Profire Energy Inc (PFIE) 2017 Q4 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 year ended December 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 release new products in 2018, the R&D department improving the capabilities of the 3100 product, that future products will add significant value to the company, that the company will able to timely deliver products with increased sales, the company's ability to deliver products to market faster, the company achieving safety integrity level, or SIL certification, within the first half of the year that will allow sales to larger customers, the company's ability to capitalize on CMS product sales opportunities, the company's ability to execute on its capital allocation plan, the company's intent to execute its share repurchase program, the company's performance in 2018 will remain consistent with previous quarters, the company's ability to return growth in 2018 and the company's ability to achieve revenue growth in 2018.

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 filings with the Securities and Exchange Commission. All forward-looking statements are made 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 will be available for replay through March 15, 2018, starting later this evening. It'll be accessible via the link provided in yesterday'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. Thank you for joining us and for your interest in Profire. We are pleased to provide this earnings report. In spite of the unpredictable nature of gas and oil prices throughout the year, Profire outperformed analysts, and frankly, our own expectations. In 2017, the average price per barrel was $50.88. However, for 6 months of the year, the price was in the 40s. Many early projections predicted that the average price per barrel would be in the $55 to $58 range, where most of the year our customers felt the market volatility as the oil continued to underperform. Despite that volatility though, Profire saw great success. This was in large part attributable to our focus on increasing our customer base throughout the industry downturn and into the recovery.

Since the downturn began in 2014, we have been able to increase the number of our customers more than 300%. Near the end of the year, the market began to stabilize and we saw an increase in sales orders throughout Q4. Our efforts throughout 2017 enabled us to maintain our status as an industry leader and produced a healthy increase in revenues both year-over-year and quarter-over-quarter. Profire recognized 2017 as its second-best revenue-generating year in company history. For the year, we recognized revenues of $38.3 million, which is up from $20.5 million in the previous 12-month period or an increase of 86%.

Net income in the same period was $4.4 million, which represents a dramatic increase over the prior 12-month period. Our performance is a direct result of our strategic plan and principles. The success we experienced this year is partially enabled by Profire's long-standing principle of remaining debt free. At the year-end, Profire had 0 debt and cash and liquid investments in excess of $24 million. In the beginning of the industry downturn, we enacted a cost management plan. We are committed to cost control, even now that the industry is recovering. This strategy allowed us to realize positive quarterly cash flows throughout the year.

An additional part of our overall plan is to invest in employee retention. Throughout the industry volatility, we were able to retain our sales staff. This team now has nearly 100 years of combined experience. This experience and knowledgeable staff offers superior service when responding to customer requests and needs. We also continue to allocate resources to R&D to augment our product offerings. In particular, this year, we began to -- the process of expanding product certifications. We believe that the improved certification will allow us to service additional customers in more complex environments. This year, we were able to leverage our position as industry leaders as we continue to outperform our peers in the oilfield services arena.

With that said, I will now turn the time over to Ryan Oviatt, our CFO, to discuss the financial results of the year. Ryan?

Thanks, Brent. Yesterday, after the market close, we filed our 10-K with the SEC and discussed the year'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 year, we exceeded expectations and demonstrated commitment to our cost management strategy, while deliberately spending to improve operational efficiencies and investing in research and development. As Brent mentioned, we experienced great success in 2017.

Let's begin by looking at the income statement. In 2017, we recognized $38.3 million in revenue, which is an 86% increase from the same period a year ago. Many factors contributed to the increase in revenue, including the growing customer base that Brent mentioned as well as the stabilization of the price per barrel of oil throughout the year. In Q4 of 2017, we saw an unexpected increase in revenue. We previously communicated that we believed the fourth quarter would remain flat or decrease slightly. However, we recognized $10.9 million in revenue compared to $10 million in the previous quarter and $7 million in the same quarter of last year. We attribute this increase to customer spending their remaining CapEx budgets before the end of the year. With the increase in revenues, our gross profit increased to just over $20 million or 53% of total revenues as compared to $10.4 million or 51% of total revenues in the prior 12-month period.

