Profire Energy Inc. Q1 2023 Earnings Call
So it was just the operator, thank you for standing by the profile of energy call will begin shortly thank you for your patience.
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Yes.
Good morning, everyone and thank you for participating in today's conference call to discuss pro fire Energy's quarterly operating and financial performance for the period ended March 31 2023.
As a reminder, all participants are in listen only mode and the conference is being recorded.
After the presentation, there will be an opportunity to ask questions to join the question queue. You May Press Star then one on your telephone keypad should you need assistance during the conference call you may signal, an operator by pressing star and zero.
I will now turn the call over to John <unk> Investor Relations consultant at three part advisors to get the call started.
Thank you operator.
With me on the call today co CEO and CFO for a buyer of a G. W.
And of course, the Eo camera chip.
Yesterday after the market closed the company filed its Form 10-Q with the SEC.
This quarters highlights in a press release.
As always both of those documents are available on the investors section of the company's website.
A transcript of this call will be posted in the coming days.
Before we begin today's call I would like to take a moment to read the company's safe Harbor statement.
During this call but are not historical are forward looking statements. This call contains forward looking statements, including but not limited to statements regarding the company's expected growth.
Revenue diversification success.
Research and development of new products the repurchase of company shares.
And our customer base in the natural gas market.
The ability of company resources to make beneficial investments in 2023 and beyond and the company's future financial performance.
All such forward looking statements are subject to uncertainty and changes in circumstances forward looking statements are not guarantees of future results or performance and involve risks assumptions and uncertainties that could cause actual events or results to differ materially from the events or results described in or anticipated.
Bye.
We're 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 this release and the company assumes no obligation to update forward looking statements to reflect subsequent events or circumstances, except as required by law.
Readers should not place undue reliance on these forward looking statements.
To remind everyone that this call is being recorded and will be available for replay through May 24, 2023, starting later today there.
It will be accessible via the link provided in yesterday's press release as well as to the company's website at profile energy Dot com.
Following the remarks by Mr. <unk>, who will open the call for your questions now I would like to turn the call over to the co CEO and CFO co fire LNG, Mr. Ryan Oviatt right.
Thank you John and welcome to all of you who are joining us on the call today.
Our first quarter 2023 results built upon the momentum we generated in the second half of 2022 as we recorded the second highest revenue quarter ever expanded our gross margin above 50% for the first time since Q3 of 2019 and reported our best quarterly net income and EBITDA in company history.
We have now achieved eight quarters of sequential revenue growth and three of the top five revenue quarters have all been within the last nine months.
Our strong performance in recent quarters as a result of several strategic efforts, including investments in our sales and operations teams.
And aggressive product procurement and quality focus.
Sales price adjustments to combat inflation.
Maintaining our high standard of customer service.
We have also benefited from the overall post pandemic recovery within oil and gas markets.
Put the magnitude of the recovery in perspective revenue from our legacy business for the prior six months exceeds our total revenue for all of 2021.
Recent policy announcements at the state and federal level have increased pressure to reduce oil and gas consumption within the next decade. However, we believe hydrocarbons will remain a critical piece of the world's energy supply for many years to come.
The necessary infrastructure for many of these alternative energy initiatives is not and will not be in place within the timeline as proposed and.
And the current cost projections are likely prohibitive for widespread adoption.
Despite these pressures the outlook for our core legacy business remains very favorable due to pent up demand.
E&P companies continue catch up efforts on multiyear deferred maintenance as well as ongoing efforts to gain better efficiency out of their new and existing wells.
With that let me turn my remarks to <unk> financial results for the first quarter of 2023.
During the quarter.
We recognized approximately $14 6 million in revenue, which represents a 4% increase sequentially and a 53% increase over the prior year quarter.
The sequential and year over year increases were primarily driven by ongoing customer demand price increases on the products, we sell ongoing historical strength in oil and natural gas prices and continued progress in our strategic diversification efforts.
Gross profit increased to $7 8 million as compared to $6 6 million in the fourth quarter of 2022, and $4 6 million in the year ago quarter.
Gross margin improved to 53, 8% of revenues from 47% in the prior quarter and 47, 9% in the first quarter of 2022.
The increases were the result of greater fixed cost coverage from the higher revenue base pricing.
