Profire Energy Inc (PFIE) 2018 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 first quarter 2018 ended March 31, 2018. 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 future business development activities, the release of new products, the new product certifications that add significant value to the company, additional capabilities of the existing products, the potential of international markets, the company's ability to deliver products to markets faster, the company achieving Safety Integrity Level or SIL certification, and increased sales due to 3100 products.

All such forward-looking statements are subject to uncertainties and changes in circumstances. Forward-looking statements are not guarantees of future results or performance involving risks, assumptions, uncertainties that could cause actual 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 results filed with the Securities and Exchange Commission. All forward-looking statements are made in pursuant of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All forward-looking statements are made only as of this date and this release and the company assumes no obligation to forward looking -- 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'd like to remind everyone that this call is being recorded and will be available for replay through May 17, 2018, starting later this evening. It will be accessible via the link provided in yesterday's press release as well on the company's website at www.profireenergy.com.

Following the remarks by Mr. Hatch and Mr. Oviatt, we'll be open to your call for questions. As a part of the question-and-answer session, Mr. Hatch and Oviatt will be joined by Profire Energy's Chief Business Development Officer, Cameron Tidball; and Chief President of Operations, Jay Fugal.

Now I'd like to turn the call over to President and Chief Executive Officer of Profire Energy, Mr. Brenton Hatch. Thank you. You may begin.

Thank you very much. Good afternoon, everyone, and thank you for joining us and for your interest in Profire. We are pleased to provide this earnings report as our momentum continues from 2017 into 2018. As mentioned on our last call, Profire recognized 2017 as its second-best revenue-generating year in company history. As you see by our numbers, we are happy to report our seventh consecutive quarter of significant revenue growth, most of which included double-digit increases quarter-over-quarter.

For the quarter, we recognized revenues of $12.1 million, which is up from $10.9 million in the previous quarter and up 55% from the $7.8 million we recorded in the first quarter of 2017. Net income in the same period was $1.8 million, up 42%, which represents a dramatic increase over the prior quarter. When compared to the same quarter a year ago, net income has increased more than 200%. We believe that there are a few factors that have contributed to our current growth trajectory.

On a macro level, we feel we have been the beneficiaries of the increase in commodity prices. Although these are unpredictable at times, we feel that with the apparent stabilizing in the industry that we can continue in our growth mode. In Q1, the average price per barrel of oil was $62.91. This was an increase of 14% from the prior quarter and 22% increase over the same quarter a year ago. In that same 12-month period, we increased revenues by 55%. The overall healthier macro environment helped our growth, but the execution of our growth strategies allowed us to outperform the industry's recovery rate. Another factor that's contributed to our growth has been the first facet of our business strategy, expanded customer base.

During the downturn, we encouraged our salespeople to focus on increasing our customer count. Through their efforts, which began in 2014, we have been able to increase the number of our customers by more than 300%. In the last 12 months, we've had over 500 customers that have purchased our products. As prices have risen and stabilized, we are seeing these efforts directly result in increased sales orders throughout the latter part of 2017 and into 2018. Our results speak for themselves when you consider both our quarter-over-quarter and our year-over-year growth.

We remain a leader in the industry, and we plan to remain so through our continued efforts. As we mentioned on the last call, we have changed Mr. Cameron Tidball's title and role to Chief Business Development Officer. In this new role, Cameron is leading the business development team focused on Profire's strategic growth. Over the coming quarters, you will hear more about our new plans and strategies.

As always, we are going to maintain our core corporate beliefs and strategies while taking deliberate and measured actions for growth. On the long-term horizon, we at Profire feel that the international market is large and untapped for us and could be very fruitful. We are evaluating and looking at different strategies to enter markets overseas. Nearer term, we will continue to add new capabilities to our existing products and plan to release new technologies that we can sell adjacent to our current product offerings. Our practice is to seek input from our customers to help us develop new solutions to bring to the marketplace and to expand automation in the industry.

Another core focus for us that feeds into our overall plan and the areas that I just mentioned is our commitment to allocate resources to R&D. We will continue to do so in order to augment our product offerings and enhance those we have. One area, in particular, that started last year was the process of expanding product certifications. We believe that these certifications will allow us to service additional customers in more complex environments. We have mentioned that we are pursuing SIL, or Safety Integrity Level certification, for our 3100 systems and other future products. We said that this would be completed in the first half of 2018, and we're pleased to report that we have completed our portion of this process and submitted all required documentation. It is in the hands of the governing body and is now only subject to their final approval. All indications are that our work satisfies the requirements and expectations. We look forward to updating you on the process.

