Profire Energy, Inc. (NASDAQ:PFIE) Q1 2023 Earnings Call Transcript May 13, 2023

Operator: Good morning, everyone, and thank you for participating in today’s conference call to discuss Profire Energy’s quarterly operating and financial performance for the period ended March 31, 2023. [Operator Instructions] I will now turn the call over to John Beisler, Investor Relations Consultant at Three Part Advisors to get the call started.

John Beisler: Thank you, operator. With me on the call today is Co-CEO and CFO of Profire Energy, Ryan Oviatt; and Co-CEO, Cameron Tidball. Yesterday, after the market closed, the company filed its Form 10-Q with the SEC and first quarter’s highlights in the press release. As always, both of those documents are available on the Investors section of the company’s website. The 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. 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 company’s expected growth, revenue diversification success, planned research and development of new products, the repurchase of company shares, growth in our customer base in the natural gas market, the availability 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 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, 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 May 24, 2023, starting later today that will be accessible via the link provided in yesterday’s press release as well as through the company’s website at profireenergy.com. Following the remarks by Mr. Oviatt and Tidball, we will open the call for your questions. Now I would like to turn the call over to the Co-CEO and CFO of Profire Energy, Mr. Ryan Oviatt.

Ryan?

Ryan Oviatt: 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 is the result of several strategic efforts, including investments in our sales and operations teams, an aggressive product procurement and quality focus, sales price adjustments to combat inflation, and maintaining our high standard of customer service.

We have also benefited from the overall post-pandemic recovery within oil and gas markets. To 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 timelines proposed, 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 multi-year 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 Profire’s 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; 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 headcount additions and overall cost inflation across the business. Net income for the first quarter was approximately $2.6 million or $0.05 per diluted share.

This compares to net income of $1.8 million or $0.04 per diluted share in the fourth quarter of 2022 and net income of $627,000 or $0.01 per diluted share in the first quarter of last year. Cash flow from operations in the first quarter was approximately $474,000 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 our solutions require and are already looking to secure supplies for 2024. 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 have $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. Cam?

Cameron Tidball: 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 Profire team has now achieved eight consecutive quarters of top-line revenue growth, and we continue to improve and deliver 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 in new industries. This focus guides 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 well completion activity. Investment in automation, including Profire burner management solutions, remains paramount to producers and operators as they focus on increased safety and efficiency of their production equipment, reducing on-site emissions and streamlining operational efficiency. Our share in this market has never been stronger. We continue to find new opportunities directly or through our resale partners to retrofit legacy thermal appliances as well as support new construction as drilling and completion activity, continues to support global production demand. Accretive tailwinds such as emissions regulations and ESG pressures continue to support Profire’s 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 Profire’s industry leading burner and combustion management solutions. We have now supported the integration of over 85,000 burner management solutions in this part of our business. 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 thermal appliances with new customers. Our customer base in this market segment continues to grow as we collaborate on solutions that support upgrading existing heated appliances as well as ensuring new heaters are delivered to site with Profire 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 Mulcare Pipeline Solutions and the Blythe Company. We continue to consider additional partners that have experienced infrastructure and customer relationships in markets where Profire does not have a sales and service presence. Let’s turn to our critical energy infrastructure market focus or what we used to refer to as the downstream side of midstream.

Leveraging our premium brand, we continue to gain meaningful traction in this diversified market and revenue opportunity. In the quarter, we completed projects and filled orders with notable customers, including Equitrans Midstream, Enterprise Products, DCP Midstream, EnLink, 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 near triple-digit revenue growth year over year in this area of revenue and customer diversification. In the quarter, we were able to recognize revenue and receive 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 alternative 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 supports the production of renewable natural gas and reduction of CO2 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 in 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 automotive and metallurgy coating.

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 and combustion management solutions and technologies. As we look forward, we remain optimistic that many of the tailwinds we benefited from in 2022 and the first quarter 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 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 Profire’s value proposition to our existing markets and customer remains strong as our technology solutions, engineering capability, and technical service expertise continue 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 Profire. To the Profire 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?

Q&A Session

Operator: [Operator Instructions] The first question is from Rob Brown from Lake Street Capital. Please go ahead.

Operator: [Operator Instructions] The next question is form Jim McIlree from Dawson James. Please go ahead.

Operator: The next question is form John Bair from Ascend Wealth Advisors. Please go ahead.

Operator: This concludes the question-and-answer session. I would like to hand the call back over to management for closing remarks.

Cameron Tidball: 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 EF Hutton Conference tomorrow in New York and Three Part Advisors’ virtual conference in June. Thank you, everyone, 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.