Q4 2019 Earnings Call
Good afternoon, everyone and thank you for participating in today's conference call to discuss Profire Energy's fourth quarter fiscal year 2019 ended December 31st 2019.
Joining us today is the CEO profire energy Brett to match.
Oh prefer.
Oh yeah.
Before we begin today's call I would like to take a moment to read the company's safe Harbor statement cautionary note regarding forward looking statements.
Statements made during this call but are not historical are forward looking statements.
This call contains forward looking statements, including but not limited to statement regarding the Companys operating expenses.
International markets, the availability of companies resources to make beneficial investments in 2020 and beyond.
The successful integration part.
And the company's future financial performance.
All such forward looking statements are subject to uncertainties and changes in circumstances.
These statements are not guarantees of future results or performance and involve risks assumptions and uncertainties.
Cause actual events or results to differ materially from the events or results described or anticipated by the forward looking statement.
Factors that could materially affect such forward looking statements include certain genomics business public market and regulatory risk factors.
Integrated companies periodic reports filed with the Securities and Exchange Commission.
All forward looking statements are made pursuant to the safe Harbor provisions the private Securities Litigation Reform Act to 1995.
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.
Meter should not place undue reliance on these forward looking statement.
I would now like to remind everyone that this call is being recorded and will be available for replay through March 26, 2020, starting later this evening.
It will be accessible via the link provided in yesterday's press release as well as the Companys website at Www Dot Profire energy Dot com.
Following the remarks by Mr. Han Mr. only out there we will open the call to your question.
Part of the question answer session.
Mr. Sachin Oh, yeah, well be joined by Profire, Chief business Development Officer Cameron Tidball.
Profire Energy's Vice President of operations, Jay Frugal, and Vice President of product development Patrick Fisher.
Oh now I just heard the call over to Chief Executive Officer, I prefer energy Mr. Brenton Hatch. Please go ahead.
Thank you and welcome everyone to our fourth quarter and full year 2019 earnings call to Profire energy.
I'm pleased that the accomplishments, we are making internally and our president position given the current market environment. Although this progress has not fully transpired into the financial due to the turmoil in our industry I want to update you on the things that continue this that profire apart.
The other 2018, we announced our strategic investment plan for 2019 that included focused investments and product development international expansion and M&A activity.
These investments are proving valuable forces, we achieved a number of our strategic objective in 2019.
These included the acquisition and integration of mid flow and mid millstream.
Chaining silk certification and initiating still a bar P. R 2200, and again, achieving full year profitability, we managed to accomplish this well generating cash from operating activities and maintaining our debt free balance sheet.
2020 has presented US a number of challenges, including the continued volatility of the oil and gas market, which has been exaggerated by the spread of that Corona virus and other global condition. This of course is placing additional pressure on oil prices, which in part has continued to limit the amount.
Capital expenditures being made by exploration and production companies as they shift their focus to cost management and allocating their cash flows towards such things as debt reduction and share repurchases.
I am confident that our cash position, coupled with our cash flow generation and discipline will allow us to manage through this volatile period and position us to take advantage of opportunities to grow our company.
Before I get into our plans for 2020 I'd like to turn the call over to Ryan for a review of our 2019 result.
Right.
Thanks, Brent yesterday after market closed we filed our 10-K with the FCC and discuss the years highlights in a press release.
As always the bulk of those documents are available on the Investor section of our website. The transcript of this call will be posted in the coming days.
For the full year 2019, we recognized 39 million in revenue, which is down 14.5% from the same period, a year ago, primarily driven by the ongoing downturn in volatility of the oil and gas industry. This is evidenced by the fact that the average oil price and the average onshore rig count were both down 30.
10% year over year indications from our sales force our that our customer capex budgets were down even more significantly than these industry metrics.
Gross profit decreased to 19.5 million as compared to 22.9 million in the prior year gross margin remained flat at 50.1% of revenues compared to 50.2% in the prior year. The typical fluctuations of gross profit margin are driven by changes in product mix.
And inventory of warranty reserves.
Total expenses were approximately 16.4 million worry 9.6% increase from last year.
This increase is primarily due to an increase in employee related expenses and professional fees related to the two acquisitions that were completed during the year end two other cost district to further strategic initiative.
