Q2 2023 Profire Energy Inc Earnings Call
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Good morning, everyone and thank you for participating in today's conference call to discuss profile entities quarterly operating and financial performance for the parent period ended June 30th 2023, I will now turn the call over to John B Beitler Investor Relations consultant.
A three part advisors to get the call started please go ahead.
Thank you operator with me on the call today is the co CEO and CFO of provider energy, Ryan Oviatt and co CEO Cameron Tidball.
Yesterday after the market close the company filed its Form 10-Q with the SEC.
That's the quarter's highlights in a press release.
Both of those documents are available on the investors section of the company's website.
This call will be posted in the coming days.
I'll begin today's call I would like to take a moment to read the company's safe Harbor statement.
That's made during this call that are not historical are forward looking statements. This call contains forward looking statements, including but not limited to statements regarding the company's expected growth revenue diversification product availability industry efforts in the production of clean energy growth in our customer base in the natural gas.
Market inventory balances potential acquisition opportunities the availability of company resources to make beneficial investments in 2023 and into 2024 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 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 this release.
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'd like to remind everyone that this call's being recorded and will be available for replay through August 24th 2023, starting later today.
It will be accessible via the link provided in yesterday's press release as well as through the company's website at profile energy Dotcom.
Following the remarks by Mr. Adelphia and football we will open the call for your questions now I would like to turn the call over to Nick Coe, CEO and CFO profile energy Mr. Ryan Oviatt Ryan. Please go ahead.
Thank you John .
And welcome to all of you who are joining us on the call today.
Our second quarter 2023 results reflect the sustained momentum across our business.
We recorded our fourth consecutive quarter of revenue in excess of $12 million and posted our highest ever quarterly net income and EBITDA for.
The last six month, and 12 month periods represent the best ever consecutive six and 12 month periods in company history.
We are excited about the path, we're on and our ability to continue to operate at these record setting level.
We are a much better and stronger company today than we were when we last achieved this level of quarterly revenues profits and cash flows.
We have more products to offer our customer base is larger our technology keeps getting better and better and we believe the outlook for our business is strong for the next several years.
This quarter's performance is the result of a number of strategic actions taken over the past 12 to 18 months, including.
Strategic staffing efforts investments and revenue diversification initiatives inventory management and response to supply chain issues and pricing initiatives.
Offset inflationary pressures.
As we have previously stated we believe hydrocarbons will continue to play a significant role in global energy requirements for the foreseeable future.
Recently multiple LNG projects have been announced that will add billions of cubic feet of.
Of capacity.
<unk> expects global demand for LNG to increase more than 50% over the next decade.
EQT one of our top customers for the past several years is the U S is the largest natural gas producer and it's one of the major players in the LNG production space.
We subscribe to their mantra that quote unleashing U S LNG and replacing international coal with American natural gas is the largest green initiative on the planet and the world's best weapon to address climate change and quote.
Okay.
As they stayed so eloquently theres, a great opportunity to help the climate and to meet our own and the rest of the worlds energy needs through the clean production of U S natural gas.
World continues to demand more energy in all of its forms not less.
The recent upward moves in crude oil and natural gas prices in July .
Or a tailwind to our business, particularly as E&P companies continue their focus on maintenance that has been deferred for many years as well as invest in improved efficiency and ESG initiatives.
The EIA short term energy forecast for July shows a reversal of their same forecast at the start of the year as it relates to oil prices.
The forecast now shows prices increasing for the next 18 months into the Eighty's.
Even though we have already surpassed that in the month of July alone.
Similarly, either natural gas forecast continues to show a price is getting back to the mid to upper $3 range.
These forecasts combined with the capital discipline being demonstrated by U S and Canadian exploration and production companies is part of what gives us confidence in the strength and resilience of the oil and gas industry for the next several years.
With that let me turn my remarks to profile, our financial results for the second quarter of 2023.
Okay.
During the second quarter, we recognized $14 4 million in revenue compared to $14 6 million in the first quarter and $9 6 million in the prior year quarter.
Typically <unk> revenue for the second quarter declined sequentially as oil and gas activity slows entering the summer months and the resulting from the spring break up cycle in Canada.
For comparison in the two years prior to the pandemic second quarter revenue decreases were approximately 7% compared to the first quarter.
The year over year increase was primarily driven by ongoing customer demand pricing initiatives and continued progress across our strategic diversification efforts.
Gross profit for the second quarter was $7 4 million compared to $7 8 million in the prior quarter and $4 4 million in the second quarter of 2022.