Price increases and revenue mix between product service customers purchasing product in the period and the contributions from diversified revenue streams as well as typical fluctuations in inventory and warranty reserves.
Total operating expenses for the fourth quarter were approximately $4 5 million compared to $4 3 million in the fourth quarter and $3 9 million in the year ago quarter.
The sequential and year over year increases reflect the impact of head count additions and overall cost inflation across the business.
Net income for the first quarter was approximately $2 6 million or <unk> <unk> per diluted share.
This compares to net income of $1 8 million or <unk> <unk> per diluted share in the fourth quarter of 2022, and net income of 627000 or <unk> <unk> per diluted share in the first quarter of last year.
Cash flow from operations in the first quarter was approximately 474000 compared to a negative $1 2 million in the prior year quarter.
Our inventory balance at the end of the quarter was approximately $10 6 million compared to $10 3 million at the end of 2022.
We continue to see disruptions within the supply chain.
For certain products and expect this will remain for several quarters.
We continue to work with our suppliers to obtain the parts and components that are solutions require and are already looking to secure supplies for 2024.
Yeah.
Overall, we are pleased with the start to 2023, we believe we can maintain the progress in our legacy business throughout the year, which will be aided by our strategic diversification strategy.
We had $16 3 million of cash and liquid investments and remain debt free.
We are excited to announce that our board of directors has approved another $2 million share repurchase program that will run through April of 2024.
We believe our stock is undervalued and that repurchasing stock at current prices is a good way to return value to our shareholders.
I will now turn the call over to Cam to provide an overview of our business Kim.
Thank you Ryan.
Q1 represented one of the strongest quarters in our history, surpassing our strong 2022, Q3 and Q4 results.
As Ryan mentioned the profile team has now achieved eight consecutive quarters of top line revenue growth.
And we continue to improve in.
And delivered consistent operational and financial results across our business.
Our strong performance reflects the chemistry of our industry, leading solutions and customer centric culture, driven by our team.
We remain focused on our strategic initiatives to secure protect and grow our core legacy business and diversification of our revenue streams within the petroleum industry.
As well as the new industries.
This focus guide our research and product development as well as our sales marketing and customer experience strategies.
Let's start with our upstream and midstream business in the quarter, our core market benefited from stability in commodity prices and drilling and complete completion activity <unk>.
Investment in automation, including profile burner management solutions remains paramount to producers and operators as they focus on increased safety and efficiency of their production equipment, reducing onsite emissions and streamlining operational efficiency.
Our share in this market has never been stronger we continue to find new opportunities directly or through our retail partners to retrofit legacy thermal appliances as well as support new construction as drilling and completion activity continues to support global production demand.
Accretive tailwind such as emissions regulations, and ESG pressures continue to support profiles the ability to capture what we believe to be an expanding total addressable market.
We continue to see consolidation as larger e&ps acquire smaller operators, allowing streamlined operations and cost reductions strategically lowering breakeven costs.
We expect this trend to continue and believe that it is a positive outcome for greater adoption of profiles industry, leading burner combustion management solutions.
We have now supported the integration of over 85000 burner management solutions in this part of our business we.
We have successfully executed our strategy to increase our average revenue per BMS unit, adding greater value to our customers as we provide them with complete burner management solutions.
Looking at our natural gas transmission and utility market segment.
Q1 sales activity was on par with our expectations, we continue to find new opportunities for retrofits of legacy thermo appliances with new customers.
Our customer base in this market segment continues to grow as we collaborate on solutions that support upgrading existing heated of clients as well as ensuring new heaters are delivered to site with pro fire solutions installed from the OEM.
This customer base includes Dominion energy National grid, Atco gas national fuel Fortis as well as numerous Oems and strategic partners, such as multiyear pipeline solutions and the life company.
We continue to consider additional partners that have experienced infrastructure and customer relationships in markets, where profile does not have a sales and service presence.
Let's turn to our critical energy infrastructure markets, our focus or what we used to refer to as the downstream side of midstream.
Leveraging our premium brands, we continue to gain meaningful traction.
This diversified market and revenue opportunity.
In the quarter, we completed projects and filled orders with notable customers, including Echo trends midstream enterprise products, DCP midstream and Leach energy transfer and Kinder Morgan.
