Profire Energy Q2 2024 Earnings Call Transcript

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August 8, 2024

There are 5 speakers on the call.

Operator

Good morning, everyone, and thank you for participating in today's conference call to discuss Profire Energy's quarterly and financial performance for the period ended June 30, 2024. I will now turn the call over to Steven Hooser, Investor Relations Consultant at 3 Part Advisors to get the call started.

Speaker 1

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 discussed the quarter's highlights in a press release. As always, both of these documents are available on the Investors section of the company's website. The transcript of this call will also be posted in the coming days.

Speaker 1

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 revenue diversification success, ability to support growth and diversification, the increase in global and domestic demand for natural gas, crude oil and LNG, future performance in new and existing markets, OpEx production cuts, increased drilling activity, sales pipeline, the increased necessity of hydrocarbons, potential M and A opportunities, material increases in the U. S. Power generation, stock repurchase plan, product development and introduction and the company's future financial performance.

Speaker 1

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 provision and 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.

Speaker 1

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 22, 2024, starting later today. It will be accessible via a link provided in yesterday's press release as well as through the company's website at www.profireenergy.com. Following the remarks made by Mr. Oviatt and Mr.

Speaker 1

Tidball, we will open the call for your questions. Now, I would like to turn the call over to our Co CEO and CFO of Profire Energy, Mr. Ryan Oviatt. Ryan?

Speaker 2

Thank you, Stephen, and welcome to all of you who are joining us on the call today. Our Q2 results represent another strong performance for the company, with the 2nd highest quarterly revenue in company history, an increase in gross margin and higher year over year net income when adjusted for last year's tax credit. The revenue growth is coming across all aspects of our business. We continue to experience healthy demand for our legacy products, generated our highest quarterly service revenue in company history and continued traction across our diversification efforts, which accounted for 15% of total revenue in the quarter. In the 1st 6 months of the year, our diversified revenue has significantly outpaced the same period of 2023.

Speaker 2

The underlying fundamentals for our business remain very favorable. Demand for electricity continues to increase through the growth of data centers and the electrification of the home through additional electronics and charging of EVs. The EIA predicts that the U. S. Will use 3% more electricity in 2024 compared to 2023 and that consumption will grow again by an additional 1% in 2025.

Speaker 2

60% of the U. S. Electricity production still comes from natural gas and coal, which isn't forecast to change materially anytime soon. LNG will continue to play a larger role in the global energy market. Shell predicts global demand for LNG will expand by 50% by 2,040 as China and other Asian countries switch from coal to natural gas.

Speaker 2

As we have stated before, these trends are positive for Profire's future as we continue to supply the energy industry, safety and automation solutions that reduce the impact on the environment. Oil prices have fallen below $80 per barrel in recent weeks due to signals of slowdowns in global economies despite the ongoing geopolitical tensions in the Middle East. OPEC Plus's production cuts are expected to continue for 3 additional quarters which should keep upward pressure on oil prices over this period. These actions combined with any further We remain very optimistic about our ability in the We remain very optimistic about our ability in the second half of twenty twenty four to match or exceed our first half performance and to carry that forward into 2025 and beyond, although there may continue to be some fluctuations from quarter to quarter. Our balance sheet remains strong and provides financial flexibility, which allows us to consider additional strategic actions such as acquisitions or stock repurchases.

Speaker 2

As previously announced, we began another stock repurchase program in the 2nd quarter. With that, let me turn my remarks to Profire's financial results for the Q2 of 2024. During the Q2, we recognized approximately $15,200,000 in revenue compared to $13,600,000 in the first quarter and $14,600,000 in the prior year quarter. This quarter's performance represents the 2nd best quarter in company history. Gross profit for the Q1 was $7,900,000 compared to $6,800,000 in the prior quarter and $7,400,000 in the Q2 of 2023.

Speaker 2

Gross margin was 52% of revenues compared to 50 percent in the prior quarter and 51% in the Q2 of 2023. The sequential and year over year increase was primarily and inflation across the business. Total operating expenses for the Q2 were approximately $5,300,000 or 35 percent of revenue compared to $5,000,000 or 37 percent of revenue in the Q1 and $4,200,000 or 29% of revenue in the year ago quarter, which included a $762,000 cost reduction from the employee retention tax credit. The sequential and year over year increase reflects the impact of inflation and additional headcount in support of strategic growth and increased business activity. Net income for the 2nd quarter was approximately $2,100,000 or 0 point 0 $4 per diluted share.

Speaker 2

This compares to net income of $1,400,000 or $0.03 per diluted share in the Q1 of 2024 and net income of $2,900,000 or $0.06 per diluted share in the Q2 of last year. As previously mentioned, the prior year quarter includes a $762,000 or $0.02 per diluted share tax credit related to employee retention. Cash used in operations in the 2nd quarter was approximately $2,500,000 compared to cash generated of approximately $1,300,000 in the prior year quarter. This difference was largely driven by a strategic increase in inventory as well as reductions in accrued liabilities. Our inventory balance at the end of the quarter was approximately $16,100,000 compared to $15,700,000 at the end of the first quarter.