Gross margins continue to vary a little quarter-to-quarter, primarily due to the mix of proprietary and third-party products. Total operating expenses increased to $13.4 million from $11.4 million in the previous 12-month period. This 18% increase in operating expenses is a modest increase when compared with the 86% increase in revenue over the same period. During the year, Profire maintained its cost management plan and insured expenses did not increase at a rate faster than revenue. Operating expenses for general and administrative increased 16%, R&D increased 72% and depreciation decreased 16% as compared to the previous 12-month period. The increase in expenses is primarily due to higher labor cost to meet the increasing customer demand and to retain employees. The increase in R&D is deliberate and illustrates our commitment to continuous innovation, to improving our products and expanding our product line. We believe this increased spending in R&D will ensure we remain a market leader for technology and automation in the oil and gas industry.

Total other income during that period was roughly $280,000, the majority of which was attributable to interest income and the impact of foreign exchange rates. Our net income was $4.4 million or $0.09 per diluted share compared to a loss of $686,000 or a loss of $0.01 per diluted share in the prior 12-month period. This significant net income increase is attributable to our staff's hard work to grow revenue, while keeping cost growth under control. We were able to accomplish this without a drastic increase in employees or overhead cost throughout the year. Our lean management activities allowed us to increase production without a correlating increase in expenses. Now let's look at the balance sheet. Cash and liquid investments totaled over $24 million as compared to $20 million a year ago.

In the past year, we have been actively repurchasing our own stock as part of our capital allocation strategy. Since the inception of the program, we have purchased nearly 10% of the shares outstanding at an average share price of $1.29. We believe these activities added significant value to our shareholders. These repurchases were enabled through operating cash flows. In addition to repurchasing stock, we invested minor amounts in capital improvements to update some of our facilities and assets. Working capital management remains a focus. Inventory levels decreased slightly when compared to the previous year. We are proactively working with our vendors to manage lead times to ensure that we'll be able to deliver in a timely fashion to our customers and react quickly to market demand.

Our accounts receivable collections remain strong and the balance of accounts over 90 days old was only 13% of total accounts receivable compared to 17% in the previous year. We plan to continue with our capital allocation strategy throughout 2018. This plan includes the continuation of our stock repurchase program. In addition to that, we plan to invest in R&D to enhance our capabilities to bring products to market faster. We routinely discuss and explore M&A opportunities as a way for Profire to continue to grow its market share and possibly enter new markets. In 2017, our market continued to improve as drilling remained steady and the average oil price increased 18%. However, the number of drilled but uncompleted wells continue to rise. We monitor drilled but uncompleted wells because we believe this is a predictor of future sales opportunities. Our product is installed once the well is completed. When our customers begin completing these wells, we should see a significant increase in sales.

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

Thanks, Ryan. We plan to build on the success and momentum of 2017, and we believe we are well positioned to take advantage of this year's market opportunities. Throughout the year, we were able to outpace the industry recovery by almost 4x. In 2017, the oil price per barrel rose 18%, while compared to our increased revenues of 86%. Rig counts were down in the first half of the year, averaging 1,010 rigs and increased only slightly into 1,134 in the second half of the year. In this same period, where the industry recovery was underwhelming, we were able to increase our net income by over 700%.

Throughout 2017, we were able to focus on product development, thus increasing its capabilities and reach. As I previously stated, our R&D department has worked at upgrading our product certification, while not yet complete, we believe that we can achieve a safety integrity level, or SIL certification, on our product development process in the first half of 2018. After speaking with customers and investigating opportunities, we believe this upgraded certification will allow us to quote on larger projects with our products and explore other market possibilities. In addition to the expanded certification, our R&D team is working to improve the capabilities of our 3100 BMS, product development remains a focus in our strategic plan.

With input from our customers, we are constantly developing new technologies to bring to the marketplace and expand automation in the oilfield. In 2017, we saw increased interest in our CMS product as well. As our customers continue to expand CapEx budgets, they are looking for technology that can improve their efficiency and cut costs. Profire was invited to present at a series of conferences designed to introduce production companies to new technologies. From these conferences, we have seen a significant increase in request for trial units and sales quotes for the CMS product. The overall market remains uncertain as we head into 2018. Oil prices are currently outperforming projections. However, such projections are inconsistent as to what may happen throughout the year. We believe drilling will stay fairly level in 2018. Should the market remain constant, we believe there is room for Profire revenue growth. We offer proven products and plan to add to our product line in 2018 to take advantage of sales opportunities that were not previously available to us. We also plan to leverage our growing customer base into increased revenues as they execute their CapEx budgets for the year.