We also continued to receive orders from Oems, who manufacture thermal appliances for this segment of the energy industry.
In 2022, we achieved triple digit revenue growth year over year in this area of revenue and customer diversification in.
In the quarter, we were able to recognize revenue and received new purchase orders, which could enable us to repeat year over year growth at nearly the same pace in 2023.
New and repeat business with this customer base reinforces our position as an emerging strong and reputable alternatives to traditional incumbents, who have historically owned this market.
Project planning design delivery and execution backed by reliable and performance driven products solutions and service support our customers with an exceptional experience, which we believe will lead to increased growth and specification.
Turning to our progress in non oil and gas and industrial markets.
We continue to build from the successes of 2022, where we achieved over 400% revenue growth year over year, and we continue to see significant opportunities in 2023.
In the quarter, we fulfilled orders for various customers in mining and metal landfill food and beverage and renewable natural gas production.
In the quarter, we were able to receive repeat orders from one of the United States largest producers of renewable natural gas. We continue to look for opportunities to expand our revenue within this exciting and growing industry, which support the production of renewable natural gas and reduction of Cotwo emissions at landfills and agricultural facilities.
Recently, we were invited to scope and assess potential upgrades of thermal appliances at a small batch refinery.
We believe our success performance and track record and our critical energy infrastructure segment will enable us to leverage our project list and capabilities in the refinery and petrochemical industry.
As a result of positive referrals received from an EPC, who we collaborated with on a project in 2022, we have been introduced to several project opportunities, which entail heat treating processes for automotives and metallurgy coding.
We continued business development activities related to projects that support wastewater management solutions as well as potential landfill biogas projects.
Our revenue diversification strategy continues to focus efforts in developing sales and marketing service capability engineering design and support and product development in this space.
We are optimistic that we can continue to attract new customers and deliver on project opportunities, which will strengthen our value proposition and reputation as a leading provider of industrial burner combustion management solutions and technologies.
As we look forward, we remain optimistic that many of the tailwind we benefited from in 2022 and the first quarter, we will continue.
Global demand for energy continues to grow the North American oil and gas industry continues to give indication of investment in automation solutions, and we believe that the oil and gas industry will remain stable.
Lastly, we see a strong customer and need for our products and our diversification strategy.
Research and product development remains critical to our future.
Our strategically balanced approach to focus on short mid and long term product and solution capability remains intact.
We believe profile's value proposition to our existing markets and customer remains strong as our technology solutions engineering capability and technical service expertise continued to provide a compelling alternative to that of our competition.
As we develop both core and new markets. We are confident that our solutions will continue to provide industry with safety reliability compliance efficiency and environmental protection.
Before we turn to questions Ryan and I would like to thank you for your interest in and support of profile to the profile team.
We thank you for your perseverance creativity and commitment to our customers and each other and for the work you do each and every day to enable our ongoing success.
Operator would you please provide the appropriate instructions. So we can get the Q&A started.
Certainly we will now begin the question and answer session to join the question queue. You May Press Star then one on your telephone keypad, you will hear a tone acknowledging your request if youre using a speakerphone. Please pick up your handset before pressing any keys to withdraw your question. Please press Star then two.
We'll pause for a moment as callers join the queue.
The first question is from Rob Brown from Lake Street Capital. Please go ahead.
Good morning Rod.
Nice quarter.
I just wanted to.
Kind of dig in a little bit on the demand environment, I think you mentioned oil and gas being stable and seeing good strength, there, but how do you sort of what are you hearing from customers in terms of that marketplace and demand continuing throughout the year.
What's sort of driving that.
Okay.
Current market.
Yes, certainly we appreciate that I appreciate the question there.
As we look at things from a macro environment from a pricing perspective.
Oil price natural gas price, there, obviously have come down significantly from where they were a year ago.
Historically these are still quite strong prices in e&ps that producers are still making good money with these this level of pricing that we see that as long as pricing holds steady or stable in this environment or it goes up from here.
Which is kind of where we think things are still headed for the next year plus.
Maybe potentially a couple of years beyond that but in that environment. We think that the demand continues to stay as we talked about in our prepared remarks for.