Speaker 2

We expect the pace of growth in our inventory balance to slow, but we'll maintain sufficient levels to meet customer demand as we continue to transition from our legacy BMS system to our latest technology BMS product lines. We ended the quarter with 18,400,000 dollars in cash and liquid investments and remain debt free. I will now turn the call over to Cam to provide an overview of our business.

Speaker 3

Cam? Thank you, Ryan. To all those joining us on the call today and to those who will listen to or read the transcript in the coming days, Ryan and I want to express how extremely pleased we are with the performance of our team and the results we've been able to achieve in the 2nd quarter. As mentioned by Ryan, our 2nd quarter results rank as our 2nd highest quarterly revenue in company history, all while delivering strong accompanying financial results in gross margin and net income. Profire's performance over the last 8 quarters continues to demonstrate the strength of our brand in our traditional markets as well as continued validation of our diversification strategy and trajectory.

Speaker 3

We remain committed to our strategic growth objectives, which are focused on maintaining and growing our market leading position with upstream oil and gas producers and natural gas utility, transmission and distribution providers coupled with our high growth focus on midstream and critical energy infrastructure operators as well as the vast opportunity in the downstream industrial and renewable space. We remain confident in our ability to deliver consistent results and continue to plan for growth. Our burner and combustion management technology and automation solutions continue to be the preferred platform of choice in our traditional markets and are gaining momentum and notoriety with new customers in new and exciting industries. Let's dig into our diversification progress. In Q2, our combined diversification revenue exceeded Q1 by nearly 40% with revenue from non oil and gas increasing by nearly 2 30% quarter over quarter.

Speaker 3

Our combined diversification revenue equated to just over 15% of our total revenue in the quarter. Comparing our first half results of 2024 to 2023, we are significantly ahead of our pace of last year, proving our ability to add new customers and projects, earn repeat business and generate new opportunities for our pipeline through efforts and initiatives of our sales and marketing teams. Our current backlog of diversification business has never been higher as we continue to win new projects in various industries. Thus far in 2024, our diversification results have been derived from critical energy infrastructure, landfill, biogas, biofuel, chemical manufacturing, power generation, metal manufacturing and mining. In the second quarter, we were able to win several exciting new diversification projects, which comprise both new customer acquisition and repeat business with the expectation of continued collaboration and projects.

Speaker 3

Of note, we were awarded our first project with a producer and manufacturer of various specialty chemicals, products and synthetic waxes. We were also awarded repeat business with a leading technology firm who specializes in carbon dioxide removal and production of biofuels and syngas. Profire's 3,100 technology and platform will support critical combustion and flame safeguard management to enable these customers to operate their facilities and applications safely and efficiently. Our reference case of projects continues to grow. Our engineering, sales and service teams are gaining valuable knowledge with each new application that we encounter and project we deliver on.

Speaker 3

As we compare our capabilities now to that of just 3 years ago, we are able to support projects with larger scale, greater complexity and detail and we are proving to be a valuable and even preferred option to that of the incumbents who have traditionally served these markets. As we have mentioned on previous calls, we feel that Profire is in a strong position to leverage our technology and proven project execution. This will enable us to continue to grow market share in the various industrial markets that have the need to operate critical heaters and appliances safely, reliably and efficiently. As mentioned, we experienced strong growth in critical energy infrastructure in the 2nd quarter. With our 2nd quarter and first half results, our year is on track to meet our internal growth targets.

Speaker 3

In the quarter, we were successful in completing projects with several national operators as well as winning new high profile projects with Marathon's midstream division, MPLX and Kinder Morgan. Profire was selected to support the initiatives of these leading operators to help lower emissions at specific plants and facilities. These wins continue to demonstrate the trust our customers have in Profire to support them in reaching internal and regulatory environmental targets. We continue to build relationships with original equipment manufacturers who design and manufacture fired equipment used in various downstream industries. We are also focused on collaborating with automation providers who serve these various markets.

Speaker 3

These OEMs and automation firms are turning to Profire due to our technology, our field and combustion experience, as well as our rapid response and ability to deliver design and technology solutions that meet industry needs and stand above that of our competitors. Our plans remain to find service and sales partners in geographic areas where we currently do not have team members to support our expanding customer and installation base. In summary, we are pleased with the progress we are making towards our diversification goals. Our sales pipeline and backlog continues to strengthen. We remain on pace to exceed 2023's results in this diversified area of the energy sector.