As Ryan mentioned, we experienced an unanticipated uptick in sales in Q4. We are optimistic that our performance in 2018 will remain consistent with our performance in the previous quarters. Thank you for your interest and investment in Profire. We strive to offer reliable and competitive products. Our entire Profire team is dedicated to our success in that regard. We've proven that we can manage Profire through changing industry conditions and feel we are now more capable than ever to take advantage of the opportunities before us. We believe our future at Profire is positive and -- as we continue to grow into 2018.

Before I turn it over to the operator for questions, I'd like to take the opportunity to thank our Profire team for making all this possible. We have built a company and culture here that I'm very proud to be a part of, and I thank each of you for contributing to our success. Now with that, I will open up the call to questions. Operator, would you please provide the appropriate instructions, so that we can get the Q&A started?

(Operator Instructions) Our first question comes from Rob Brown with Lake Street Capital Markets.

A follow-up on your comment about the quoting activity in the CMS business. Could you kind of characterize the level of that, is it mostly trial units at this point? Or are you getting some follow-on activity there?

Great question, Rob. But I should mention that -- as we proceed here, that we have in attendance with us Mr. Jay Fugal, our VP of Operations and Mr. Cam Tidball who quite often joins us, who is now our Chief Business Development Officer, but he has attended to the sales end for this past quarter. And Cam, perhaps you could answer that question for Rob?

You bet. We've had a -- with -- as announced in, I guess, a reading there, CMS is really -- the last 2 quarters we've seen an uptick with quoting activity, mainly because of some features we've added, some technology that we upgraded in our current platform that has allowed us to do some things that we currently -- we previously couldn't do. Then, coupled with some of these conferences that we are invited to, we are able to be in front of more E&Ps at levels that we hadn't had the opportunity to be to have those discussions with. And so the quoting activity has dramatically gone up. We already have put systems in place, quite a few in the South Texas area, where H2S ultra-fab skids are very popular. We're saving chemical and really keeping pipeline integrity high is critical to bottom line. We've had some great success there with some major E&Ps. So it's still very preliminary. We've got some more conferences we've attended here, the same group that put these together last month. And so we hope to see even more going into South Texas, Canada and into the Permian Basin, that's where those conferences were focused on. So to quantify it, it's still small numbers relatively. But the change in acceptance, the desire to try the systems and even some of the POs we've got is proving to us we've got some great case studies where it's helping our customers save on the bottom line. So it's been great.

Wow. That was impressive, Cam.

On the -- second question is really on the customer demand environment. Q4 was better than you expected. You saw some -- I guess to what extent -- was there a pull-forward in orders? Or do you see that demand continuing into '18?

As I mentioned in my other comments here just as I was wrapping up, Rob, we don't see any reason why we can't continue forward. We are quite positive about what's going on. The interest in the request for quotes and so on. We're quite optimistic about this year. We, of course, are not the world's best prognosticators when it comes to knowing what oil prices are going to do. But -- well, actually we may be as good as anybody else in the world. But nobody seems to have done much of a job of that. But given that the things stay fairly level in terms of the oil price situation, we anticipate that this will be a positive year for us for sure.

Our next question is from the line of Jim McIlree with Chardan Capital.

Ryan, the inventory turns have improved significantly over the past couple of years. So good going on that. But I'd like to know if this is kind of a -- if this -- is this the goal? Or is there more improvement to come?

Yes, great question, Jim. There's still some areas of our inventory where we think that we can make some improvements. Some items that are slower moving. And obviously, the CMS would fall into that category as we ramp-up in CMS activity as Cam mentioned, and that would pull down some inventory there a little bit. There's a few other areas of some product that we think we can continue to improve upon. But at the same time, as we're ramping up sales and other activity for the 3100 and for 2100 and other key components that are selling quite actively, and we anticipate we'll continue to do so. We're working with vendors right now on lead times and trying to figure out exactly what is the right amount of that inventory to hold. So as we see sales activity increase, I think the value of inventory might go up a little bit, again, especially related to 3100 product as that moves forward. But overall, we're happy with what we've achieved recently related to inventory turns and working very closely with our vendors and Jay as well with the overall ordering quantities. We have made some improvements in how we're ordering to where we're working with, what we refer to as release time POs. So we're kind of scheduling out of our orders throughout the next 6 months or even year and getting inventory in smaller quantities in at the time when we think we're going to need it as opposed to taking really large orders all in at once.