Catch up on ongoing deferred maintenance over the last five plus years and then also significant investments in new technology, focusing on ESG initiatives on increased.
Increased efficiencies.
Challenges dealing with labor and the environment and so forth, but I'll, let can make a few comments on more specifics from what we're seeing from customers directly.
Yes, absolutely as we.
Mentioned in our comments.
See a lot of consolidation we've seen it and we expect that to continue and more of the strategy that we're seeing from E&ps and our customers have discussions with us is not so much the land grab land grabs going on there it's done quite bond is done.
They have more than enough.
Opportunity with acreage.
With permits to keep going so well.
When you look at our customer bases.
They don't necessarily need the capital they needed in the past.
With an acquisition and what but as they continue to do these acquisitions are just going to buy up assets from a lot of the independent you'll see the consolidation which.
The whole goal of it as two to lower their operating costs.
And so as we mentioned in the call.
This perfect storm for pro buyer, where theyre going to need automation, they're going to do it.
We've always talked about how we have this.
Huge addressable market.
It varies year to year based on commodity prices.
While we believe with you mentioned.
ESG pressures.
New legislation from the EPA.
Cleaning things up that if theyre going to keep a well on they're going to keep a heated asset going if youre going to keep a pad running youre going to have a burner management on it and we've seen a large uptick, especially in the last three quarters on retrofits both directly for us.
During them to ourselves as well as with our partners. So.
Customers are.
Not drill baby drill it's a different thing now.
Yeah.
Keeping production steady and slightly increasing it we're still see an increase in production for the year LNG is going to.
We think especially the northeast and the Permian.
They see the opportunity that exists in the world for LNG exports are there they are building towards it.
Okay.
Okay. That's great overview. Thank you and then on the kind of the diversification efforts.
Where is that as a percent of revenue today and how is that pipeline.
Kind of shaping up for the next the rest of this year and into next year.
Yes, so as we mentioned in our last call Q4 call last year in 2022, we saw a significant increase in diversification revenue and success we were at.
6% of total revenues for the year last year for Q1.
We've had a little bit of a slower start to the year as far as revenue coming in during the quarter. We still saw some some good strength in that critical energy infrastructure segment.
It was a little bit slower in the non oil and gas side of things as far as revenue during the quarter.
But we had really good success during the quarter as far as the backlog.
The orders coming in.
Cam do you want to comment on that side of the equation there.
Yes, absolutely.
Sales pipeline activity.
Customers and projects that we're engaging with.
The repeat business.
And repeat I guess opportunity to bid on projects in the quarter was strong.
And so we just think it lenses menu.
Mentioned.
We feel like we can get.
Really good strong growth this year like last year, maybe not to the tune of nearly 400%.
But we do think that we are on a great trajectory with activity that's happening it's always great to get a customer that has is used it for the first time in a year.
Last last year last fiscal year, and then they come back because they've got more projects as we mentioned.
The EPC and engineering consultancy firm that does some very.
Interesting industrial projects, we've done a great job for them on one of their.
Neal plants that they are the engineered core and they have now brought us several opportunities where we're looking at some more heat treating.
Applications for profile.
We're also starting to see that it's starting to branch out into new.
Fees within the United States, and Canada, and as such we we are looking at.
At what point do we add a strategic partner, it's one thing to get something installed and completed an area, but needs to be taken care of and service intermittently. So we're looking at more partners to bring into the profile of the old <unk>.
Areas, where we don't have people.
Okay.
Okay. Thank you very much I'll turn it over.
Thanks, Rob Thanks, Rob.
Once again, if you have a question. Please press Star then one.
The next question is from Jimmy <unk> from Dawson James. Please go ahead.
Yeah.
Good morning, Hey, guys good morning.
Can you talk about pricing.
Any recent pricing actions and what youre seeing on your ability to.
Get price increases.
<unk>.
Tim do you want to comment on that.
Yes.
We of course did some price increasing in 2022.
Also have done it in 2023.
We've been able to to a degree tests that are market to see where we can get to we've also been able to see price increases from our competitors, we know that they've increased their prices.
Within our core legacy business upstream midstream and downstream utility.
Do they like it now do they accept it yes.
The great thing is we've been able to continue to command premium we are the highest price when it comes to that market for burner management solutions, whereas on the other hand.
