Profire Energy Inc (PFIE) 2021 Q4 法說會逐字稿

Good morning, everyone, and thank you for participating in today's conference call to discuss Profire Energy's Fourth Quarter and Full Year 2021 Ended December 31, 2021.

I will now turn the call over to Steven Hooser, Investor Relations at Three Part Advisors to get the call started.

Thank you, operator. With me on the call today is Co-CEO and CFO of Profire Energy, Ryan Oviatt; and Co-CEO, Cameron Tidball.

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 historic are forward-looking statements. This call contains forward-looking statements, including, but not limited to, statements regarding the company's expected growth, impact of higher oil prices, management of the supply chain, and anticipated impact of government sanctions, expansions in new markets, customer adoption of the PF2200 product line, investments in the launch of new products, anticipated sales opportunities and planned projects, the ability of the company's resources to make beneficial investments in 2022 and beyond, the company's exploration of M&A opportunities, and the company's future financial performance.

All such forward-looking statements are subject to uncertainties 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 risk factors identified in the company's periodic reports filed 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 the 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 a replay through March 23rd, 2022, starting later this evening. It will be accessible via a link provided in yesterday's press release, as well as the company's website at www.profireenergy.com. Following the remarks by Mr. Oviatt and Tidball, we will open the call for questions.

Now, I'd like to turn the call over to Co-CEO and CFO of Profire Energy, Mr. Ryan Oviatt. Ryan?

Thank you, Steven, and welcome to all of you who are joining us on the call today. I will start the call by providing some updates on our industry and our business followed by a review of the financial results and then I will turn the call over to Cam to discuss the quarter's highlights, outlook, and strategic direction.

Our 2021 results reflect the gradual recovery of the economy following the extended global shutdowns in 2020. Revenue, gross profit, and EBITDA increased sequentially each quarter during the year in line with oil demand increases and oil price improvements, driven largely by the reopening of economies worldwide. Subsequent to year-end, oil prices have risen and topped USD 120 per barrel for the first time since 2008. This is putting increased pressure on U.S. and Canadian producers to begin ramping up production. However, we expect the near-term impact to be modest as producers grapple with the challenges of finding the additional skilled labor and available drilling and production equipment necessary to achieve higher production volumes. The lack of capital spending over the past 2 years will be a challenge for producers and will likely limit their ability to scale quickly.

Thankfully, the COVID case rates have started to decrease dramatically in the U.S. and most places around the world. This has caused the CDC, along with many additional state and local governments, to roll back mask mandates for indoor environments and a number of companies are beginning to set dates for employees to return to work in the office. We are part of this trend and are excited that our Canadian employees can once again gather in our facility as a full team like our U.S. workforce has been able to do for some time now. The EIA expects global production to meet or slightly exceed demand later this year, but the current geopolitical climate may result in greater volatility in prices and global inventory levels. This adds to the already challenged environment resulting from lower production levels over the past 2 years.

The recent unrest in Ukraine has contributed to the upward pressure on oil prices. Until yesterday, the Biden administration had not sanctioned Russian oil exports, which represents approximately 8% of U.S. oil imports. If these sanctions were to be combined with fewer government restrictions on U.S. oil production, this could have a significant impact on our business and the U.S. oil industry in general.

With that, let me shift gears and turn my remarks to Profire's financial results for the fourth quarter and full year 2021. Yesterday, after the market closed, we filed our Form 10-K with the SEC and discussed the quarter and full 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 the fourth quarter, we recognized USD 8.3 million in revenue, which represents a 19% increase over Q3 and a 47% increase over the prior year quarter. The sequential and year-over-year increases are primarily due to the continued economic recovery from the COVID-19 pandemic. Gross profit increased to USD 3.4 million as compared to USD 3.1 million in the third quarter of 2021 and USD 2.8 million in the year ago quarter. Gross margin decreased sequentially to 41.6% of revenues from 44.9% due primarily to product and customer mix. In an effort to help combat the unprecedented inflationary pressures experienced throughout 2021, we implemented a price increase across our product line at the end of 2021.

Total operating expenses for the fourth quarter were approximately USD 3.7 million compared to USD 3.4 million in the third quarter and USD 2.8 million in the fourth quarter of 2020. The sequential and year-over-year increases reflect the significant cost inflation impact on our business combined with restaffing efforts in response to the recovery during the year. Specifically, G&A expenses for the fourth quarter increased 8% sequentially and 36% year over year. R&D expense decreased 7% on a sequential basis but increased 20% from the prior-year quarter. Depreciation and amortization increased 58% sequentially and 55% as compared to the same quarter a year ago.