Gross margin was 51, 3% of revenues compared to 53, 8% in the prior quarter and 45, 7% in the second quarter of 2022.
The sequential decrease is primarily related to the product and customer mix.
While the year over year increase was the result of the greater fixed cost coverage from higher revenues.
Price increases as well as typical fluctuations in inventory and warranty reserves.
Total operating expenses for the second quarter were approximately $4 2 million compared to $4 5 million in the first quarter and $4 3 million in the year ago quarter.
The sequential and year over year decreases reflect the non recurring recognition of the second half of an employee retention tax credit available through the cares Act.
Which more than offset the impact of head count additions and overall cost inflation across the business.
Net income for the second quarter was approximately $2 9 million or <unk> <unk> per diluted share.
This compares to net income of $2 6 million or <unk> <unk> per diluted share in the first quarter of 2023, and net income of 284000 or <unk> <unk> per diluted share in the second quarter of last year.
Okay.
Cash flow from operations in the second quarter was approximately $1 3 million compared to $1 8 million in the prior year quarter.
Our working capital balances are strong and have the ability to continue to generate positive cash flows for our business in the coming quarters.
We continue to monitor these balances and work to optimize them where possible in the challenging supply chain environment, we have to operate under.
Our inventory balance at the end of the quarter was approximately $13 million compared to $10 6 million at the end of the first quarter.
Our efforts over the past six to 12 months to procure the product and components necessary for our solutions is starting to pay off.
Though there are still issues with sourcing and quality from certain suppliers.
We continue to think long term and are already.
Already working with our suppliers to ensure we will have the necessary product for 2024 to support our customer demand.
As noted above we are optimistic about the second half of 2023 and 2024.
Thanks to the strength of our legacy business, our diversification efforts and a robust sales pipeline.
We ended the quarter was $17 4 million in cash and liquid investments and remained debt free.
Late in the quarter, we were able to begin repurchasing stock under our previously approved and announced share repurchase program.
We repurchased approximately 47000 shares of our stock in the period.
We continue to evaluate opportunities to use our cash beyond the share repurchase program, including increases to our sales and marketing spend.
Allocating additional resources to product development and potential acquisition opportunities.
With that I will now turn the call over to Cam to provide an overview of our business Kim.
Thank you Ryan.
Q2s performance represented our second best topline revenue quarter in the last 12 months and as Ryan mentioned ranks amongst our best results in company history.
Our team continues to deliver strong financial performance as a result of consistent operational execution and focused delivery of an excellent product with superior customer experience.
Our customer centric team and culture remains focused on our strategic initiatives support and attention to our traditional legacy business, coupled with strategic development of diversified revenue streams within the energy industry as well as new industries remains paramount to our strategy.
This consistent focus throughout the organization guides, our sales and marketing strategies as well as our product and business development process.
Commodity prices drilling and completion activity as well as our customers ESG initiatives impact pro fire's revenue in the upstream and midstream energy segments.
In the quarter W. T I averaged $73 per barrel slightly below Q1s average of $76 per barrel natural gas prices averaged $2.16 in the quarter.
Versus $2 64 and quarter one.
Drill count in Q2 averaged 815 versus Q1s average of 977.
U S completions.
Activity declined with a monthly average of 1013 in Q2, while Q1 averaged 1101.
Despite the softening of some of these industry metrics, our business remained steady due to customers continuing their focus on internal ESG goals related to improving emissions, increasing automation and lowering overall carbon footprint.
Fire products and solutions play a significant role in lowering the requirement for gas driven nomadic devices, increasing combustion efficiency of heated appliances maximizing uptime of equipment that ensures destruction of volatile organic compounds and decreasing the necessity for site visits from operators.
All of these factors contribute to the reduction of greenhouse gas and methane emissions that our customers operations Profiler technology supports the clean and efficient production of crude oil and better positions producers to develop and provide affordable reliable clean natural gas, which we believe to be one of the globe's most impact.
Full tools to support the world's current and future energy requirements.
We continue to support upstream and midstream customers, such as EQT, Chesapeake Chevron Conoco Oxy funeral and many more as they bring on new production retrofit existing pads and fields as well as seek opportunities to increase efficiency and lower emissions as they continued to produce the valuable.
Is critical to rural a reliable energy infrastructure.
In the quarter, we continued to gain momentum with our proprietary burner technology, which is being used by a major producer in Canada to achieve significant reductions in the amount of fuel gas required on site by as much as 35% that's drastically lowering the burden and impact of federal carbon taxes on their business.
As well as a reduction in their C O two emissions.