In our critical.
Critical energy infrastructure space and outside of oil and gas were more on the lower side and we've been able to increase those prices as well.
So.
Really.
We will we have increased our service rates we've increased our.
<unk> parts are not to the degree we'd like to on that side because those are some of the parts and components that people can get just anywhere. So we have to be cautious on that we don't want to give away that business, which we've worked hard to get but on our proprietary products.
Definitely built to raise the prices there.
And are there expectations for additional price increases for the rest of the year.
We'll be looking at a price increase.
No doubt.
The fourth quarter, which again really won't take it.
Correct.
For the following year.
We will be increasing our service rates.
Most likely here in the next quarter as well.
Great and lastly can you address.
Cost pressures.
I've been in Calgary.
Part of that.
Any sort of.
Lingering issues you've had with obtain.
Obtaining the parts that you need I know that that's been an issue.
In the past 12 months or so.
If you can address whether or not that's changed so that the cost pressure on on your parts as well as the availability. Thank you.
Yes for sure.
On the cost pressure side, we certainly are seeing.
A better environment than we were a year ago, a lot of pressure last year at this time and kind of throughout the year, especially on the labor market.
The markets in the main areas, where our people are located have been quite challenging.
Very very good labor rates for employees.
And workers in those areas so.
Finding people keeping people retaining people was quite a challenge throughout 2022.
That pressure is not entirely gone, we think it's come down a little bit it's been a little less pressure a little less turnover.
Some of our areas, but still our employees are feeling the pinch from inflation.
And.
We want to help with that or relief from that of course, and so we do what we can we have gone through our annual kind of reviews and raises process earlier this year.
<unk> made adjustments to labor rates and compensation.
We also had a really good year last year. So we were able to pay out some.
Some bonuses and better bonuses and many years of the path. So we think we're doing the right things to keep our people and to continue to share with them.
The benefits of having a good year here at pro fire.
We expect to again that those pressures will we will continue that the labor market will continue to be.
Challenging and that we want to continue to retain our people for sure.
From a component and supply chain perspective.
Similar story, where we think some of the pressures.
Have eased up a bit but there is still ongoing pressures for key components out of Asia electronics.
<unk>.
Some metals as well so.
As we worked through those challenges and our team has become very good at working through those challenges, helping us keep product on the shelf and coming in the door.
We're finding some relief, but we also find new areas of.
Of difficulty in parts that are either no longer available or have lost some of the quality that they once had and we're having to find other alternatives and work those in through certifications and other processes with our manufacturers. So unfortunately, we see that that pressure is going to probably continue throughout this.
Year, and maybe even into early next year.
In various ways.
We hope that it continues to get better but for example, our newer system the 'twenty 200.
The components for that system are different than our legacy 'twenty 100 system and those for the 2200 system are more challenging to get in that pad.
More price inflation, we've had to go more to broker markets and paid premiums in order to keep those parts moving we do again see some relief coming in the next 12 to 18 months in some of the orders there but it's.
The environment that we are still in and it's still going to continue.
For some time.
Great that's helpful and my last one is.
Ryan in your response, you were talking about the 'twenty two versus the 'twenty 100 can you just.
Just update us on the revenue split between the two.
Yes, I don't have an exact split.
And in even in this quarter.
Some of the benefit that we saw in the gross margin percentage came because we sold a lot more of the 'twenty one hundreds.
A lot less of the 22, hundreds and that was largely an availability challenge with some of those components.
100, <unk> continue to have a better margin at the moment because of all of the things I was just describing in relation to them. We still believe that the 2200 is the future for profile. The 'twenty 100 is nearing its end of life and we've been extending that and had to extend that because.
The supply chain challenges.
But we're moving forward again, we'll be shifting once the supply chain improves and stabilizes for the 2200 were certainly be shifting.
That product to be the main product that we offer but right now Q1.
Again, I don't know the percentages, but the bulk of what we sold would have been in the 2221 hundreds.
Only a few of the 22 hundred's would've gone out and we would have continued to sell 3100 switches.
Again, a good stable product and servicing largely that critical energy infrastructure.
The stream that we are focusing on and <unk> seen good good rates, there as well, but that shift will need to continue to happen over time as the supply chain allows us to do that.