This was unexpected increase as we continue to execute strategic investments as part of our growth plans, although we intentionally didn't allow the cost structure to increase by as much as we originally signaled at the beginning of 2019.
Operating expenses for DNA increased approximately 3% R&D increased 38% and depreciation and amortization increased 95% as compared to the previous year.
The increase in R&D was driven by ongoing development of the P. F 2200 product line, which began initial commercial sales in December 2019, the increase in depreciation and amortization was the result of additional fixed assets and intangible assets recognized through the acquisitions.
Further part of the increase in amortization expense was the full write off of the patent associated with the CMS product line.
M.S. sales continued to be insufficient to justify retaining the value of the patent on the balance sheet any longer.
Total other income during the period was 403000, the majority of which was attributable to interest on investment and the sale of fixed assets [laughter] that income for the year was 2 million or four cents per diluted share compared to net income of 6.1 million or 12 cents per diluted share in the prior.
Here.
Net income was also impacted by two one off unusual items, which worthy additional CMS product and patent write down of 525000 huh.
The derecognition of tax loss carry forwards in Canada with a potential tax benefit of approximately 685000.
Tax losses in Canada have been fully applied against previous tax payment and can be carried forward for 20 years from the year in which they were generated however, because current projections show a likelihood of further losses in Canada for the short short term.
We have been unable to retain these future tax benefits on the balance sheet.
We will continue to explore tax planning strategies that will hopefully allow us to recognize these benefits well before they expire in 18 to 20 years.
If it had not been for these two one off items, our net income and earnings per share would have been significantly higher.
In the fourth quarter, we recognized 8.1 million in revenue, which is down 23% from the same period, a year ago and 18% from Q3.
The average oil price in Q4, 2019 was down 5% compared to the average Q4 2018, well the onshore rig count was down 24% or the same period.
The net loss for the fourth quarter was one point threemillion or three cents per diluted share compared to net income of 831000 or two cents per diluted share and the same quarter last year.
As stated previously when discussing the full year performance.
These figures were impacted by the one off items recorded in Q4 related to CMS product write downs and Derecognition of tax loss carry forwards in Canada.
Now, let's look at the balance sheet.
Cash and liquid investments totaled 18 point sixmillion as compared to 22.6 million at the end of 2018.
The 4 million decrease reflects our 2019 cash flow from operations and changes in working capital balances of seven point Sixmillion.
Offset by 4.4 million spent on M&A 4.7 million on a new building in Canada, and 2.7 million pursuant to our share repurchase program.
Our significant cash reserve allows us flexibility in responding to changing market conditions.
We remain debt free we own outright the majority of our facilities, we operate from as well as the trucks and equipment used to run our business.
We have historically carried a large amount of inventory due to the long lead time nature of many of our products or the components necessary to build our products. This strong balance sheet position provide does even further flexibility in times of volatility and uncertainty.
Throughout 2019, and even in the first quarter of 2020 M.P. companies have continue to focus more on capital capital discipline like debt reductions dividends and share buybacks than they ever have done historically.
This typically means less cash available for exploration exploration in Capex expansion.
As a result of these ongoing macro trends, we believe many M. P's have pulled back on Capex budgets and may continue to restrict capex spending throughout 2020.
As we move forward and 2020 with confidence in Profires long term outlook, we will continue efforts to control spending and maintain the capital discipline that has served us so well for many years, we will continue to look for strategic opportunities for to provide value to shareholders, which might include additional M&A opportunities or additional shares.
Purchases.
Among other strategic activities.
I'll now turn the call back over to Brent.
Thanks Ryan.
We're pleased to report that Profires 20, Nineteens strategic priorities and investments have received positive validation from our market and new and existing customers Profire continues to be an organization that collaborates with in response to our customers needs and requirements. This philosophy is that the core.
Our of our business development strategy.
In 2019, our R&D team continued development of the 2200 and in the fourth quarter, we began sales and marketing initiatives. We have received very positive feedback and respond to the features and benefits of our latest BMS controller, receiving still certification on the 2200 was a monumental.
Achievement in 2019.
This certification process is never easy and requires patience in diligence.
2200 is our next generation BMS controller and platform that will eventually replace our current 2100 family of BMS controllers. The 2200 has been designed to be an open platform, which will potentially enable expansion of all tournedos control systems in the future.