I think in prior calls, you've talked about lead times for some of your components being extended, particularly with the recovery from the downturn a lot of your suppliers were just no longer in existence. Is that -- has that been -- has that ameliorated somewhat over the past quarter? Are we still looking -- are you still looking at kind of a tight supply chain?

I think I'll actually pass that to a fairly new name here Mr. Jay Fugal, who is VP of Operations and who is very actively involved with these groups you're referring to and with the whole inventory control process. Jay?

Thank you, Brent. And I think as move forward strategy on this release PO will be key to ensuring that we keep this product coming in and flowing in at the rate that we need it to. We do experience some longer lead times than what's comfortable for me anyway in the day to day. But the great news is some of our vendors and suppliers that we've had partnered with over the past couple of years even have really been able to react well to what we need moving POs where we need them to, getting products in on time. But we have our purchasing and procurement team that is actively looking for alternative product in case we need to stray -- backfill some of this area. But it's definitely a very strong area of focus for our operations team as we look forward. And it's -- we're very, very aware of when the product is supposed to arrive and how the sales are impacting them day to day.

All right. That's helpful. And then kind of a broad question on R&D. It's I think in the long list of warnings about all the things that can go wrong in 2018, it was mentioned new products not being developed on time. And Ryan, you mentioned an increased level of R&D. And so I'm just trying to understand kind of either as a dollar amount or as a percentage of sales or as growth from the prior year, what your goals are for all R&D dollars? And then I know that you're spending it on certain things like CMS and 3100. But that warning at the beginning made me think that there's a new product coming out in 2018. So if you could address those, that would be great.

Yes, I'd be happy to. I didn't hear that, Jim, because I always fall asleep during that part of the presentation. But actually, I did hear. We do have new product that we anticipate releasing, hopefully this year, and we're quite excited about it. We think it will be certainly very accretive to what we're doing here. I would not -- even though you heard that potential warning, I would not read into that too much. We certainly believe that the time line that we have projected is fairly accurate. We anticipate in the coming couple of months to have completed the whole SIL certification process. And we feel like by Spring that will happen, which will allow the 3100 sales to augment significantly. As far as this other new product and others we are working on, we think we're very close to the time lines that we have originally intended. So yes, nothing was intended by that to the negative.

And as far as the R&D dollars or levels or percentages or growth going forward, Ryan, can you address that?

Yes, certainly. We've increased R&D quite significantly during 2017. A lot of that was due to the focus on SIL, the focus on adding new capabilities to the 3100 and then also what Brent has just been talking about, the new products. So I think the best assumption would be to kind of look at the Q3, Q4 run rate as far as R&D spending and assume that, that continues throughout 2018. We think that we're well positioned with that R&D department right now. Don't anticipate needing that significant people or anything else for the department. But would anticipate kind of that same run rate throughout 2018.

The next question comes from the line of John White with Roth Capital.

On the oil and gas side, did you experience particularly strong growth in any certain region or basin that you'd like to talk about?

Actually, I could respond to some of that. But Cam, why don't you address that. You're very actively involved, obviously, with sales.

You bet you. So Q3 and Q4, we had strong growth in the Permian Basin, which we did for the majority of 2017 with the focus we have put in that area, obviously, with it being the focus of many of our customers who're putting a lot of dollars there. We've seen significant growth there. The DJ Basin continues to be incredibly strong for Profire in terms of a market share, and especially in Q4, we saw a large uptick in the DJ Basin there. So those would be the main 2 areas that we've seen some great growth. We've had some big orders in heavy oil country as well in Q4 that, as Brent mentioned, we weren't expecting a heavy oil being at Northern Bakken region. And so those have been the primary drivers for the growth in Q3 and 4.

Our next question comes from the line of Mark Lanier with Pegasus Capital.

I'd like to return to the CMS side of the business. Help us frame the market potential there as you've become increasingly close to customers and prospects in trial units? And also, looking out 2 years, what's a reasonable goal for what that might be as a percentage of the business, all other things being equal?

Cameron?