Net loss for the fourth quarter was approximately USD 145,000 or breakeven on a per share basis. This compares to net income of USD 92,000 or breakeven on a diluted share basis in the third quarter of 2021 and net income of USD 56,000 or breakeven per diluted share in the fourth quarter of last year. Cash flow from operations in the fourth quarter was a negative USD 309,000 compared to a positive USD 142,000 in the prior year quarter. During the quarter, we repurchased approximately 664,000 shares of our common stock for approximately USD 755,000. As of December 31st, 2021, we had roughly USD 1.2 million remaining on our repurchase program.

For the full year 2021, we recognized USD 26.4 million in revenue. This compares to USD 21.5 million in 2020. The 23% increase is primarily due to the increased customer demand related to the ongoing economic recovery from the pandemic as well as our success and progress in the strategic growth segments of our business. Gross profit increased to USD 11.4 million as compared to USD 9.5 million in the prior year. Gross margin decreased to 43.3% of revenues from 44.4% in the prior year. This year-on-year decrease in gross margin is primarily due to product and service mix and inflationary pressures on both fixed and variable costs.

Total operating expenses for the year were approximately USD 13.4 million. This represents an USD 810,000 increase from 2020. The increase is primarily related to higher G&A expenses resulting from overall cost inflation and the restaffing of positions correlated to the recovery of our business. However, this 6% increase was lower than our revenue growth rate for the year. R&D expense decreased 14% and depreciation and amortization increased 14% compared to the prior year. Total other income during the year was USD 334,000 compared to USD 421,000 last year. The decrease is attributable to fewer fixed asset sales and the associated gains or losses year over year. Net loss for the year was approximately USD 1.1 million, or USD 0.02 per share. This compares to a net loss of USD 2.2 million, or USD 0.05 per share last year. Cash flow from operations for the full year was USD 649,000 and our cash and other investments totaled USD 17.5 million compared to USD 17.6 million at the end of 2020. We had no borrowings or other debt on the balance sheet at year end. Capital expenditures for the year were approximately USD 169,000.

Our inventory balance at the end of the year was approximately USD 7.2 million, down from USD 8.4 million at the end of 2020. To date we have been able to adequately meet our level of customer demand. However, continued disruption of the supply chain over the next 3 to 6 months could make this more challenging. We will continue to proactively work with our suppliers to procure the necessary parts and components to deliver our BMS solutions while replenishing the inventory used over the past couple years.

I will now turn the call over to Cam to provide an overview of our business. Cam?

Thank you, Ryan. We are excited about the financial results for the fourth quarter. In the quarter, we were able to achieve the highest top-line revenue for a single quarter since Q3 of 2019. We are encouraged by the positive trends that are supporting improvements in both our core legacy business as well as our diversification efforts into new industries. Looking at our core legacy business, the combined onshore rig count for the U.S. and Canada averaged 704 in the quarter, representing an 11% increase from the previous quarter, as well as an 80% increase from the beginning of the fiscal year.

The average WTI price per barrel of oil in Q4 was USD 77, representing a 10% increase from the previous quarter. Producers continued to draw down on previously drilled but uncompleted wells as the DUC count decreased to 4,650 at the end of 2021, representing a 48% drop from its peak in June of 2020. We have and continue to see positive signs from our customers, such as increased drilling activity and plans for additional equipment upgrades. We are encouraged by recent industry consolidation activity, which has new buyers looking to modernize the assets they have acquired. These signs will likely create additional opportunities with both new and existing customers.

Although Profire has prepared for these expected increases, we are also dealing with challenging supply chain issues and human capital constraints that are impacting most industries. Our sales team continues to find new and expanded opportunities for our PF3100 platform. We continue to gain momentum in selling to customers who have larger, more complex burner applications. We expect that our solutions, project execution, including engineering and design, price point, and product performance set us apart from traditional competition at larger midstream plant operations and facilities. This has led to increased quoting of proposal activity that we believe will support our 2022 revenue goals and targets. However, we may see some revenue volatility quarter over quarter as we navigate the industry's supply chain challenges.

The PF2200 continues to roll out successfully. Approximately, half of our customer base has begun adopting the PF2200 platform. Some early adopters have already begun to spec the PF2200 as their base platform. We expect the majority of our customers to shift over their new equipment purchases to the PF2200 between now and the end of 2023. We remain focused on finding opportunities to expand our solutions offerings to our existing customers. Emissions monitoring and quantification continues to dominate the press and in turn the minds of our customers. We feel our existing customer relationships present a strong opportunity for Profire to bring these types of solutions to our customers through potential partnerships, acquisitions, or other investments. We are investing in R&D to bring additional solutions that we believe will help our customers in their efforts to track, measure, and quantify emissions and support their efforts to demonstrate that they are producing responsibly-sourced gas.

