Profire Energy [PFIE] Conference call transcript for 2022 q2
2022-08-05 10:43:09
Fiscal: 2022 q2
Operator: Good morning, everyone, and thank you for participating in today's conference call to discuss Profire Energy's Second Quarter 2022 ended June 30, 2022. I will now turn the call over to Steven Hooser, Investor Relations Advisor for the Company.
Steven Hooser: Thank you, operator. With me on the call today is Profire's Co-CEO and CFO, Ryan Oviatt; and Co-CEO, Cameron Tidball. Yesterday after the market closed, Profire filed its Form 10-Q with the SEC and discussed this quarter's highlights in a press release. As always, both of these documents are available on the Investor 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 the moment to read the Company's Safe Harbor statement. Statements made during this call that are not historical are forward-looking statements. This call contains forward-looking statements, including, but not limited to, statements regarding the impact of commodity prices, supply chain challenges, revenue forecasts, diversification, completion of strategic projects, the Company's expected growth, investment in R&D and new products, testing and sales of new products, the Company's exploration of M&A opportunities 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 facts, results or performance and involve risks, assumptions and the 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 includes certain economic, business, public markets 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 provision 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. I would like to remind everyone that this call is being recorded, and will be available for replay through August 19, 2022, starting later this evening. It will be accessible via a link provided in yesterday's press release as well as on the Company's website at www.profireenergy.com. Following the remarks made by Ryan and Cam, we will open up the call to question-and-answer session. Now I'd like to turn the call over to Co-CEO and CFO of Profire Energy, Ryan Oviatt. Ryan?
Ryan Oviatt: Thank you, Steven, and we welcome all of you who are joining us on the call today. I will start the call by providing some updates on the industry and on our business followed by a review of the financials and then I will turn the call over to Cam to discuss some exciting project wins, overall company outlook, R&D progress and strategic direction. Our second quarter results demonstrate the ongoing progress of our business towards returning to our historical top line run rates through the systematic execution of our business strategy. We have also benefited from a strengthened oil and gas industry and the ongoing global recovery from the pandemic period over the past two years. Revenue, gross profit, EBITDA and income increased meaningfully compared to the prior year quarter. Sequentially our results were strong but were impacted by the ongoing inflation across the business, specifically in direct labor and freight and shipping costs. Despite these headwinds, we posted our fifth consecutive quarter of revenue growth and second straight quarter of post-pandemic net profit and positive EBITDA. Oil demand within the U.S. continues to increase as post COVID activity accelerated from the prior year, particularly as we moved into the summer season. Oil prices have pulled back in the past month after retesting [Hystead] in March. However, supplies remain constrained due to sanctions against Russia related to its war in Ukraine and continued regulatory obstacles in the U.S. at the federal and state level. Despite the pullback, prices remain at their highest level since 2014, leading to an increase in the weekly average rig count, which is almost back to its pre-pandemic level. The continued inconsistent messaging from the current U.S. administration is unlikely to lead to a meaningful increase in activity from E&Ps going forward, combined with the labor shortages and the delays within the supply chain to obtain the necessary parts to repair or upgrade existing wells and associated production equipment. Gas prices are more likely to decrease due to demand destruction related to the recession concerns and consumer budgetary constraints than from the effects of bringing on additional supply. So far this year, the U.S. has reduced his strategic petroleum reserves by 21% in an effort to lower gas prices at the pump. But this has had only a marginal impact so far. The SPR now sits at only 66% of its authorized capacity. In the past week, the Biden Administration and the Democrat controlled Senate has been pushing legislation that includes massive credits, incentives and funding for converting home appliances and vehicles to electric models. If this legislation passes both the Senate and the House, it will put additional short term and long term pressure on the electric grid and electricity supply. As of 2021, 79% of all energy consumed in the United States was generated through fossil fuels. Only 19% of all electricity produced in the U.S. was generated through renewable sources. We believe energy diversification over time is possible and necessary, but that oil and natural gas must be an essential part of this transition for many years to come. Because of these pressures, combined with other global challenges on oil and gas supply, we believe commodity prices and prices at the pump will remain high for the foreseeable future, which should be positive for our business going forward. With that, let me turn my remarks to provide some additional details on Profire's financial results for the second quarter of 2022. In the quarter, we recognized $9.6 million in revenue compared to $9.5 million in the first quarter and $6 million in the prior year quarter. The year-over-year increase is the combined result of the increased activity related to the ongoing economic recovery, higher oil prices and consistent execution