Well, CMS has obviously been this thing that we brought on when -- we bought it at a great stock price and then the market collapsed, and then we had lots of interest, the easiest meeting we could get, to be honest. But no one would pull the trigger, no one would champion it from our customers' perspective. And it seemed like no one wanted to really step out of line and to say, hey, this is something that could help, because of fear of job loss, which we get that. With the last little bit, your last 6 months where we feel a lot more excitement about this. We've got customers who're settled down a little bit to a degree, back-focusing on optimization of all business and automation as a whole. Adding the features we did, that allow us to do these ultra-fab skids which is used mainly in sour gas applications; pump splitting, which allows them to take these sites where they have several pumps and use 1 controller to take care of it. In terms of what the market potential is, we see a strong opportunity, very strong in the Eagle Ford. We see a lot of opportunity in the Duverney play in Canada just because of the amount of different types of chemicals being used to treat. Permian is obviously the place we wanted. In terms of quantifying the market potential, we still think that there is an -- with every well that goes in, there are almost always -- except for in the Northeast, there is almost always chemicals being used. Now not always does it make economic sense, that's as of today. We remember years ago, when BMS didn't make economic sense and now table stakes, you have to have it. So to qualify it, it's still somewhat learning. We're working towards understanding. But we still believe that every end-user needs to be using these at every injection point they have. And so the realization of that, that's going to still take some time. We'll probably need to evolve the product, but it's on our road map to figure out what that -- where Profire's place is in that niche. So I didn't answer your question completely, Mark, so I apologize for that. I don't have a projection for 2 years out, but Ryan does for sure.

But Mark, I might add too that when we initially brought the BMS unit down from Canada, it had been quite popular in Canada, partially because of government legislation. But it took us years before we were able to sell our first product here, and then it was a very slow ramp up. But as we've put out these trial units and people used them and saw the advantage of it, it now -- as Cam says, it -- everybody needs it, everybody wants it, it's specced in on virtually all equipment. And we anticipate that it's going to take a year to -- for the CMS to ramp. But we think it will follow the same trajectory pattern that our BMS units did as well. So we're being patient with this having seen this once before, but also seeing the end result of that patience with the BMS unit.

And a follow-on having to do with sales. Talk a little about what your plan changes are at the margin in terms of sales force size and allocation. I'll be curious how you're planning for that.

Mr. Oviatt?

Sorry, can I clarify your question, were you talking about numbers of salespeople?

No.

Numbers of salespeople and allocations to different areas, but principally numbers, what the sales were at year-end and...

I could answer that, but I don't know if Cam would like my answer. So I will let him address that.

Sure. We're still at a stable force of 17 revenue-generating positions, we call. Now when you also add in the fact that we have our close to 20 service technicians who are also revenue-generating, sales-promoting, that gets our team quite large. Now as where we're going to allocate, and we have this last year -- we've got kind of 2 divisions. We have our legacy product, which we need that transactional-based account sales person in boots on the ground in the area where we need them the most. There's really not another area that we need to get someone into. Currently, we far outperform our peers in customer support, customer accessibility, that ability to get a hold of someone quick. Profire excels at that. That's one of our main customer experience strategies is to deliver that. Now the other line that we have is our 3100 business development in which we have put a person in place to lead that. And he obviously still works with our existing sales team, but we will be looking to grow that team this year. We've planned for it. And that leg will not only have direct sales, but it will also be -- eventually we envision distribution management of system integrators. So that's yet to be seen. We want to do our best, first of all, to get out there and take business direct, learn direct from customers and really then have our pick of the layer for distributors down the road. In terms of where we go from there? Obviously, as our road map unfolds, as people -- as we release new products and things like that, we fully anticipate growing sales channels in the future. So it'll be exciting for Profire.

Our next question is from the line of Arieh Coll with Coll Capital.

Question #1. Just highlighting oil prices. As you mentioned, they averaged about $56 in the fourth quarter WTI, they are actually risen here in January, February, averaging about $61, so that's up about 9% from the fourth quarter. So I'm just trying to understand the -- if you look at your sales in January and February, to what degree you have the higher oil prices and implicitly the higher profits that your customers translated into sales in January and February being above the levels you had in the fourth quarter?