We continue to demonstrate that our solutions can help customers increased efficiencies, thus lowering their overall emissions and operating costs.
In the quarter, we commenced the project with a major producer in the Permian basin, which could lead to significant upgrade opportunities stemming from our expertise in optimizing combustion efficiency of heated appliances.
Our proven experience and supporting our customers and dealing with operational challenges related to emission.
<unk> and protection of human life, and asset continues to elevate profilers reputation as the leading provider of burner and combustion management solutions.
Our success in the upstream and midstream business leverages into the downstream utility and natural gas transmission markets.
We enable operators in this space to achieve safety automation and appliance efficiency or customer basis supported by valued distribution partners as well as direct end user relationships.
We continue to develop this area of our business with our existing sales force and through efforts to expand our partner and distribution network.
As part of our diversification strategy revenue generation and critical energy infrastructure continues to grow.
This space is characterized by applications that perform critical functions related to the treating processing.
NGL fractionation storage and transmission.
Customers, such as Kinder Morgan Enterprise products Williams, Tc energy energy transfer MPLX, Alta gas and DCP midstream represent a small sample of the customers. We are working with to support new construction as well as retrofit activity.
In Q2, we saw an increase in projects delivered and the associated revenue coupled with some exciting bids with existing and new customers for future projects. We believe this momentum will enable us to achieve our annual revenue targets in this diversified space.
Turning to our diversification progress in non oil and gas and industrial markets.
As expected and communicated previously our progress from a revenue.
Revenue recognition and project wind perspective has been inconsistent on a quarterly basis sales and project cycles. In this space are longer than our traditional legacy business. Despite our results to date, we remain extremely encouraged by the quantity of projects. We're bidding the volume of purchase orders received as well as our sales pipeline.
In the quarter, we installed and commission projects related to food and beverage production managing vented hydrogen supply at a lithium battery factory incineration of biogas at a renewables landfill.
Critical amine re boilers utilized at waste management landfills as well as maintenance and support at a pulp and paper mill.
We also continue to find and received new opportunities for projects from repeat customers.
Profiler continues to gain traction with renewable natural gas producers, who collaborate with landfills to take biogas and transform it into pipeline quality renewable natural gas.
We see this area as a growing market for pro fire and an area, where our technology and expertise are easily leveraged.
On our Q1 call. We mentioned that we were invited to scope and assess potential upgrades for thermal appliances at a small batch refinery. We are excited to report that we have been awarded a purchase order to conductive engineering feed study, which we believe could result in formal bids to retrofit several heaters within the refinery.
Towards the end of Q2, we began talks with a leading provider of steam reforming gasification systems that are used that state of the art integrated bio refineries facilities.
Since our initial discussions we have submitted a proposal to support applications, which take biomass material and transform it into jet fuel we have been shortlisted and believe that we have a strong chance to win this project, which will again add to our growing list of applications that we can support with our technology and solutions.
Revenue diversification in oil and gas as well as the new industries remains a critical area of focus for profile, we continue to invest resources in support of our growing customer and application base. We remain optimistic that we can continue to attract new customers partners and applications with our technology solutions Prada.
<unk> process design and support.
We are confident that our brand and value proposition and reputation as a leading provider of industrial burner in combustion management solutions and technologies will continue to increase.
Our research and development investment remains critical to our future.
We continue to employ a strategically balanced approach to short mid and long term product development and research.
We continue to place time and energy on the investigation of accretive acquisitions, our strategy remains intact to pursue opportunities that will help us in smart and strategic growth.
Before we turn to questions Ryan and I think you individually for your interest in and support of profile to our team. Thank you for your contributions to supporting our customers our business and our team what you do each day. It makes a difference to the safety of our customers the protection and efficiency of their equipment and the protection of our environment.
Operator would you please provide the appropriate instructions. So we can get the Q&A started.
Of course, 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 Victoria.
Please press Star then two.
The first question comes from Jim Mcilroy with Dawson James. Please go ahead.
Yes, thanks, good morning.
Hey, guys.
In your commentary I was a little bit confused is it seemed like.
You were pointing to certain aspects of the market that would suggest.
Either a slowing or a.
You know a peaking out of growth, but other parts you seem to be.
Much more bullish.
Just hoping you could maybe re characterize what you're seeing in the market right now or are you.
Any weakness or any and.
And pulled back from your customers.
Yes, good question Jim.
I'll, let cam comment as well on this but.
It's the crazy market that we're in right there are signs that show both ER.
Positive and potential pullback.
The broader economy, there is still talk about whether or not a recession will happen. Some believe we're past it some believe it's still coming.