Throughout 2018, we will continue to leverage our position as industry leaders in the oil field technology arena, while appraising other potential industries for opportunities.

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

Thanks, Brent. Yesterday, after the market closed, 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 the quarter, we continued to manage cost while recognizing growth in both our legacy products and newer product lines. This strategy allowed our revenues to outpace cost.

Let's begin by looking at the income statement. In the quarter, we recognized $12.1 million in revenue, which is a 55% increase from the same period a year ago and is up 11% from the previous quarter. This increase is largely attributable to our ability to leverage our larger customer base while the macro environment continues to improve. Oil prices have increased and remained steady in the $60s, providing confidence in the industry, which led to our customers spending more than we had anticipated. We are adding new customers every quarter, which is a contributing factor towards our increased revenue.

With the increase in revenues, our gross profit increased to $6.1 million or 50.3% of total revenues as compared to $5.8 million or 54% of total revenues in the prior quarter. Gross profit margins decreased due to product mix changes, increased direct labor cost and adjustments in our inventory and warranty reserves. Total operating expenses were approximately $3.9 million or a 2.8% increase from the previous quarter. This is a modest increase when compared with the 11% increase in revenue over the same period. Our ability to leverage existing resources, combined with well-executed cost management plan, allows revenues to increase at a rate higher than cost.

Operating expenses for general and administrative increased 3.9%. R&D decreased 5.8%, and depreciation increased 6.6% as compared to the previous quarter. The increase in expenses is primarily due to higher labor cost to meet the increase in customer demand and retain employees. R&D expenses decreased slightly due to the timing of costs and payments related to the SIL certification work.

Total other income during the period was roughly $114,000, the majority of which was attributable to the sale of fixed assets and interest on investments. Our net income was $1.8 million or $0.04 per diluted share compared to net income of $1.3 million or $0.03 per diluted share in the prior quarter. Net income is up 42% over the prior quarter and up 213% over the same quarter a year ago.

Now let's look at the balance sheet. Cash and liquid investments totaled nearly $25.5 million as compared to $24.3 million at the end of 2017. Inventory increased to roughly $7.3 million from $6.4 million in the previous quarter. This uptick is attributable to increased product demand and planning for future growth. Our operations team is working closely with vendors to establish release date purchase orders to offset longer lead times. Our accounts receivable collections remain strong, and the balance of accounts over 90 days was only 5% of total accounts receivable compared to 13% at the end of 2017.

As Brent mentioned earlier, we have completed our portion of the process to achieve SIL certification on our products. Completing this work will now allow us to invest in R&D, specifically to enhance our capabilities, to bring products to market faster.

We will continue to monitor merger and acquisition opportunities in our current market and invest in our business development team to explore other market opportunities for existing and future products.

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

Thanks, Ryan. We plan to build on our momentum from the 2017 through 2018 as evidenced here in our first quarter. We believe that we're well positioned through the groundwork that we've laid and plan to continue with our growth strategy while evaluating new opportunities.

In the past quarter, the average oil price per barrel continued on its upward trajectory and increased 14%. Rig counts are up nearly 10% when compared to the previous quarter. We believe the increase in drilling is indicative of a healthier industry overall. Profire is positioning itself to take advantage of not only the current environment but any possible future growth.

Our newly established business development team plans to research how to best leverage the SIL certification that we plan to receive in the coming months. This certification allows us to begin the process of working on larger and more complex projects. The 3100 product will play a major role as we use this certification to build contacts and establish relationships that we anticipate will lead to significantly increased sales in the coming years.

Our Chemical Management Systems recognized their most consistent sales ever through the previous 3 quarters. We have seen a steady increase in discussions with customers, resulting in additional requests for quotes and trial unit placements. In the previous call, we mentioned that we were invited to attend a number of conferences to present on the CMS product. These conferences were attended by many potential customers and are driving greater interest in the product.

Our performance is a direct result of our strategic planning and execution. The success we are experiencing is partially enabled by Profire's standard of remaining debt-free. At quarter-end, Profire had 0 debt and cash and liquid investments in excess of $25 million. We will continue our efforts to focus on sound fiscal responsibility. This strategy has allowed us to realize positive quarterly cash flows for many quarters now.

Looking forward, we are optimistic that our performance through 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 in a timely manner. Our entire Profire team is dedicated to our success in that regard. Our strategies have proven that we can manage Profire through changing industry conditions, and we're seeing the results of our efforts. The result of our strategic initiatives have built a solid base for growth into 2018. We plan to stick to our principles, leverage that base and add growth initiatives as we move forward.