In the fourth quarter of 2021, we received repeat orders or completed new combustion projects in biogas, power generation, landfill, water and wastewater, chemical, construction and infrastructure, and food and beverage. Projects completed in the fiscal year in the mining renewable and biogas industries were focused specifically on efficiency improvements and the destruction of fugitive emissions including methane and other VOCs. We continue to strengthen our pipeline for non-oil and gas project opportunities, and we expect to see meaningful growth in this area in 2022 and beyond. We continue to develop relationships with existing and potential strategic partners, end users, and OEMs from the industries mentioned above, and the quantity of opportunities continues to trend upward.

In the quarter, we received purchase orders for products and services to support a new dryer appliance in a food-and-beverage processing plant of a leading national supplement manufacturer. We expect there will be opportunities to upgrade the existing heated appliances at this same facility in the future. We were also awarded a significant upgrade project at an LNG fractionation facility, which we expect will be executed in the second quarter of this year. In response to the ongoing positive signs and use cases for our combustion products and expertise in alternative industries, we have added an additional resource to our sales team. We now have 2 full-time sales representatives focused exclusively on these initiatives outside of oil and gas. We have also restructured our compensation strategy for key team members, including business leaders and sales team members, to promote business development efforts focused on this strategic initiative.

In 2021, we were successful in our push for business growth in midstream oil and gas as we completed several significant projects at larger midstream operations. Our successes are enabling us to pursue repeat business and to credibly approach other midstream plants with large multi-burner applications with a proven track record. We continue to invest time and energy in investigation of potential acquisitions which are complementary to our vision and growth initiatives. As always, this is a challenging and time-consuming process. Profire will continue to employ proper due diligence to balance risk versus reward in assessing these opportunities. As we reflect on the previous years, we look forward with optimism in 2022 and beyond. Looking at the future of our business, we feel that we are in a better position to capitalize on the organic growth from our core business and to execute on our growth strategy into new industries.

We have expanded and have successfully proven the value of a larger suite of burner management solutions, including controllers, high-efficiency burners, and service exposure. Our customer base continues to expand and our sales and service team continues to assist our customers with critical safety and efficiency solutions. Our sales pipelines in our legacy business, midstream plant operations, and non-oil and gas industries continue to strengthen. We have added to our sales team as our market has expanded, supporting our strategy to enter new industries. We continue to work on development of existing and new strategic sales and distribution partnerships, specifically with those who have high exposure to applications found in non-oil and gas industries. Stability of oil and gas prices at or above current EIA forecasts should enable our extensive customer base to invest further in technology upgrades as well as expand drilling and completion plans.

We have continued to manage our cash position effectively. Through our share repurchase program, we have repurchased 664,000 shares, or 1.4% of total outstanding shares prior to starting the program. Before we turn to questions, Ryan and I would like to once again thank our employees for their continued dedication and commitment to the ongoing success of Profire, our customers, and our shareholders.

Operator, would you please provide the appropriate instructions so we can get the Q&A started.

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

Just first on the environment. Obviously, a lot has changed over the last few weeks. What are you seeing in terms of the customer demand environment more into this year? And how do you -- historically, does higher oil prices flow through to you in terms of timing?

Yes, I can definitely tackle that one here first, Rob. If you look at, obviously, not really an elephant in the room, but the developments in Russia and Ukraine, and we've got a lot of questions over the last few days, months, weeks about what will this mean. Really, they've obviously ignited, pardon the pun, but our core market, which is really already a coiled spring. If you look at what our customers, we knew as early as in the middle of Q4, we expected, we forecasted that we would see an increase in production. It just had to happen with the decrease of DUCs. The fact that there's 50% less from its peak. That's a huge issue for U.S. shale when it comes down to it because not all of those DUCs are completion worthy. So we already knew there had to be some increase in production. We're seeing the COVID numbers go down. So we expected this -- an increase to occur in 2022. Obviously, we saw a nice uptick in 2021 in the fourth quarter and the back half of the year as we predicted.

But with the whole Russia-Ukraine thing, if you're alluding to that and maybe you're not, that's going to take time really for the U.S. and even North America gas and oil producers to catch up. It's really a 6-month thing before they could even add those incremental barrels that will -- there will be a deficit from Russia being out of this. So we still think that things are positive for our industry. The oil prices being up doesn't hurt. That's for sure. It definitely helps us, and it will flow through to us eventually. But as Ryan mentioned in his comments, there is a lag on that for sure. Ryan, do you want to add anything to that?