We're kind of.
Of the opinion and hopefully our prepared remarks indicated at least some of this that despite any of the short term movement kind of upward down, which we've talked about Q1 to Q2.
July as a result.
We think kind of the longer term over the next one to two years that the oil and gas market is going to remain strong.
There is upward movement.
Natural gas is going to continue to be.
Major need just like I mentioned about EQT and their view of American natural gas and LNG and the potential that the.
The U S has there with that and we certainly believe that we buy into the that message and that our customers are going to continue to benefit from those types of movements in the market. So yes, we do see some of that kind of shorter term quarter to quarter volatility up and down and.
And that does have.
The impact on our business. We did try to also highlight that even though the movement in some of those metrics were larger Q1 to Q2. It didn't have as big of an impact on our business.
Because of a lot of the strategic things, we're doing but also because of the effort that our customers continue to demonstrate their discipline and how they are investing in their businesses right now.
Kevin anything you want to add to that.
Yes, I guess, the only thing I would add to that Ryan is the fact that our customers' sentiment is still the same they're focused on making their share of shareholders' money not at ensuring a stability in the supply and demand.
On the supply side in an energy markets in United States, and Canada, but when it comes down to it again as Ron mentioned some of the metrics soften slightly but even since the end of Q2, we've obviously seen an increase in oil price.
Natural gas price, we believe is going to go up and all these things help us, but again the underlying tone of what profiles products and solutions do for our customers.
Yeah, you know, we're seeing this deferred maintenance deferred capital allocation to automation strategies moving to more efficiency to avoid them.
Carbon taxes in the Canadian market. All these things are perfect for pro fire solutions to come in and support and help so we still feel very optimistic about things. Despite some of the metrics softening, obviously to a larger degree than our than our revenue in the last quarter.
And Ryan you talked about the quarter to quarter.
Change in in this year is much stronger than it was prior to the endemic is there any is there a chance that maybe some of your customers were pulling in.
Orders.
In order to avoid a price increase or they're looking at inventory issues as well I mean is there a little bit of a.
Potential that that customers were.
We're ordering now for fear of what might be coming.
In the second half.
Cam do you want to take that one.
You know our pipeline right now is its very strong meaning the orders that we've taken that we haven't delivered on there definitely is.
The idea out there and we've planted it we've played it back even prior to 22022 is to that that the orders need to be in.
In order to ensure that product is there and available we saw we thought we'd see more of a spike at the end of last year or two to avoid price increase but I think customers. Just believe it's going to happen you see it more from resellers and Oems and you do end users.
Any of our clients and customers that stock inventory and things like that you saw a little bit of it but for the most part we've kind of seen a little bit of more of a normal behavior now, but customers are still ordering out further in advance than they had in previous years by far.
Okay. Thank you and my last question is on.
On the inventory and receivable balances at just.
I know you you've been.
Working hard to bring these down but it just seems to be.
Yeah.
Very difficult. So I'm wondering if maybe we I shouldn't I should stop expecting those balances to come down and maybe that's just the cost of being in business right. Now is to have those high receivable and inventory balances.
Yes, good question and it's certainly something that's on our minds and we continue to monitor.
I would probably characterize our actions as of late and even up until now more about training.
Trying to make sure we have enough product than strictly on bringing the balances down.
Coming out of the supply chain challenges related to Covid and the pandemic.
Ben and have to order parts.
Sometimes at least a year in advance in order to ensure that we will have it when we need it when our customers want it and.
And even then we still have a backlog of orders so.
That's where the focus has been we are seeing things continue to get a little bit better kind of every day and in that regard, but there is still as I mentioned have a ways to go we still have some quality issues and availability issues with certain customers. So from an inventory perspective, I'm optimistic that it will come down is that going to come.
Down next quarter I can't guarantee that we are still looking at what do we need to have on hand, what do we need to have an order for 2024 to get us through that timeframe.
So we still have a lot that is on order and there are some timing challenges of when that's going to come in when it's going to be available specifically in Q2.
A lot of the product that we put an order in Q4 of last year was finally, starting to flow in in a consistent manner. So that's been part of that increase of just over $2 million in inventory that we saw in Q2.
We also have continue to have the dynamic of the eventual shifts from our 'twenty 100 product to our 2200 product.
The 2200 components and systems have been much harder to get over the last year and a half then the 'twenty 100. So we've been building inventory on both of those and then the switching is a challenge because we can't go back and forth with our customer we can't sell them 21, hundreds today 22, hundreds next week.