That's great. Thank.
Thank you so much and that's it for me.
Excellent Thanks, Tim.
The next question is from John Bair from ascend wealth advisors. Please go ahead.
Thanks Neil.
Hey, Hey, guys nice quarter, great momentum going there.
I hope it continues to roll along.
Two questions you talked about the <unk>.
Labor issues I guess.
Attaining existing employees and so forth.
I'm curious as to whether or not youre seeing any pressures as you expand into non oil and gas markets are you having to bring in.
New employees to help.
Address that area or is that something that can be expanded upon it internally.
Cam do you want to talk about our efforts on the sales and service side as it relates to those market yeah.
You bet.
John .
So far we've brought on a lot of the talent that we wanted for that space going back.
While the business leader that that leads at all.
Almost eight years ago.
Obviously he has experience in.
And all of our industries, but we.
We've put some horsepower behind that really in 'twenty, one and 'twenty two.
As we go forward and some of the new markets. We're looking at it's more the support in the back and the back end from an engineering perspective and applications tight view of these things.
When we look at it.
Some applications team that can support it so we don't see the need to drastically increase our.
Our sales and service footprint to take care of these industries.
Where we add here and there, yes, we will where we look at them.
Expanding our partner network.
Lastly in areas, where we just don't have bricks and mortar.
We are going to aggressively be looking at that so we mentioned a couple on the call that.
Strategic partnerships with old, they're mainly focused on downstream utility in certain geography areas in the United States.
Well, there's a there's a bunch of area Midwest West.
West Coast.
Even in some of our areas, where we have people, where we want to look to add partners, who have existing relationships with whatever industrial type of plants happened to be in those areas, where we're never going to build the knock on all the doors.
We think.
With what we've been able to do so far.
Those companies who are in those spaces that sell to those types of customers, whether they be asphalt plants or gravel drawing ore mining whatever it might be.
They have partners. They have they have companies that do this type of work and they probably are feeling the pain that how does that people were running into with the incumbent suppliers of automation, especially burner management in those spaces. So we think.
The doors open to a degree where we can come in and provide a.
Very valuable alternatives, so I guess back again to your question.
We're not really needing to add.
Ton of people.
Stan.
We will have to strategically hiring we will.
But for the most part it's a focus on finding those partners who are in those spaces with those relationships.
Oh, that's good.
Good way to leverage.
And then another question on capital allocation and that is at what point would profile consider perhaps initiating.
A small dividend or special dividend something like that as opposed to.
Strictly.
Share buyback alright situation.
What would need to happen to seriously consider doing something like that.
Yes.
An interesting question and we get that on occasion from investors as we meet and speak with them in.
What we find is there is really kind of two camps. One that's either you really want to pay a dividend or to you really don't want us to pay a dividend in <unk>.
As we've talked about it internally.
In your management with the board.
We look at it right now we think that there are other good sources that we can deploy our capital to that are important to us that we want to continue to see growth as opposed to starting to pay a dividend.
Once you start a dividend it seemed nearly impossible to stop it without significant consequences and I understand there could be the concept of special onetime type dividend and we may consider that but right now we think that there are other ways.
That are probably better for us.
We think our share prices at a bargain right now that we haven't gotten recognition over the prior three quarters significant historic record performance.
It hasnt materialized into the share price and that's going to continue then we're certainly going to deploy some capital and buy some shares back.
As we look at other ways to continue to grow I think with our performance and where we think the company is headed we're going to continue to cash flow. So we.
We expect that we should probably be able to fund the dividend from our operating cash flow over the next 12 months, but.
We will see and hopefully after this report is more widely known from from what we published yesterday that the share price might react.
And move up from where it is today, but if it stays at these levels. Then we will certainly be deploying capital to acquire some shares back.
Okay.
Fair enough very good thanks, a lot.
Keep up the good work thank you.
Alright, Thank you Mariano.
This concludes the question and answer session I would like to hand, the call back over to management for closing remarks.
Thank you everyone for joining us on our call today and thank you for all your continued support as always we're available for any discussions or questions. You may have Additionally, we will be participating at the Hutton Conference Tomorrow in New York and three part advisors Virtual conference in June . Thank you, everyone and have a great.
Hey.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
Okay.
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Okay.