Your offering is flexibility and shorten development times Profire continued to solidify our position as a market leader in the upstream and midstream burner management space.
Our 3100 product offering has opened doors to facilities projects in applications that our previous product line could in 2019, we increased our 3100 project revenue, even though total company revenue decreased we're proud of this performance given our customers.
Lower capex spend throughout the fiscal year Profire believes that the 3100 will be key to our continued expansion of the downstream market.
As previously reported in 2019, we completed the asset purchase a midstream energy products based out of Alberta, Canada. Due to this acquisition. We have continued to add accretive products that our existing sales team can market then so.
This acquisition has expanded our offering of combustion related products solutions and expertise.
The equity purchase of mid flow services LLC based out of Ohio has increased our presence in northeastern U.S.
Retention of mid flows team members was Paramount to Profire and completing this transaction. We're pleased to report that integration initiatives have been successful and we're now operating as one team.
Assimilation of these two acquisitions in 2019 was a heavy undertaking for our team. We're proud to report that integration no difficult has been largely successful. We're now a one stop shop for burner management systems.
In 2019, we continue to work our multiyear investment plan in building out our international sales and distribution channels. As we have reported previously profire products can be found in oil and gas applications throughout the world in 2019, we continued to solidify relationships with suitable.
Distribution partners efforts to quantify and qualify.
Markets and strategic partners, where the prime focus of our international business development team. We looked at 2020 is a year, where we will continue to build these relationships provide training and support to our distributors and their customers as they focus on sales and marketing initiatives, thus far most of our international.
Distribution sales have been realized in South America and Asia.
As you are aware very few our immune to the economic disruptions related to the Corona virus just prior to the outbreak which resulted in significant manufacturing delays profire received a shipment of a significant quantity of MVP product that we believe will satisfy market demand until factories.
Supplying our product to return to full capacity the inventory on hand allows us to respond quickly to customer needs, which over the years has distinguished profire from its competition.
As global commodity prices have declined sharply in recent days, we plan to respond accordingly, and continue to focus on capital discipline, we're monitoring the situation closely and retain the flexibility to adjust our budget if needed we are optimistic about the future because of our business principles that allowed us to advance.
During the last industry downturn and can now be duplicated.
The strength of our balance sheet allows us to look and build to the future well many of our competitors may be forced into holding patterns or selling assets.
Our financial position allows us to build on the investments into any 19, well being financially prudent.
Thank you and we will now open the call to questions. Operator, please provide the appropriate instruction. So that we can get the Q and they started.
[noise]. Thank you if you'd like to ask a question. Please press star one on your telephone keypad a confirmation total indicate your line is in the question can you maybe press star to if you'd like to remove your question from the Q for participants you think speaker equipment, they may be necessary to pick up your handset before pressing the star key.
For the question and answers portion of this call. Please keep question limited to one primary question and one follow up question.
Our first question comes from the line of Rob Brown with Lake Street Capital markets. Please proceed with your question.
Hello, Good morning, Mr. Brown.
Morning break morning, right [laughter] up just just kind of a question on the outlook, which I realize its little hard to predict at this point, but.
What sort of the latest you're hearing from your customers in terms the demand environment and maybe how they're reacting to the to the up to the commodity price change here.
Rob I'm not supposed to use that kind of language on air So Oh, maybe right that an email to yet.
It's a it's not pretty and in general terms, but but can you you have more based space interaction with with some of our customers can you speak to that one.
Yeah definitely you know obviously pandemics in price wars or are not new to us. However, combined together that is new territory for all of us in our careers.
There's no doubt this price war.
Between Russia.
And Saudi is is impacting things we have.
We continue to be in touch with our customers, but we know there will be changes you you probably read some of the outspoken Ceos of being peas, and some of the things that they're trying to do to reassure shareholders.
But as Brian said, it's not pretty.
That being said.
We still get the calls we're still having our salespeople are being asked the questions will you have product and because of our inventory strategy.
Because of decisions, we made in the past invest in that.
We believe will build to handle customer needs and demands, but it's not a wonderful thing right now, but ah well have to see how it plays out Rob.
Okay. Appreciate I appreciate the color there. Thank you.