Switching back to 'twenty, one hundreds after that they don't really like that behavior. So we have been building a bit more supply on the 2200 side and now that we've got that we can start switching customers over and know that we'll be able to continue to supply them with those newer systems.
Going forward. So there are a number of dynamics in there over the longer term I would say over the next 12 to 18 months, we certainly want to be bringing those balances down, but we also care more about making sure we have the product on hand to sell to our customers then.
The reverse of running out.
On the AUR side.
Some of that is timing as well, even with excuse me even within the quarter.
We see some lumpiness in the months and Thats been with kind of some of the labor challenges that we've had we've had some turnover here and there in the warehouses and then had to re staff mid quarter and then also the timing of when products coming in during the quarter. So in this last quarter, we had a lot more product available in.
June than we did in April and so we were able to shift more out that just means that that flows later into a R.
In the quarter than than if it were smoothed every month. So again, just some timing issues largely I think <unk> will be able to come down sooner than.
Okay.
That's great. Thanks, a lot guys. That's it for me.
Thanks, Jim.
The next question comes from Rob Brown with Lake Street Capital markets. Please go ahead.
Hey, Rob Good morning, Ken Good morning, Kevin Ryan.
Just just wanted to follow up on the pricing kind of changes that you've made is that fully now kind of implemented and in results or is there still more to go there in terms of that.
What you see in terms of margin.
Cam do you want to tackle that one.
Yeah, you bet. So yeah fully implemented the obviously the 2023 price changes, but with that being said.
Some of our resale products and even some of our proprietary products. If there is a change in our ability to procure the prices.
They continue to fluctuate we pass those along to the customer we've been able to hold our own proprietary products for the most part for the year, but we've had some of those that we have to move here and there, but it's well expected that we will be looking at price increases for 2020.
For years as well, it's just the way it is and Nobody's business is becoming a less costly to run it's only more cost and that has to it has to go somewhere but for them.
Really we've been able to implement across we don't have any old outstanding orders really of any substance that are still on old pricing.
Okay, Great and then in terms of where are you at in terms of your diversification of revenue are you I think your goal was.
So, 10%, plus but where where is that at today.
We are on the critical energy infrastructure side or what we've called in the past like the downsides.
History of downstream of midstream.
We're ahead of targets for ourselves the internal targets, we set for angles that we set for ourselves we're doing very well there in terms of revenue recognition as per their remarks on the call.
In non oil and gas, we're behind where we'd like to be however, we're still.
<unk> on track to do better than last year, but the sales orders we've brought in exceed where we were last year. So we will definitely have an increase the ability to hit.
Still potentially in that realm to be able to hit that 10%.
But.
What we're really encouraged about is just the number of bids and the opportunities and the breadth of our solutions.
Solutions that were being invited to participate because of reputation that is growing.
The Oems that we've supported on some projects last year the year before and into this year, they're taking that further those Oems often deal in multiple industries. So we're getting lots.
Great traction there.
Starting to see.
A little bit more coming from the chemical side as we invest the time and talent to that space and as I mentioned on the call here earlier we're.
We're really excited about one of the opportunities we have in that Regasification market again, so renewable space, it's something that has been proven and there's a global footprint and appetite for that which could help expand our products and we're working with an OEM in that space, we're working direct with end user in that space.
As well as an engineering firm or.
All within the last six months, we've started those discussions and now into project bids so.
Behind on the I guess overall on that kind of a stated target of 10%, but still within reach still.
Progressing nicely and very optimistic about where we're going with our with the amount of bids that are out there in terms of a dollar value in quantity.
And I would add to that that those jobs are sizable.
It doesn't take a lot of those wins to help us kind of move that needle as well. So we are as Ken said very excited about the size and the number of opportunities still in front of us and the likelihood that we should be able to achieve them.
Okay, great. Thank you I'll turn it over.
Thanks, Rob.
Once again, if you have a question. Please press Star then one.
The next question comes from John Bair with ascend wealth advisors. Please go ahead.
Good morning.
Can you hear me.
We got to.
Yeah.
Yeah, We got you John .
Sorry, operator, we lost John .
Yeah.
Operator.
Yeah.
Seems we're having some technical difficulties everyone hold on and the operator will help us here.
Yeah.
Yes there.
There are no more questions in the queue I would like to hand, the call back to management for closing remarks.
Thanks, everyone for joining us on our call today and thank all of you for your continued support as always we're available for any discussions or questions. You might have also we will be participating at the three part advisors ideas conference in Chicago on August 23rd and the Lake Street Investor.
Conference in New York on September 14th Thank you, everyone and have a great day.
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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