It's an interesting question, Arieh. We have tried to track this over the years, and just see how directly our sales were connected to that. And we feel like there's usually about a 6- or 8-month lag time after prices go up that the -- and most of that's related to CapEx spend. The E&Ps take a while to ramp. Now the fact that, that as Cam suggested earlier, that we are on virtually every piece of equipment now or at least the need for it is specced in by the engineers and so on. When the prices are at $40, most of these E&Ps are starting to break even. And so as we get into the $40s and $50s, 2 quarters last year, the prices averaged in the $40s. And yet our -- you saw that we made some significant sales. So I think that some of this, especially for products that are considered necessities, happens whether we have $58 oil or $62 oil. And I don't think that we necessarily see a huge jump. But typically, we follow if we had to pick a time about 6 months after the rise in oil prices it takes to flow through to us.

Okay. And then secondly, so I would call that -- I wouldn't call that an answer. But on the tax rate, asking Ryan, can you just clarify what your federal and state taxes are going to be for 2018 in light of the new law?

Yes, certainly. In the U.S., we expect that the federal rate will be that 21% number that everyone's aware of. And then with other state factors, we anticipate another 5% there. So a combined rate of around 26% for the U.S.

Got it. So that means you can have a bigger Christmas party?

Exactly, and you're invited.

And then one last thing. I was looking at your 10-K, Ryan, I'm not sure how the accounting works in terms of allocation of costs, but I was surprised to see that Canada lost money in 2017. And I would assume the way you allocate the expenses, all your corporate G&A kind of goes into the U.S. segment. So can you just kind of explain why Canada in spite of $7 million or $8 million of annual sales, I think that's right, lost money last year? And what's the prognosis for 2018?

Yes, good question. So there are quite a few different factors that come into play there. The overall margins that we realized in Canada are a little bit lower because service is the bigger percentage of our total revenues there, so that has some impact. We do have the majority of our R&D -- well, all of our R&D group is up there now in Canada. So the costs are there. But we do allocate portions of those into the U.S. based on the nature of those costs. So overall, it's kind of several different factors that are contributing to that. Without going into all of that detail, we are continuing to look at ways to either be able to allocate more costs into the U.S. appropriately and also where we locate employees and hiring and so forth. So we hope that we can see some improvement there. Overall, the rate of improvement in the rebound for Canada has been slower than in the U.S. as well. But we do anticipate things continuing to increase and improve there. So hopefully for 2018, we will be able to have positive figures in net income for Canada.

Okay. And then lastly, just on the -- on your OEM channel. Some of your OEM partners have been -- had not been -- have been a little backordered and weren't delivering orders as fast as you would like. I mean, how is their performance now if you had to rate them, A, B, C, D in terms of how they're doing? And if they need improvement, how are you trying to help them maybe to become even more effective?

Mr. Tidball?

Well, the OEM business, I would say to a degree in Q3 and Q4 of last year, they are starting to somewhat catch up. But the loyalty that they received from E&Ps is -- well, they don't enjoy what we enjoy. They -- it's a Me2 business. There is not a lot of science that goes into rolling steel. And if anyone who's an OEM around here, I don't mean it in a bad way, it's just -- lots of people can roll steel and put a fire tube in a -- in there. And it seems like shops will spring up and shops will go away very quickly or companies who are in adjacent businesses think it's an easy thing to get into, because they have a connection at a company that will buy some from them. So their availability to deliver, they struggle to a degree because their outlay of capital is very high. In order to manufacture, they need a lot of space, they need a lot of equipment, yet their return on being paid is slower. And so their ability to order product, to keep things going, for some of them they struggle for sure. We deal with, probably I would say, in Canada, U.S., very strong relationships with approximately 50 of the -- and that would represent, I would think 95% of the major, if not more, OEM/fabricators in the United States and Canada. So can they keep up to a degree? And they're keeping up a lot better now just because there is more of them in the business than they were end of 2016 and early in '17. But this will continue to be a struggle for them to keep up as our end users continually beat them down on price points. Because, again, it's a -- there's low barriers except for cash to get into that business. There's not a lot of technology.

Our next question is from the line of Samir Patel with Askeladden Capital.