And then in terms of the 3100 in particular.
As a little bit of a different customer base.
How is that project pipeline are going down if you you know how much was that impacted by oil and oil prices.
Hey, Cameron again this it might be Youre show today, the way it looks the if you're on dealer.
You know.
We feel that it is a little different clientele. However, there is some overlap 3100 sales historically, so far I've been.
A lot of it has been in our current business upstream and midstream, but we we try to move into these projects are on what we call. The downstream side of midstream, which is your your larger appliances. So these these customers, although they do pull from different.
Plans and budgets, but we have heard of deferrals for sure I'm. Some will continue to go forward. We've we've had some good projects our to go through in the quarter, but.
We do expect some impact there as well.
Okay. Thank you I'll turn it over.
Thanks, Rob Thanks.
Thank you. Our next question comes on line of John Light with Roth Capital Partners. Please proceed with your question.
Good morning, Joe I'll say, hi, Hello, I'll say good morning, since you're in Salt Lake City I presume.
That's [laughter] so.
Brent you had some positive comments on supply chain and inventory as you finished up your prepared remarks or.
Do you want to offer.
Some additional color or do you.
Do you have exposure to Asian supply chain.
We are of course, because we we access some of our products out of China. We we've been really rather concerned of course with present circumstances, but one of the positive things Oh <unk> I should have Jay if you will speak to this maybe I will in just a moment we.
We were wise enough in that department to to make some decisions which got.
Products on the water prior to any of this happening and and it looks like we will have plenty of product plenty of inventory because of those decisions that we made two to move a little faster than than some of these conditions have moved.
So we we're quite optimistic about how we're going to be able to handle things I I appreciate it can mentioning that.
That because of the tradition of Profire always being able to.
They have inventory when it is needed by our customers. There we have many customers that are.
Still planning in spite of conditions to <unk> to use our products and a used in fairly aggressively and that's really sets us apart from some of our competitors, but but Jay do you want to speak to that a other issue of product availability in inventory.
Yes, Thanks, Brent Hi, Rob so as Weve really put or.
Strategy towards having product available we've stayed very close in touch biweekly with our suppliers out of China, and we've been able to work with some people there on not just what we had in the pipeline, but how we pull some of that forward. So.
That's absolutely right.
Right and the strategy in the team that to put it all that effort behind that we were able to get some of that product received and.
North America here prior to a lot of the troubles that they've been having over there. However, I would like to outside we do continue to work with them I'm like I said, even biweekly really helping.
I understand better how this is going to impact us and we've got contingency plans in place.
With that.
And Jay maybe if I can just add to that or you know from a range of our products.
We're talking about direct exposure just in relation to the M E P product or the midstream product that we acquired.
Midway through the year this year in and that's been a great addition to our product offerings. We continue to grow that portion of our business and the amount of that that we're selling.
But that doesn't cover you know our traditional BMS systems and our supply chain for that those are all sources to either in Canada or in the U.S. and many of our other third party component.
Our direct sourcing is through the U.S. in Canada. The thing we don't fully know is how many of those suppliers are going to be hit and impacted by the China supply chain. So there's likely other indirect supply challenges there, but as we also said in our prepared remarks, we tend to carry a large.
Story on the books and we have a large number of systems and so forth. So we're working with those suppliers as well and staying in close contact with them and so far are not being told of any significant issues or challenges or delays. Obviously this is an evolving situation then and we'll have to evolve as it up.
All right.
Good common thing Scott.
Well that's a.
Smart move a decisive move in a steep management so congratulations.
Follow up if I may or Capex for 2019 was.
Significantly higher year over year end. During these calls in 2019, you did a good job of Telegraphing that to us.
Do you want to offer any telegraphs on Capex for 2020 this time.
And I know, you're not going to be real hey, I know, you're not going to be real specific so I understand.
Thank you so John just to clarify you're talking about Profires capex not industry.
P. Capex.
Hi, Oh, yes, we're not even going to talk about a unique athletics [laughter] because I don't even want to talk about nothing to talk about but yeah great question.
The Capex that we invested in 2019 was primarily all related to our new building up in Canada.
That has been.
Virtually completed we're actually in the Newbuilding Cam and Jay or actually joining this call from that Newbuilding, we moved in.