of our revenue diversification strategy. Gross profit for the quarter was $4.4 million as compared to $4.6 million in the first quarter of 2022 and $3.3 million in the year ago quarter. Gross margin in the second quarter was 45.7% of revenues compared to 47.9% in the first quarter. The decrease in the current period is due primarily to higher direct labor and freight and shipping costs. Gross margin increased 170 basis points compared to the second quarter of 2021 due to better fixed cost coverage resulting from the higher revenue base. Total operating expenses for the second quarter were approximately $4.3 million compared to $3.9 million in the first quarter and $3.3 million in the second quarter of 2021. The sequential and year-over-year increases reflect the significant inflationary cost pressures on our business, in particular all labor related costs and travel and vehicle related expenses. Labor costs are also higher due to our restaffing efforts in response to the industry recovery over the past year. Specifically G&A expenses for the quarter increased 36% year-over-year. R&D expense increased 20% from the prior year also due to inflation on labor and additional certification activity. Depreciation and amortization decreased 4% compared to the same year ago quarter. Net income for the second quarter was approximately 284,000 or $0.01 per diluted share. This compares to net income of approximately 627,000, or $0.01 per diluted share in the first quarter, and a net loss of 397,000 or $0.01 per share in the second quarter of last year. Cash flow from operations in the second quarter was a positive $1.8 million compared to a negative 265,000 in the prior year quarter. This quarters increase was due to operating cash flows and normal movements and working capital balances. During the quarter, we repurchased an additional 451,000 shares of our common stock for approximately $611,000. This completed our $2 million repurchase authorization from last September. In total, we repurchased more than 1.6 million shares or roughly 3.4% of shares outstanding when the repurchase program began. The average purchase price was $1.22 per share. We continue to evaluate future repurchase plans as part of our ongoing capital allocation strategy. Our inventory balance at the end of the second quarter was approximately $9.3 million up from $7.7 million at the end of the first quarter, and $7.2 million at the end of 2021. We continue to experience inventory delivery disruptions related to supply chain issues. However, our ongoing efforts to get inventory in the door should allow us to support our customers and address our backlog of orders over the coming quarters. I will now turn the call over to Cam to provide an overview of our business. Cam?
Cameron Tidball: Thank you, Ryan. As mentioned previously, Profire's Q2 results represent five consecutive quarters, wherein we have achieved growth in top line revenue. Though Q2 results were relatively flat, this is primarily due to supply chain constraints, and resulting impacts on available inventory, as opposed to a slowing or a softening in customer demand. The Q2 results were in line with our comments from the previous earnings call. Our opportunity pipeline continues to strengthen and backlog of business has grown to historic levels. Although we will continue to face supply chain challenges, we remain confident in our ability to manage through this and to create continued momentum for top line revenue growth and profitability. We have begun to see increased inventory from the strategic orders placed at the start of this year. Shipments are arriving at our facilities on a more regular basis, which will help us chip away at the sales order backlog in the second half of the year. Our sequential improvement as well as our strong opportunity pipeline demonstrate ongoing progress in our traditional markets, as well as in our strategic diversification initiatives. Profire technology and solutions remain the market leader in the upstream, midstream and downstream transmission energy segments. Our market share in these business lines continues to grow as evident from our robust backlog. The key drivers that impact demand from our customers in our traditional end markets include; commodity pricing, rig count, well completion and North American oil and gas production. During the quarter, the WTI price per barrel was $108, which is a 14% increase from the previous quarter, and a 64% increase from the 2021 Q2 average. The combined onshore rig count for the U.S. and Canada averaged 810 in the quarter, which is down 1% from the previous quarter, primarily driven by the normal seasonality in the Canadian market. Overall, the onshore rig count is up 59% as compared to the same quarter of 2021 or a 36% increase as compared to the 2021 full year average. The U.S. drilled but uncompleted well count or DUC count continued to decrease to 4,245 at the end of the quarter. Remaining DUCs at the end of Q2 represent a 52% drop from its peak count in June of 2020. Additionally, we believe hydrocarbon based energy is a requirement to meet global energy demand. United States and Canada continue to lead the world in clean ethical production of oil and natural gas. The industry will continue to face headwinds. However, we are encouraged by an increased pushback from industry leaders promoting the benefits of this valuable resource. We expect North American oil and gas production to continue to ramp as demand continues to increase. U.S. shale oil production is forecasted to grow by 1.4 million barrels per day in 2022 as compared to year end 2021 with an additional 1 million barrels per day increases in 2023 and 2024. Due to the tight supply of drilling and completion goods and services, we expect moderate increases through the second half of 2022. Based on this data, and indications from our customer base, we remain confident that Profire is positioned well