I had one question and 17 follow-ups, but someone already asked about tax rate. So I guess, I only have 16 follow-ups now. Jokes aside. So first of all, I know we talked about this a little bit previously. I'm aware that the different basins kind of have different intensity levels for how many burners are needed depending on the type of hydrocarbons that are coming out of the ground. That being said, one of the trends is, obviously, longer laterals, more frac stages. So when you guys are looking at completions as a barometer of sort of market opportunity, is it the number of completions or the number of completed stages kind of as completions intensity increases, that you guys are looking at as sort of the top line driver?

Well, that's a good question. Mr. Tidball?

The longer laterals is something we're, obviously, watching. We want to see how that impacts production pad infrastructure. They're trying to get as tight as they can with spacing and then shoot those laterals out. That does create issues for drilling. You can wreck formations a lot easier. There's a lot more risk. Now we know they're going to get good at it. North America is great at shale production, so they're going to good at it. How does that change things? Could it reduce burners? Yes, in some areas, definitely can, especially your unconventional areas, which is a lot of it. So it's something we're watching. When we look at the DUCs and things like that, we're not looking at lateral in any sort of scientific method right now. It's not easily obtained data. You get a sense of it from the E&Ps when they present at these big conferences of what they plan to do, but it's not published data yet. We're not sure when it will be or if it will be, but if things -- definitely we've got to watch it. The production strategy. Of course, we know eventually, one day there'll be a lot more pipelines as governments get out of the way. There'll be a lot more pipelines, and they'll use more central facilities. We also see that as an opportunity to increase in the future, we're talking years out here, on our road map to provide different types of automation, site monitoring. There's so many opportunities that can come from that. There's probably -- burners are going to be used for a long time. We know that. However, we also know that we have to diversify. And so I think, we can look to years ahead here in how we're going to tackle that. So back to laterals. We're watching it. It's yet to be seen how that's going to impact pad construction.

Okay. I appreciate the color. On the service side, it looked like you actually had a pretty strong Q4 on both the revenue and margin side. I don't know if you -- sorry, if you already mentioned it, but do you have any comments on that, Ryan?

Yes, I can comment a little bit and maybe Cam can add a little color there as well. We have seen a really good uptick in service activity. In Q4, there was a lot of activity in Canada especially, and then also here in the U.S. We've had some good success with our preventative maintenance programs that we've rolled out with a couple of our customers, where our teams are going out every 6 months or so and servicing all of the equipment in a particular field. So those elements of success have impacted the service activity for us, but it's increasing and the margins have improved a little bit because of that activity as well.

Okay.

Cam?

Go ahead, sorry.

No, I was looking at if Cam had anything to add there.

Not really, you hit it on the head there, Ryan. The big customers that we had a lot of push there in fourth quarter to get things taken care of and maintained. So I think, you hit it right on.

Okay. And I think you -- again, sorry, if I missed this. With -- I know you mentioned that there was a little bit of the upside in Q4 from the spending of the CapEx budgets. Does that -- did you see any of that as pull forward from Q1? Or do you think that Q1 will continue to build off that?

We're very confident given the general atmosphere in the oilfield and what we're sensing from requests for quotes and so on, that we will not see a significant drop. We wouldn't anticipate that.

Okay. Cool. And then finally, on the 3100, did you -- again, sorry, if you mentioned this already. Did you -- do you think you're going to have those certifications in time for the selling season this year? Because I know that there was a specific kind of time of the year when a lot of those projects go out to bid?

Yes, yes, we really do. We expect in coming months and within a couple of months to see this hopefully coming to a close and allowing us to move forward with that. Having said that, we are moving forward. We're filling a lot of requests for quotes for the 3100 even without the sale certification. So we're, by no means, sitting and waiting for that. It will just augment what we're presently doing, taking us into a little different space, into some of the refineries and so on. So yes, we think that will happen by spring time for sure.

Okay. And I know I said finally, but I actually have one more, which is between your cash balance and obviously, improved cash flow from operations and the tax cut, what are you guys planning to do with that? Is it more of the same? Do you start to look to more M&A activity? What are you guys thinking?

Well, Aria Cole talked about this expanded Christmas party for this coming year. So we're considering all things. But certainly, M&A is something that we're constantly considering. We have been actively involved in the share buyback program and so on. And we don't anticipate a lot of changes in our approach to that. If we find some interesting M&A opportunities, we feel like we're in a position where we can move on that. And other than that, nothing too new or startling. Thanks so much, Samir, for calling. We have a long list, and we're short of time. So we'll move forward.