I believe all of our staff up there over the last weekend and not on Monday, So were there the buildings up and running functional obviously with any new construction project. There's you know some trailing finishing touches or you know touch up that type of thing that that is still ongoing.
But pretty much for for the rest of the year. It's it's minimal so there there will be a little bit of carryover cost associated with that.
At this point in time minimal minimal I mean, it'd probably be maybe 500000 or something that we'll see.
This year does just finishing that up that and again a lot of that's already been incurred in January and February.
We don't have any plans for major capex beyond that we do have a truck fleet that we rotate as those items are needed, but you know it in this current environment. We're looking at can we get a longer life out of our vehicles and maybe deferring some of those investments so.
There will be some capex this year, but it will be a fraction of what we saw for 2019.
Well quite a bit at DKL considering management.
[laughter] customary comments.
Right.
Seriously I appreciate that color and I appreciate that detail and ER I'll turn the call back.
Thank you. Thanks appreciate it.
Thank you, ladies and gentlemen, as a reminder, if you'd like to join the question Q. Please press star one under telephone keypad. Our next question comes from Samir Patel with Askeladden capital. Please proceed with your question.
Hey, guys [laughter]. Thanks, So so one comment one question and the comment to Echo the previous caller as you know just wanted to congratulate you guys on.
The way you run your business I think its times like these that really speak to the value is having a strong balance sheet focus on cash flow and you know as a shareholder it's nice to know no matter. What happens you guys are can be around to a in Boston fried coming out of the downturn. So that's a calling it a the question is regarding your international growth ambitions, you spoke a little bit about it empty.
Prepared remarks, but I was hoping I could get a little more color. It seems like that's one of the interesting areas right now because obviously industry demand is down but on the other hand or kind of growing from a base of zero or near zero with some of those international distributors. A couple of quarters ago. I think you had talked about some markets being somewhat more competitive than others, you know with regards to the existing tech.
Allergy from other players that those markets are you, saying, maybe if you could you speak to early learnings and kind of where you see where do you see traction and kind of what your expectations are for that piece of the business and 2020.
You bet Cameron.
You bet.
So really we spent a lot of 2019 trying to find the right types of partners you don't want to just throw it into a big machine, where your another product on a line card that you hope to get brought up.
We look to finding companies similar to ours that were in instrumentation hopefully in combustion a in markets that we had investigated through research to find out obviously is their production strategy similar to the out of North America, where he is required through this.
Ernie that we we didn't deviated through 2019, we kept on it we've we've brought on six partners or in process of bringing on those six partners and and for the most part we have the globe covered in terms of the geography, where well.
Our equipment our products could be used.
Now comes the the fun part and that is working with these distributors getting in what their customers determining their budgets determining what competitive products exist. That's that's that's kind of our steps right. Now in fact, we have a crew that's in South America right now.
All right now are meeting with customers and training et cetera, So our expectations are.
We can we believe that we'll continue to learn more of where our products is I took a called not even a month ago.
Saudi Aramco <unk>.
Loves Profire, apparently however, technically our product is an approved to be used with Saudi aramco. So it's an interesting thing our products end up in these countries because domestic Oems or fabricators use our products and ship them overseas. So.
Oh, it's going to be a great Europe learning, we do think that there will be.
Some some progress this year, we're to the point of we're still planting seeds, but there should be some harvest this year, but again how is this all going to be impacted by.
The markets commodity prices well have to see but we're really I'm excited about the progress that we're seeing there.
Cool. Thanks, Kim Thanks, Thanks, guys appreciate the color.
Thanks, Matt.
[noise] thinking there are no further questions in queue I'd like to hand, the call back man Smith for closing comments.
Thanks.
Thanks, everybody for joining us today on this call to discuss our.
Fourth quarter end, the full year actually have 2019, we'd like to thank all of you for your continued support as always were available to answer any questions that you might have discussed you from matters that.
That you might be interested in feel free to contact us. Thank you each of you and have a great day.
Thank you.
Again, I would like to remind everyone that this call will be available for replay through March 26, 2020. Starting later this evening via the link provided in yesterday's press release.
In the Investor Relations section of the company's website. Thank you ladies and gentlemen. This concludes today's call you may now disconnect your lines.