to continue our success into the second half of 2022 and beyond. Our existing size and operating structure is positioned to support this forecasted growth with minimal headcount addition. Our solutions continue to bring value to our customers as we support critical imperatives related to safety, operational efficiency, and environmental protection. As an update to our strategic diversification initiatives, we continue to gain traction and win projects related to large midstream plants, and alternative industries. We are encouraged by the results year-to-date, the projects we have completed, and the sales orders we have received in Q2 are planned to be completed in the third and fourth quarters of this fiscal year. We continue to add customers and their repeat business for heater applications found at large stream midstream plants. Based on our current run rate and the opportunity pipeline, we expect to be able to more than doubled 2021 revenue in this growth segment in 2022. Currently, we are tracking to exceed $1.5 million in this segment alone for the fiscal year. Turning to R&D, we remain focused on strategic investments in our research and product development initiatives, which will contribute to our near mid and long-term success. Implementing this balanced strategy aims at bringing solutions to our current customers and industry, as well as preparing for the future needs of tomorrow's customers. We continue to conduct research related to potential solutions to further improve efficiency and lower emissions of heated appliances. We believe these efforts will support our customers ESG initiatives relating to lowering their overall GHG emissions and methane intensity. Last quarter, we announced that we had begun the field trials and beta testing of a Profire developed solution focused on solving a significant pain point that our upstream, midstream and downstream transmission customers experience related to the collection and reporting of real time carbon emissions data. This solution also provides a low cost effective remote monitoring solution for isolated appliances without telemetry connections. We continued product trials through Q2, and are optimistic about the continued interest and valuable feedback we have received. During the quarter, we continued development on the user experience, as well as other integration requirements. We expect to begin quoting and strategic sales activities in the third quarter. We look forward to keeping you up to-date on this exciting initiative that has the potential to provide Profire with a recurring revenue stream. I'm excited to report on and give an update on some new project wins. In Q1, we closed our largest non-oil and gas deal in the history of Profire. In the second quarter, we were able to surpass this achievement as we were successful on winning a significant renewable natural gas project. Repeat business, increased presence and interest in our solutions in renewable natural gas, biogas, metal manufacturing, food and beverage, LNG and landfill continue to add credibility to Profire in this growth segment. On our Q1 call, we announced that we expected to achieve triple-digit revenue growth year-over-year related to this diversification initiative. Based on Q2, its performance and the projects we expect to close in the coming quarters. We now expect to reasonably exceed the $1 million annualised run rate we referenced in our Q1 forecast. Our sales team continues to gain confidence and valuable contacts in new industries. We are able to leverage our service team members' expertise and technical prowess as we execute projects in these industries. Our project execution team members exceed customer expectations on design, documentation and delivery. The overall experience with Profire is proving to be a strong differentiator in these exciting new markets. The future remains bright for Profire and our shareholders. Our team is strong, creative and committed. We are executing on our strategic growth initiatives. Drivers of our traditional business are pointing in our favor. We are seeing early and positive returns to our investment in our diversification endeavours. Investment in product and solution development continues to be paramount to our future. We continue to be diligent in looking for and assessing partnerships and potential mergers and acquisitions as part of our overall capital allocation strategy. Before we turn to questions, Ryan and I think each of you, our team members astound us with their commitment to our vision, mission and success. We thank our shareholders for their confidence in us as management and in the team at Profire. With that, I will now turn the call over to the operator to start the question-and-answer session.
Operator: Thank you. [Operator Instructions] The first question comes from Rob Brown with Lake Street Capital Markets. Please go ahead.
Operator: The next question comes from John White with ROTH Capital Partners. Please go ahead.
Operator: [Operator Instructions] The next question comes from Jim McIlree with Dawson James. Please go ahead.
Operator: That is all the time that we have for questions today. And I'd like to have the call back to management for closing remarks.
Ryan Oviatt: Thank you, operator. Thanks, everyone for joining us on our call today to discuss our second quarter results. We'd like to thank all of you for your continued support. As always, we're available for any discussions or questions you may have. We will also be participating in several investor relations conferences in the next few months including the three part advisors IDEAS Conference in Chicago later this month. The Lake Street Capital Markets Conference in New York in September, and the Dawson James Conference in Florida in October. We look forward to meeting many of you at these events and thank you and have a great day.
Operator: This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