The next question is from the line of Jim McIlree with Chardan Capital.

Just one more on the CMS. Can you talk a little bit about the time line of the sales cycle? And when I say that, I think there's 2 time lines I'm interested in. One is, what it's like right now? And then once this setting is up and running and successful, what kind of sales cycle you think there is going to be?

Cameron, do you want to continue? You've fielded most of these questions on the CMS, that you're most conversant with it, so.

Sure. I would say, time line one is that kind of usually 3 to 6 months from the time we meet them, sell them on the concept, get management or change process in place, get the installed books, monitor it and then get a decision to proceed forward. So that 3 to 6 months. We've had quicker ones. We've had longer ones. And then after that, the plan -- the hope will be similar to that of BMS, where it becomes a specified piece of equipment, where if certain skids are coming out, they're going to come with it. We've seen some small -- 1 small producer in the Eagle Ford has already done that. Unfortunately, they're not ordering 100 a month. If they were, that would be great. But they don't have the biggest field. We do think that there are some companies that they have hinted at. That if they -- if this does well as advertised, they will retrofit their fields. And then we get into a circumstance where it's -- well, how quickly can they install a more week and how quickly can we install. It becomes a do they have enough in the capital budget or can they go back and say, "Hey, this makes sense. Let's spend more on the capital budget." So we're not sure how that could look. We do think that if we get an end-user to spec it in as we have for some small ones, larger ones, that they would put it in with their new drills. And again, it's not a large expense when you consider what they're spending. So I think, that we should be able to have a better report and perhaps we can even touch base on this, Jim, as it progresses. But I'm very intrigued to see how this quarter and really next quarter pans out with some of the things we've got out there.

Our next question is from Anthony Schuman with Corporate Financial Advisors.

Just a couple of quick ones, mainly geared to Ryan. Do you -- looking over the releases that you gave, have you used up all your net operating losses? Because it looks like you're fully taxed in '17.

Yes, we haven't actually had net operating losses to carry forward because we've been profitable throughout all the downturn.

Our next question is from [John Blair] with [SingWealth].

I just need to remember what it was. Just kidding. At the recent -- at the recent conference you were talking about introducing or looking into applications in other industries outside of the traditional oil and gas, petrochem. And just wondering if you could say anything about how that is? And some of this was, I guess, touched on in some answers and some previous questions to some extent. But could you put some color, as they say, on that?

You bet. The more -- the further we developed the 3100, the broader it gets in terms of its potential for other industries. But you might have noticed that we just very recently changed the title of Mr. Tidball from that of VP of Sales to Chief Business Development Officer. And falling squarely on his shoulders now is the responsibility of augmenting, of speeding up this effort that we have been making to look to see where our products can be useful in other industries and how those could mess with what we're presently doing. So we're very interested in this. But that is one of the steps that we are taking towards making that more of a reality.

Next question comes from Richard Dearnley with Longport Partners.

I'm new to your company, but to follow a number of the early questions. What was your R&D in the second half in dollars?

Oh, very specific question.

I love second half as these financial questions, it's somebody else that has to stew over it.

I apologize, but I don't have the second half R&D numbers.

Oh, how about the fourth quarter?

Now you're really testing me, hold on.

How about the year?

For the year, I believe the number was about $1.4 million.

Oh, okay. Great.

Now Richard, one of the things that you can do is reach out to us directly, and with a little time, we can get you all of those numbers. And we would say to anyone that's listening here, if they want further information on anything, we're -- we want to be available always to you, so feel free to reach out to us at Profire at any time.

Thank you. I turn the call back to Mr. Hatch. Mr. Hatch, please proceed.

Well, thank you so much, Rob. We appreciate your help today. And thanks, everyone, for joining us on this call to discuss the results of fiscal year '17. We'd like to thank our loyal customers, our employees, our shareholders for continued support and encouragement. As I just mentioned, we are available at any time to discuss any questions you might have. So feel free to reach out to us. Thank you so much for your attending today, and have a great day. See you.

Again, I would like to remind everyone that this call will available for replay through March 15, 2018, starting later this evening via the link provided in today's press release and in the Investors section of the company's website. Thank you, ladies and gentlemen for joining us today for our presentation. You may now disconnect.