Before I turn it over to the operator for questions, I'd like to thank the team here at Profire for their dedication and work over the past quarter. Our success is due to their efforts, and I thank you for your continued dedication. We take our culture and our employee retention very seriously here at Profire, and we'll continue to make it a priority.

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 is from Rob Brown from Lake Street Capital Markets.

Just wanted to get a sense of how much of the strength in Q1 was driven by new products. Or was that really the core legacy business?

I'd say that we continue to receive our greatest strength from our core business, our legacy business. But we're certainly putting a lot of efforts right now, as hopefully was aware from our comments earlier, into 2 areas in particular. We're looking to expand the 3100 possibilities as well as the CMS possibilities. The R&D team keeps adding to the capabilities of our other products, including the 3100. And we think that this, along with that SIL certification we mentioned, will allow us in future quarters, especially towards this year-end, to see a significant increase in the contributions from these other 2 areas. We as well are working on efforts to bring out new products towards year-end and into next year that will be significant contributors as well in addition to the 3100 and the chemical piece.

Okay. Great. And then on that, how much investment or what types of investments do you need to address those new product markets? Or do you feel like you've got the channels and the sales in place to do that?

Good question. We do -- we have a great sales team right now. And certainly, with the CMS, we feel that much of what we do with that can be done through the team extant. But if we do what we think we can do with the 3100, we will be adding new salespeople to that team that we have created there. We don't think it will be a significant -- that there will be a significant change in terms of cost as we add individuals. It's -- it will be moderate at best, but we will do that in response to the demand that we see out there. And we think there will be a fairly quick response to adding those salespeople on there.

Our next question is from John White from Roth Capital.

Well, congratulations to Cameron. I'm sure it's well deserved.

It is, indeed.

In that previous question, did you say you have expanded the business development team in terms of headcount or that you're planning to?

We actually have Mr. Tidball on the line right now. We'll let him share with you some of his vision that way.

All right. Thanks, Brent. John, thanks for the congratulations. I don't know if that's -- I'll take it, thank you. I appreciate it. The expansion of the business development team, really, it's so far been almost a realignment of internal resources that we have, where we have sales, marketing, service and product development/ [business] development, kind of all under 1 umbrella where we already were working under that umbrella but it's a little more formalized. In terms of the expansion of that team, yes, we have brought on some resources for product development in the form of contractors versus internally. So we'll be looking in the next quarters, adding to that development team, especially in terms of the 3100.

Okay. And I noticed you added several pages of slides on the macro oil and gas and drilling and completion activities. They look real good.

Well, thank you. Thanks. Yes, we think it should help our investors get a little clearer picture, we think, of what's going on, as clear as possible at least, at this point.

No. It's helpful. A lot of the exploration and production companies are talking about supply chain bottlenecks, shortages of trucks, shortages of truck drivers, shortages of skilled labor in general. Are you experiencing any of this?

Overall, not so much. We felt very strongly that this was going to come back and that when it did, it would come back quickly. Hence, we -- that was the reason for keeping on our entire sales team and our service team, keeping them intact, ramping up in terms of the CapEx spend on the trucks and those sorts of things, so that we were -- we would have the team and the assets available at the time. Now what we have found is that some of our suppliers have found it hard keeping up now that the things have ramped up so quickly. But to the credit of Mr. Jay Fugal and his team, being very forward-looking, they arranged for a lot of these products well in advance of when the marketplace would be going after the same product. And for that reason, we've been able to keep our inventory levels to where they would work well for us in this. So yes, we felt it a little bit but not significantly, not like most of these companies have.

Our next question is from James McIlree from Chardan Capital.

So Brent, I'm trying to decipher this comment you made that 2018 will remain consistent with previous quarters. Are you -- is Q1 in some ways a spike in activity for you? Or is it more of a new baseline of sales?

We wish we knew the answer to that when we -- kind of have to take it as it comes, Jim. But we feel like it's an indicator of how things have picked up. And in fact, as the macro market continues strong, we see oil right now in the low $70s, it's a -- we anticipate that we will be able to continue well with what we have done this first quarter. Whether there will be significant ramping from here or not, it's a bit early to tell. But we do feel like we can keep up this momentum the -- based on the indicators that we have now. We were very pleased with the results, obviously, and as we were pleased with Q4 of '17. And to see that kind of increase was really -- it was good news for us. But we are going to work very hard at, at least continuing the momentum. Whether we will be able to achieve double-digit increases throughout the year, that remains to be seen. But I think to maintain what happened in Q1 will certainly be our goal, and we anticipate being able to achieve that.