Yes, I'll just comment a little bit on oil prices and your comment. Historically, if we look back prior to 3, 4 years ago, higher oil prices pretty quickly translated into increased drilling programs in the U.S. and Canada. We're in a completely different environment now and lots of different pressures, regulatory pressures and even global macro pressures as well to where we're not likely to see that happening. But even back then when that happened, it would be a quick ramp up on rig count or on drilling, but then it was a 3- to 6-month lag for us when they actually needed the production equipment to go on to those new wells. So that cycle is still accurate, and it will still apply, maybe shortened somewhat because of new technology.

But in the current environment, as you can see, the E&Ps here in the U.S. are holding back and they're not making the moves because of the government pressure, the additional regulations and restrictions that have been placed on the industry. As I mentioned in my previous comments, I think we really have to see a softening of some of those pressures from the White House, from the administration before we're going to start to see a significant ramp up, and that might mean some pain for people at the pump and in other ways for a little bit longer until we can really see that change happen.

Okay. Great. And then also on the -- and I think you're specifically talking about the non-oil-and-gas projects, but the pipeline of projects ramping up you've alluded to. Could you give us a sense of how many projects are in the pipeline, maybe the size of the revenue opportunity there over the next couple years?

That's always fun to forecast. What we can share is, yes, we've definitely seen some success. We've now got the 2 sales team members rocking on it. But we've also empowered our team members who service more of that upstream, midstream, and downstream transmission business to look for those opportunities. We have a project team in-house that supports these as well as those larger projects that go into the downstream side of midstream. But as we look at what this looks like, as we mentioned in the comments just earlier here, we saw a meaningful growth from USD 21 million to USD 26 million, and there was -- not a substantial, but a meaningful percentage of that increase was due to the efforts outside of oil and gas.

So what does that pipeline look like? What are the number of projects in the pipeline? It's larger than it ever has been. We had a good year last year overall in terms of revenue in that space. We don't see it in the next 2 years being 50% of our revenue. But we do think that it could eventually be in the next couple years to a point where there would be more -- reason to bring on more sales team members. We'll continue to add and look for strategic partners, potentially acquisitions that are complementary to those efforts of expanding, keeping true to our core business of combustion and technology solutions related to that. So no real numbers to give you there yet, Rob, but we hope that in the future, we're able to more fully substantiate it with numbers.

And I'll just add to that. It's not only the outside of oil and gas new industries that Cam was talking about there, but we did see a meaningful increase in our growth segments within oil and gas. So that bottom half of midstream and refining petrochemical, we're seeing a lot of progress in those areas as well. And those are some of those projects where we've been able to now go back with a track record of saying, look, we've done this. It's very similar to what you've got, and we're getting more quoting and winning more projects in those areas as well within oil and gas, but also that outside of oil and gas diversification.

Our next question comes from the line of Jim McIlree with Dawson James.

Ryan, you talked about -- or maybe it was Cam, you talked about a price increase at the beginning of the year. Could you quantify that or put a range around how big the price increase was?

Yes. So I mentioned it, but I'll let Cam talk about the size and its overall -- our approach to it and how it's functioning for us.

Yes. As we looked at the price increase, we knew we needed to do it. We implemented it late Q4. We gave our customers a little bit of time as they prepared their budgets for 2022. We obviously saw somewhat of an influx -- small influx of orders coming in because people wanting to get ahead of the price increase to a degree, which we monitored. We didn't let anybody to play any dirty tricks. But for the most part, our customers accepted it. The range, approximately 10%.

Obviously, on some of the proprietary products that Profire has, we're able to go a little higher and some of the resale products, we're not able to go as high. We more wait for what our vendors raise their prices, we'll raise our prices in accordance with them. But we also had to consider just, obviously, our increases to the bottom line of Profire of moving these prices up. It was well overdue. It was the right time. But we had to be very conscious of the fact that we still are in a somewhat very competitive market when it comes to upstream, midstream burner management.

Yes, we're the dominant player. We've always been the more expensive product because we provide a better solution than our competitors. But we couldn't go to a point of pushing customers to looking at alternatives because as much as the barrel is high overnight in the last few weeks, it wasn't that high in December. And it's not likely to sustain at this. It's going to go all over the place. It's very volatile.

But we feel like we put in an increase that will support Profire's ability to get back into the black and to be a breakeven and profitable company, which is the goal. But we also have to wait and see how this all plays out. We've heard some customers -- vendors are increasing by 5%, some to 15%, some to 20%. We thought that -- about that average of 10% was the right mix for us.

And we're going to continue to monitor that in the coming year, at least, if not beyond, as far as the inflationary impacts on our business, on our costs and labor and everything. And if we need to make additional adjustments in 2022, then we will do that, and maybe it's multiple times. It's not necessarily the scenario we want because it means our costs are rising as well, but it's certainly something that we will continue to pay close attention to.

