coming quarter, but in subsequent quarters. But we have no reason to believe that the momentum that we have achieved can't continue with the lot of hard work.

Our salespeople are really out there and really doing the job. We did a lot of ground work during the downturn actually. And as I'd mentioned earlier in my comments, even from some of the new customers that we got during the downturn, we're seeing some significant purchases. So we have no reason to believe that we can't keep up this momentum and -- if we keep our noses to the grindstone as it were.

And then one final one. Just a clarification. Ryan, you spoke on G&A costs. This quarter G&A was about 2.9; last quarter it was 2.5. Historically, it's more like 2.3, it seems on average. Should we be using that 2.5 or the 2.3 number going forward?

We expect that overall, we've increased some costs slightly, so I think probably the 2.5 number specifically. Some of my comments were kind of in the overall general operating including R&D and depreciation. But we've seen a little bit of an increasing cost overall with the additional staffing that we've talked about, but probably use the 2.5 number going forward.

(Operator Instructions) The next question is coming from the line of George Gaspar, private investor.

Don't know if you can identify this for us. But can you give us some range about the individual installation sales that you're making, the value of them and how does this 3100 unit compare with what you've done generally? That's one part of the question. The other is, can you breakout your sales volume by oil region in The United States by area, if possible?

Cameron, do you want to talk about those sales issues?

Yes. The first question, can you repeat that again, George? I got the second one. I know it's a breakout by shale region. But the first question, can you come again on that?

The value on a per unit install basis, what's the value of your individual installs that you've been making, and then how does this 3100 unit that you're talking about is going to be valued comparatively speaking?

Yes, that's a great question. I can answer it with a Profire standard answer, it depends, but I'll give you a little more color than that. On our legacy product business, so that's 2100 business on upstream production and processing equipment, you can be anywhere from a box sale with $2,500 all the way up to a $10,000 preassembled fuel train solution. So a fair number that we use often is in between that $4,000 and $5,000 on average for legacy product, and it all depends on what part of it. Because we, as a company, don't install everything that we put on the field.

Now on the 3100 side, you can range anywhere from a $10,000 sale to high 6 figures, $300,000. We know we'll see projects higher than that. We know we'll have projects in the $30,000. So it's a very vast range and out of the last 5 quarters, we've been tracking 3100 projects, we're in that kind of 75, 80 up to -- between there in 100 projects. We've had that range anywhere from 6,000 to in the high 2s. So it all depends on what we're going to do.

Obviously, those 6-figure projects, they are longer lead time into the -- up to a year, or maybe even 2 years. We're already -- we're going to have to start putting it out there. We're booking into 2018, which is a nice thing, but that's just a marketing strategy to get people incented. But, yes, we have to rely on turnarounds for these projects, which are sometimes scheduled 1, 2, 3 years out. So I don't know if that doesn't really give you something you can model on the 3100 side because that is so vast, but it has been very vast so far.

And then on the areas -- regional areas of(inaudible) activity, can you give us any color on that, where the breakout of your sales are coming from?

Yes, so we focus, obviously, in about 8 different shale regions in the United States. Our territories will cover everything from the Bakken, the Permian, Colorado, Wyoming, Marcellus, Utica, et cetera. For the most part, our strongest in this last quarter, our strongest revenue, I guess, contributors would be Pennsylvania, the SCOOP, the STACK in Oklahoma, the Permian Basin. Those are all very close in contribution to our overall revenue. And then we've continued to do well in Colorado, Ohio and the Bakken. So overall, you could say the majority is coming from the first 4 that I mentioned, Permian, Pennsylvania and Oklahoma. But we're seeing great grounds in all of those areas where we've increased in all of them.

And if I could ask this on a technical side in terms of the seemingly much improving trend in the Permian Basin in terms of the output and the combination of output between oil and gas liquids, do you find an opportunity expanding for you, where you relate it to gas -- high gas-liquids ratios?

Well, Profire gets a taste of gas production and oil production. Obviously, we like liquids because there's for the most part, in the Permian Basin, a higher ratio of burners and heaters to oil than there is gas to -- heaters with gas, so we prefer that. However, Profire is getting a great taste on all new -- in a lot of the new drilling activity in the Permian Basin. So as long as they keep using heaters, as long as they keep producing well -- the wells are producing and they're completing them, we've got a great customer base, we should still be able to reap the reward.

Just a closing comment from my perspective.

I'm relatively new at following your company, but I have followed it for a few months here. But the -- it would be very interesting to see what's going to happen here. If I look at the historical perspective on the price of your security outstanding relative to where it is now in the progress that you're making and the innovation, it would seem awfully attractive for investors and I'm wondering are you planning on making -- getting out and making more presentations on to investment conferences?

Well, indeed, that's another great point that you make there. We are, in fact, to answer your question, out there to conferences doing non-deal roadshows and such as much as we possibly can and still keep operations going. We also have a number of calls weekly with various brokers and investors, where we talk to large groups. And so we're actively doing that. But it does seem to make a difference. We find that when we do get out in front of the public when we can, at these conferences, we do see a surge in activity following those things. And so because of that, we are going to make a continued effort to be very active that way.

(Operator Instructions) At this time, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Hatch. Mr. Hatch, please proceed.

Thank you, Rob.

Thanks, everyone, for joining us today on our call to discuss the results of the first fiscal quarter. We would like to thank our customers. We appreciate them very much; our employees, of course, add a great deal to our success, and of course, our shareholders for their continued support and encouragement. Please note that we are always available for any of you to discuss any questions and concerns that you may have. Please contact us at numbers that are available on our website. Thank you, everyone. Have a great day.

Thank you. Again, I'd like to remind everyone that this call will be available for replay through May 18, 2017, starting later this evening by the link provided in today's press release and in the Investor section of the company's website. Thank you, ladies and gentlemen, for joining us today for our presentation. You may now disconnect.