Okay. Great. That's helpful. And then secondly, as CMS and 3100 become a bigger portion of the total revenue, what is the impact on gross margins and/or operating margins, at least initially? I guess I'm asking, will there be introductory pricing? Or maybe you'll have a higher cost when you initially introduce the product that would result in lower gross margins, or would you have to -- I guess, not with the CMS but with the 3100, would you have some fixed cost that you would have to -- that you wouldn't fully cover, at least initially, so that might pressure margin? So a long way to ask is that, do you think there will be margin pressure from the introduction of those 2 products -- not introduction, but from the increased sales of those 2 products?

You bet. The question well thought-out. Well, Mr. Oviatt is clamoring for the mic here. So I'll allow him to answer that one.

Thanks, Brent. Good question, Jim. Overall, there may be some situations where there would be some pressure there. But the fact that we have initial sales of these products going now and a lot of interest, just speaking specifically on CMS, we don't feel that there is a need that we have to bring down the margin significantly in order to continue to move that forward. The product has good strong margins that are consistent with our other proprietary products. So we don't anticipate making those changes there. Cam could maybe comment a little bit further, but before letting Cam comment, I'll maybe just talk about the 3100 as well. Again, we're selling that in a lot of environments right now. We expect that with the SIL certification that will open up new doors. Those projects are much bigger. They do take longer to do all of the work associated with them. It involves some engineering, drafting hours, all of that kind of stuff, working with the customers. So it could be a situation where we're incurring some cost earlier on in those projects. And then the revenue comes quite a bit later, a few months down the road as the installations happen and the commissioning happens for their systems. But overall, we anticipate that the pricing will be able to build in all of those costs in anticipation of the work. And then any overruns or significant variances, we would expect to be able to go back and make adjustments with the customer on that. Obviously, we -- those will be some new opportunities for us. And we'll probably do a fair amount of learning along the way. But right now, we do not anticipate any significant change in approach that would drive our margins down significantly. Cam, do you want to comment at all on that?

Oh, you read the script I gave you perfectly.

Our next question is from Patrick Murphy from Maxim Group.

So with the increased focus on your adjacent products, including the 3100 series and the CMS, are you starting to see opportunities for larger projects now? Or is that something that you're waiting for the pending SIL certification to see?

Good question. We actually are seeing some ramping in terms of opportunities out there for the 3100 in particular. But -- and for CMS as well. We've had quite an increase in requests for quotes and the demand for trial units of the CMS to go out there. And if it's as we anticipate it will be as -- follows the same pattern as the CMS systems did as we were introducing those, we think that this puts us in a good position for future quarters. With the 3100, our sales team that is working specifically with that are working on some great projects that we think in coming quarters will be realized. And that is without the SIL certification. With the SIL that we anticipate happening in the next -- we hope in the next quarter or so to hear back finally on that, we think that, that will only augment that even further. So yes, we do see some increases right now, but we hope that, that will even be more energized as quarters go by here.

That's very helpful. And then just a follow-up on R&D. It's been up the past 2 quarters a bit on a dollar basis. I know a lot of that had to do with getting the SIL certification complete on your end. Now that that's behind you, do you expect R&D to go back into that $300,000 quarterly range? Or do you expect it to stay at this higher level as you look to build out new products and services?

Mr. Oviatt?

We have incurred some cost increases or extra costs associated with the SIL certification. We've engaged a consulting team that has helped many companies to get through this process, and they've been extremely helpful for us in accomplishing that. So we -- as we mentioned, we have just recently handed off all of our work to the governing bodies for their review, so there are some ongoing costs associated with that process and even with those consultants, depending on what the governing body does in order to fully wrap that up. So I would expect very similar levels of cost into Q2. And then beyond that, those kind of consulting costs may come down a little bit, but we also may choose to engage other resources to support the new product developments. I would not anticipate it dropping down significantly, probably remaining in maybe the high 300s or low 400s per quarter, just because we continue to invest in technology. We believe it is critical to our future, and we do have quite a few things in the pipeline that we want to bring forward.

Our next question is from Tony Schuman from Corporate Financial Advisors.

My question is focused towards Ryan. And that is, would you be -- talking about your R&D in last couple of questioners, would you be open to recovering some of the government incentives that are due you to pay for that R&D?

We do all of our R&D right now in Canada. And we do have a process that allows us to work with the costs and the benefits -- tax benefits that are associated with R&D up there. So we have that in place. And right now, we don't have any significant cost here in the U.S. as far as the opportunity to work on recovering those.

Our next question is from John Bair from Ascend Wealth Advisors.