All right. The gross margin decline in Q4 relative to Q3, seems like it's bigger than a mix issue. Is there anything else going on or was there something special about the orders or the mix that accounted for the relatively large quarter-to-quarter decline in gross margin?

Yes. Unfortunately, it was a bit larger than we have typically seen, but it is a combination of those factors. Obviously, some inflation was coming into play there. As Cam mentioned, and as we just discussed, the sales price increase didn't really happen until the end of the quarter, so that didn't help benefit or offset those inflationary pressures. But we did see a tremendous ramp-up in sales at the end of the quarter as well. And it turned out that a lot of those sales were from customers -- larger customers, OEMs, and others in that similar scenario where they do garner a little bit of a discount on our typical sales price. So that's where the customer mix and even product mix came in. The contribution from service is much lower and service revenue coming into play as well being strong during that period. So it's really a combination of those factors, but we did see a significant increase in customer orders from the larger customer base where they do have a little bit of a higher discount than some of the smaller customers. Cam, anything else you want to add on that sales customer mix?

No, you captured it well. Definitely, the larger OEMs and resellers that are working with the bigger producers, our mix of going direct versus through that channel in the quarter was definitely different than historical. So you captured it well.

Great. Ryan, you referred a couple of times to regulatory actions that could help increase production. Can you be a little bit more specific on what you're referring to?

Well, if you -- if we look back to what the Biden administration did in their first weeks and months in their office, they obviously cut the construction on the Keystone pipeline. I think renewing that, reopening that would provide additional alternatives to oil supply here in the U.S., bringing in oil from Canada and Alaska. So that would be one key thing. But then also the restrictions that they've put on new leases, obviously, there's still lots of undrilled lease land out there available that producers have. But in an environment like this where the administration continues to speak towards longer-term goals of significant reductions in fossil fuel production and use in the U.S., I think the E&P executives and leadership teams, owners are struggling to see why they would want to make significant expensive investments in drilling programs, in infrastructure, in things that are going to cost them a ton of money, but in the long-term perspective, at least what this administration is pushing for, are not likely to have that long-term payoff or that long-term payback.

So the restrictions they've actually put in place, I know there are restrictions on new LNG facilities in the U.S. as well that are being held up. So there are lots of different areas where this is impacting the industry, but it's also that overall tone and message that's telling E&P companies to hold back on very expensive massive improvements until they can see a time where those returns are going to be more profitable for them in the long term. My personal view, of course, but I think there's a lot of evidence out there that supports that.

Our next question comes from the line of John White with ROTH Capital Partners.

Congratulations. Nice results. Nice to see the revenue improvement. Back to the pricing, was that pretty much across the board? It sounds like it was.

Yes. For the most part, we -- there were some corrections on -- we went through a massive pricing project actually. And for a company our size to do that, what a lift by the team to go through it: one, from analysis; two, to implementation with currency differences, both in vendors and in customers' discount levels. It's quite an undertaking it. We wish it was just you pushed a button in our ERP and it did it, but it doesn't. So it was quite a lift. But yes, on average, that 10%, you can see it's pretty much across the board, almost every product has moved on average. And again, some we'll do better on and some we'll do as good and some will do a little bit less. But for the most part -- we really targeted, obviously, that 80% to 90% of the products that make up our revenue. That was the target focus of the project.

Okay. And you mentioned business benefiting from exploration and production mergers and consolidation. Can you give us some examples or talk more about that?

For sure. Obviously, there was -- I think it was Cabot and Cimarex. It's not like we were -- we look at these and go, wow, that end user wasn't using us. The other one who bought them is, and then we get it, although we've benefited from that in the past. But what we like to see is, obviously, 2021 reports have -- the merger and acquisition activity was as high as it's been for quite a while. I can't remember the quantification of the dollars, but it was huge, especially compared to the previous 2 years.

What we see from this, what we like about it is there's still companies. Obviously, there's sellers and there's buyers. It'd be worrisome if there was a ton of sellers and no one buying, but we're seeing that consolidation, which we believe means more push towards automation solutions, which we believe pushes more towards autonomous production, which lends to: one, our existing product suite; it lends to safety.

As you get these bigger E&Ps, they have bigger and better safety programs. They are also more conscious of, of course, ESG initiatives, especially around the emission side of things. And so we just see that as a good opportunity for Profire. It does create work for the sales and administration teams of Profire and service teams as we have to cut things over. We got to learn new billing systems. We've got to make new contacts. We got to see who shakes out in all the shuffle.

But overall, we see it as a positive thing because these companies that are doing this, they're not looking to buy assets to just let them die. They're looking to buy strong assets to bring them into the fleet, to connect them, and to gain production from them. There'd be no other reason for it, in our opinion. So that's -- it's a very positive thing, we think, for Profire.

Well, that all makes sense, and I appreciate the extra detail.

(Operator Instructions) Our next question comes from the line of John Bair with Ascend Wealth Advisors.

I want to cycle back a little bit to the margin aspect. And just saying, okay, so you've had a number of your larger customers, you've got some bump in order flow in the fourth quarter when that was announced. So the question is, do you anticipate your overall margin profile will improve as we go through this year with those price increases? And I guess specifically, how do you feel you can improve those margins so that you become more profitable with the expanding base?

Yes. Good questions, John. And absolutely, we believe that the sales price bump will help with that. It's a very key reason as to why we're doing it. How much is it going to benefit, we can't necessarily quantify that just yet. But if we're bringing up prices on average 10%, hopefully, it's having that amount of impact to offset costs certainly for us in that regard. So we do absolutely expect that, that's going to help. And as I mentioned before, we'll continue to monitor our overall cost inflation side as well to make sure that it's not continuing to outpace the sales adjustment we have made, and if we need to, we'll continue to make others in order to try to keep that margin improvement happening.

And then as we look at the pipeline of projects that we talked about earlier as well, a lot of those projects come with improved margins themselves. Just because of the nature of the projects, they tend to be a lot bigger. There's a lot more work involved on the engineering design, implementation, actually installation, all of that, that goes along with those. So we certainly are maintaining good solid margins on these bigger projects. And as we are expanding into other industries so far we're seeing that the margins are holding in those areas. But we've -- as we've made adjustments over the last 2 years to our cost structure, we certainly downsized or rightsized the business to get through COVID and now we're coming back out of COVID. But we didn't completely cut everything to where we could still have those same margins and net margins at USD 20 million in revenue or at USD 25 million in revenue.

We still believe this is coming out of the bottom and that we're getting back up and that the future for Profire is in the USD 25 million to USD 30 million annual revenue business but is much bigger than that. So we're still building that structure and maintaining the structure that we believe we need to capitalize on these significant increases that could be coming here in the near future. And therefore, we've got the structure we believe that will help support that. And as we go through that growth and we ramp back up, we certainly expect that margins are going to benefit from higher revenue and lower fixed -- not lower fixed costs but not having to grow fixed costs as quickly as we do grow revenue.

Okay. And then hopefully, you get more of the newer projects with better margins in them, and that should provide a boost there. Is that a fair way of looking at it?

Yes, absolutely. Cam, any other thoughts on your end or comments as far as those projects grow in the pipeline and their impact on margin?

No, you covered it well. And as it becomes a bigger part of our business, these other projects, so downstream side of midstream, as we've talked about, and outside oil and gas diversification initiatives. If we can maintain or on some of them get higher, there will be some that'd be up and down. But on average, it should be able to maintain more around those historical margins.

Okay. And then outside of the price increases and so forth, how are you addressing any raw material costs or component cost pressures that you're experiencing right now?

Yes, I was just going to say, I'll give it to Ryan, but that's why we moved the call to so early in the morning because we don't sleep anymore. That's all we do is working through all that stuff. No, Ryan, you speak to it.

I just figured you were doing a deal out east, that's all.

Yes. We're doing the best that we can. We've got a great team that's monitoring our components and materials, that's looking at alternatives and other options when we're seeing significant increases. And Cam joked, but within -- for Cam and I and even for that team, it is long hours and it's a significant effort right now to try and maintain the supply and get the stuff that we have already ordered in a timely fashion, but then also try to keep costs down as much as we can, and like I said, look for other alternative sources or options without destroying or disrupting the quality that we maintain for our products and our services. So it's a significant effort, and we're going to continue to put that in.

Is building inventory part of that process of certain things that you can get?

Absolutely.

Yes, absolutely, we historically have maintained a high level of inventory. That's come down over the last couple of years. But we're focused on rebuilding that and even maybe bringing on more inventory as quickly as we can to meet what we see as significant demand coming this year and at least into the following year.

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

And first question is just about inventory. You ended the quarter here with -- the December quarter with USD 7.2 million of inventory. Can you give us an update for how long it is taking for you to procure all the various parts you need to build up inventory? And are there any specific parts where there's kind of a real shortage where there is maybe a 6-month lag time or something and no specific parts could make it difficult to produce finished goods?

Yes. Certainly, we have a wide mix of inventory and components. A lot of those components going into our systems to build a finish -- to complete BMS system. We've got all the peripheral parts that then build a complete BMS solution. So the flame arresters, the burners, all of these different things we've kept in inventory. And from a systems perspective, it's an area where we're probably seeing the most challenge right now, and it's not every component within the system, but it's often 1s or 2s in components that have grown in significant lead times. So we're seeing a lot of components in the 6-month to 12-month lead time and moving in that direction. So we've been working very hard to try and get orders in and deal and manage with those lead times. But Cam, any more specific comments on the components or inventory process there?