I got a couple of quick questions. This was probably a minor consideration, but given the cash level that you have, have you given any consideration to either some share repurchase or possibly a small dividend initiation or maybe an annual versus semiannual-type payout?

That's good that you brought up this ubiquitous question that rears its head each time, John. It is a significant piece of cash, and we recognize that. We have been involved in share buybacks, including recently. And we will probably continue in that vein. We don't know, with the stock price being where it is, if that would be accretive to shareholder value or not in the future. So we will be very careful about doing that. We do keep a sizable chunk of cash available for potential M&A stuff. But we -- on an ongoing basis, we're looking at merger and acquisition opportunities, and that continues. And when we find just the right one that we think is going to be accretive to what we're presently doing or where we can use our existing sales force, et cetera, in that kind of way to augment things, we will spend some of that cash there. But we want to keep a fair piece available for M&A work. As for dividends, that's not in the plans right now. We feel we're at a point where that probably isn't the wisest choice for us. But thanks for asking, John.

Yes. I didn't figure a dividend would make any sense. I mean, you sound -- you get ramping up on the 3100 and some other things you just alluded to, new projects or -- that would perhaps take some R&D or capital expenses. But -- and certainly, with the share price having run like it has, it would not necessarily be the best time to do it. So that's good. My other question was, given -- I think in the opening comment, I think, Ryan said -- one of you said that you've seen a 300% pickup in the customer base, is that right? Over the last few years -- number of years?

That's correct. Since the beginning of the downturn, really our -- because the -- our sales force wasn't quite as busy filling orders, they had the time to go and look for new opportunities. And it was amazing what they came up with, even during a time when these other companies weren't necessarily shopping for something to spend on. We give a great deal of credit to our sales team for what they dug out. We ended up with, well, as you just said, 3x the number of customers at the end as we started with.

Okay. So the kind of follow-on to this is, given a larger customer base, are you seeing more recurring revenue, like on the replacement side? I don't recall how long would the life cycle of the product -- the earlier products are. In other words, you got a much expanded customer base. Are you seeing more recurring or replacement revenue, that kind of thing?

I might defer to Mr. Tidball on that one. He's a little closer to the actual day-to-day sales. Cam, what's your opinion on that one?

There definitely would be some more recurring replacement just because things happen in the oilfield, lightning strikes

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it does happen more frequently than we would think. I wouldn't say it's -- that replacement

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our current products moves the needle very much. It'd be a small amount of our revenue, very small

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built the product too good perhaps

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part.

Well, I know you made the presentation at the [3 part] here yesterday and made the comment that some of the earlier life-cycle products were still out there, and I'm just wondering how much effort is made to encourage and upgrade to the newer and more bells-and-whistles-type products. That's what I'm basically trying to get at. You have a larger customer base. Does that -- are you seeing any evidence? Or when do you think there would be more potential for a pickup in new sales from existing customers, I guess, is what I'm driving at.

Got you. So -- the reference would be to our predecessor to the 2100, would be the Profire 1100, which -- we believe we

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approximately 8,000 of those in the field. A large majority of those would have been bought from a small

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a good chunk of those have been replaced and

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fail, eventually they will with electronics. So I would just

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they will be replaced. But again, I wouldn't see that being a significant piece of our revenue going forward.

Thank you, Cam.

What's kind of the life cycle on one of those? Are they like the Eveready Bunny (sic) [Energizer Bunny], they just keep on going or...

That's probably an accurate description of what we have. But to your point, we have companies, as they become more current with technology -- and we see this, the last 2 or 3 years, happening that -- and as they have younger operators and so on, who want technology, we see their interest increasing in having different kinds of options available on these pieces. And I think that some of the drive is in for -- is in fact for this, and it's one of the reasons we have our R&D team working on adding possibilities to

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as we go to keep them very current with the technology growth. And with the demand that we see increasing, especially in the

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period of time.

(Operator Instructions) And with no further questions, I'd like to turn the floor back over to management now for any closing comments.

Thank you so much, Matt. Thank you, everyone, for joining us today on this call to discuss the results of Q1 of '18. We'd like to thank all of our loyal customers, our employees, our shareholders for their continued support and encouragement that's been so obvious of late. Please know that we are always available to discuss any questions that you may have. If you will contact us directly, that would be great. Thank you, and have a great day, everyone.

Great. Thank you. And again, I'd like to remind everyone that this call will be available for replay through May 17, 2018, starting later this evening via the link provided in today's press release, also in the Investor Relations section of the company's website. Thank you again, ladies and gentlemen, for joining us on today's presentation. You may disconnect your lines at this time.