Yes. When you look at Profire has historically held substantial inventories, and it's been a strategy of ours and we're going to continue to work towards it. It's one of the value propositions to our customers is that we have inventory on hand. But as we look at some of these components are, as you mentioned, are like 6 months, some have even to a point -- some vendors have come out and said, we're canceling order -- we're not canceling orders.

We're canceling delivery dates because we don't know -- we don't have anything to give you. They're tired of picking up the phone from our procurement team is what it really is. But what we were pleased to see, not that but the fact that we were able to pivot in our strategy over the years to have wherever possible multiple vendors to supply products, so that we can shift and pivot quickly. We've done some great things to avoid some really complicated situations.

To a degree, and we've talked about it, we're almost, to a degree, lucky that U.S. shale cannot respond as quick as they would like to or potentially would want to, especially if regulatory pressures would allow them to expand production to fill this gap of the, what it would be like, 700,000 barrels a day. There would be nobody who could keep up. But we've seen, again, these issues from vendors, but our team has done a great job in the past to prepare for it and to just pivot quickly.

So as Ryan mentioned, it's single components, it's not massive component list for each part. But if you look at our bill of materials for our systems, for example, it's a very long and complicated list of parts coming from many different places, which is part of our strategic advantage. But the team has done a great job to pivot as quick as possible to find new suppliers, new replacement parts, certification updates, et cetera.

Yes. Let me just ask the question again. There are certain industries like, let's say, automobile industry, where there's specific semiconductors that are just not available and so cars can't be produced. And I'm trying to understand to what degree -- how challenging is it for you to get the components you need? Because in some industries, yes, there's a shortage, but if you pay 20% more, the components you need will be available. And so what I'm trying to understand is in the spectrum if your orders went up substantially, would you be -- what I'm saying is if your inventory, let's say, today was depleted, would you be able to get all the components you need even by paying higher prices or are there certain parts were just not available and you need to wait 6 months for them?

Yes. This is interesting because I was talking to one of our team members and drove by one of the larger dealerships here near the shop here in Alberta, Canada, and there was 7 ford pickups on the lot, 7. There's nothing. They're in a place where, yes, they cannot get anything. We would have a mix of that. Luckily, we planned ahead. For example, for our systems, we've had some of the core key components that are long lead times and that we saw future end of life on, for example, our PF2100 platform where we have ample stock, but we would have a mix of that. I wouldn't be able to pinpoint that it was all or nothing for any of them, and some of them they're just longer lead times. But some of them, you can't pay more. They're just not there. For example, our solenoid manufacturers or valves, if they're not there, they're not there. But for the most part we're ahead of these things. But it is still a shuffling struggle to make sure we have the right things for the right orders at the right time I don't know if that answers it for you perfectly there isn't a perfect answer we've got a mix of both.

Okay. And then just more clearly, on the inflation that you've had in your cost of goods, what's your weighted average increase in your cost of goods has taken place that's resulted in the decline here in gross margin that was reported?

That's not really a number that I can quantify or provide. We're seeing it all in labor. We're seeing it in the cost of our contract manufacturers as we're talking about all of these different components, each of the components are having increases that are coming through to us. And then on our side, the cost of labor to complete the solution, do the assemblies in our facilities. Those things have been going up fairly significantly. I think labor increases overall are in probably 10% to 12% increased range across the business over the last 12 to 18 months. So as far as giving you a specific increase, I can't do it. But we're seeing those inflationary pressures in every aspect of the business from our utilities to labor to raw materials components just like every other business is.

Got it. Okay. Listen, best of luck in being able to provide the goods your customers need. It sounds like you're very well positioned because if you look at your inventory, it's equivalent of about 6 months of sales at the current run rate. So it's not as if you're down to your last 2 BMS systems by any stretch.

Yes, certainly.

Our next question comes from the line of James Jang with Univest.

So it was an interesting quarter. And I just have a couple of quick questions. One is you mentioned that you had an influx of orders near the end of the quarter. So are we to assume that those orders haven't been booked and those will flow through to the first quarter in terms of the top line?

No. Actually, we're saying those were booked in the quarter, and that's what helped drive our revenue up to USD 8.3 million for the quarter and that significant increase over the prior quarter at 6.9%. So that's what we're saying is we had that influx and they came in. But also, in our comments about pipeline, that's more of the forward looking that the pipeline is building. And for 2022, we're seeing all of those positive signs.

Okay. Great. And in terms of expansion into other sectors, have you been -- I don't know if you can speak about this, but have you had inquiries from, I guess, smaller power plants with what's being discussed now in the market is setting up small power plants at the source, at the wells, and then bringing on data centers and crypto miners there, those mini projects they seem to be involved. Have you had any inquiries in that sector?

We've been involved -- there's one producer in particular who's been very active at that. And yes, our systems are being used there, but I wouldn't quantify anything material so far that we've heard from expansion in that efforts from small power gens that's on the pad. No, not yet.

Got you. Okay. And with the price increases, do you expect any further price increases this year?

We look at it -- as Ryan said, we're going to continue to monitor it. If we get an increase from vendors, we're going to pass that increase on; we have to. We hope to be able to keep our core product -- Profire's product stable for [Intel] probably look at it again, while we'll be looking at it throughout the year into that Q3, Q4. We don't want to be one of these customers every -- providers that does every 3 months. However, that being said, we've had to look at our truck rates and we'll have to look at whether it be surcharges or things like that, you look at -- to fill up the diesel right now, it's, depending where you are, USD 4 to USD 6 a gallon for diesel. Definitely no service provider budgeted for that last year. So we're already looking at things like that. So those will be more on the fly, but product mix, if it's not ours and we get an increase, we'll have to probably consider an increase. If we -- if it's ours, we hope to be able to go and just do a standard increase at the end of the year.

Okay. And the last question is the acquisitions you made back in '19, can you give us an update on how that has been working out?

Yes. We mentioned in our comments, just having the ability to have a high-performance burner, our sales -- that's really why we bought the Millstream company was to get their burner technology, airplate technology. It's definitely been a huge value for our customers. We're spec'd in. I couldn't even give you a number. But that is the primary burner we sell. We sell more burners than we've ever sold before. So that acquisition has worked good. Again, is it USD 10 million? No, it's not. But for what we paid for it, basically in inventory purchase, we love the product. We love the ability to bring it to our customers. The Midflow acquisition has been fantastic.

The talent pool, the service expansion in the Northeast, the support to our business development team and product development team, the relationship that was brought with ECI, meaning the Emerson Impact Partner in the Northeast, again, they're in our top 20 for last year for customers, plus they're starting to expand outside of oil and gas as we had hoped, and we're seeing some opportunities come in the door. So very happy with those. They're fully integrated, what they have been for a while. And we're looking for the next one that makes sense for sure.

Okay. And one last one here. I think it was Ryan that mentioned that with the Russian energy ban and the U.S. ramping up production, it will still take about 6 months for the U.S. to ramp up if they still choose to. So if that is the case, when do you expect to see more ordering activity come in? Would that be in the second quarter? Or could that bleed into the second half of the year?

I think it's certainly more likely for the second half of the year as far as significant changes in orders, because as we've mentioned, there's a whole process. The drillers, the rigs have to become available to be able to ramp that up. So certainly, costs and procurement of sand and fracking supplies and drilling and all of that's got to happen. And then at the same time, they'll start to order the heaters and the treaters, the amine reboilers, all of those production pieces of equipment that need to be ordered, and we're a small piece of that. So bringing those wells online is several months down the road, and then when they go online, that's when we come into play or our products come into play. So the longer-term process for significant changes is pointing more towards the second half of the year. However, we are starting to see some increases now as well because of continued bringing down the DUC count and other activity that's already in place. And Cam, sounded like you wanted to comment as well.

You covered it well. I guess there's 2 things here again. And I think I mentioned it earlier. The already predicted increase in activity for 2022 based on COVID, based on DUC count down, that has started for sure. But for the most part, we still think that again, the securing rigs, hiring the frac crews, locating equipment, drilling, completing wells, permitting that whole process and assuming permitting was in place. That was all -- was that even ready for this year's spend? Probably not.

For us, we feel we were ready for the increase. Now a Russia-Ukraine scenario increase, nobody is ready for that. Nobody can keep up to that. So I think, as Ryan mentioned, yes, even just the back half of this year to support what they were planning to do from almost the beginning of 2022. Can't even bring in Ukraine and Russia into this. That is just going to make prices as volatile as they are right now.

So it's a tough scenario for E&Ps even if they want to. And much as Biden getting criticism for going to Venezuela and maybe not looking to the neighbors up north or going to Iran, which I don't agree with that, but I don't know that as a choice because U.S. shale cannot pick up this quick to fill the demand.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I will turn the floor back to Mr. Oviatt for any final comments.

Thanks, everyone, for joining us on our call today to discuss our fourth quarter and full year 2021 results. We would like to thank all of you for your continued support. As always, we are available for any discussions or questions you may have. Also, we will be participating in the ROTH Capital Partners Conference next week and look forward to meeting with many of you there. Thank you and have a great day.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.