Speaker 3

Our downstream and industrial project pipeline, current sales orders and potential bid opportunities have set the stage for us to break the record set in 2023. We continue to develop our internal teams and individuals who are focused on growing our ability to support projects and customers in diversified industries and plan for future sales and support expansion in the coming quarters. Turning to our traditional business and markets, overall, we are seeing stability from upstream producers. We experienced moderate growth quarter over quarter despite reduced year over year rig counts, which in turn results in less drilling and completion activity. Our growth was achieved due to overall steady commodity prices, regular business from existing customers, winning bids and completing projects from new customers, as well as achieving our best quarter in company history in terms of service revenue generated.

Speaker 3

Our customers continue to specify Profire as their burner management solution provider of choice. It is our belief that our market share has never been stronger. We continue to support E and Ps with the technology they need to safely and efficiently run their heated appliances as well as enable them to complete projects focused on emissions reduction and monitoring on appliances that are used to meet air quality regulation. The record breaking merger and acquisition activity of 2023, which carried into 2024 has continued to impact normal project discussions with upstream customers involved in these transactions. Due to the significant integration efforts which ensue, our contact's ability to execute purchase orders and make normal operational decisions can experience delay.

Speaker 3

Looking to the remainder of the year, we expect we will begin to see things settle down, which we believe will lead to potentially a stronger second half of twenty twenty four. As we look forward to the remainder of the year, we are expecting to see increased drilling activity in the Marcellus and Haynesville. Currently, both shale plays are running rigs below what is needed to maintain production levels, which has overall gas production down year to date. The gas market is still considered oversupplied. However, based on comments from our customers, we believe we will see increased activity in the second half of the year.

Speaker 3

As a result of the opening of the Trans Mountain pipeline, Canada based producers are ramping up production. With this shorter route to new markets and lower cost of transportation, operators believe that the differentials have the potential to reduce, which could result in Western Canadian Select becoming one of the most cost effective crudes available in the world. As we monitor the health and outlook of the energy sector related to hydrocarbon production, we remain optimistic on the long term demand and essential need for hydrocarbons. We believe the outlook for LNG exports from North America is bright and that the case for hydrocarbons is strengthening. We feel that more and more markets will conclude that hydrocarbons are a necessity and that all forms of energy will be required to meet future demand.

Speaker 3

The EIA forecasts remain in support of Profire's traditional business. US natural gas production is predicted to increase in 2025. Natural gas consumption in the US is expected to remain flat. LNG exports are expected to increase dramatically and crude production is forecasted to increase through 2025. For the first time in decades, the United States is going to see a material increase in its power generation needs.

Speaker 3

We echo sentiments of CEOs of leading natural gas producers that things are looking very exciting for natural gas. We remain committed to our M and A activity, employing a systematic approach to identify and assess potential opportunities. We are actively seeking and engaging with companies that offer synergistic businesses aligning with Profire's growth and scalability objectives in our current and future markets. These efforts also extend to developing products and solutions tailored to both our traditional markets and our diversification strategy. Looking ahead to the upcoming quarters and years, we are enthusiastic and optimistic about our prospects.

Speaker 3

Our traditional customers will continue to rely on us for automating their new and existing heated appliances, aiming to enhance efficiency and reduce greenhouse gas emissions. Existing regulations underscore the demand for our solution. Moreover, our efforts in diversifying into new industries with burner and combustion management solutions are gaining momentum as we can distantly demonstrate the value of our over 400 years of combustion experience and expertise across multiple sectors. Before we open the line to questions, Ryan and I want to express our sincere gratitude for your interest and support of Profire. We also want to acknowledge and extend appreciation to our team members for their hard work and commitment in supporting our customers, shareholders and each other.

Speaker 3

Operator, would you please provide the appropriate instructions so we can get the Q and A started?

Operator

And our first question will come from Rob Brown with Lake Street Capital Markets. Please go ahead.

Speaker 2

Good morning, Rob. Good morning.

Speaker 3

First question is on the service revenue activity,

Speaker 4

was quite strong in the quarter. What was sort of driving that and can that continue or how can that continue?

Speaker 2

Yes, certainly Rob. That's a great question. Cam, do you want to talk about that?

Speaker 3

Yes, for sure. Really overall, if we look at the last few quarters, our service team just continues to get busier and busier and it's in part due we think to the fact that human power is stretched in especially the upstream industry. And as we've moved into some of these diversified industries as well, we've been able to secure some nice projects that our service team has been involved in the commissioning and sometimes the installation portions of that. Can it continue? To a degree, yes.

Speaker 3

We are extremely busy this quarter, but we will say our team is probably a little more stretched than we'd like from the hours they're working. We have expanded the service team slightly and we continue to look for more technicians that we can either bring on that can just be plug and play or that we can train, especially in the Permian, probably the Northeast as we see it getting busier there. But really as our service team, our tenure is becoming really strong. We don't have a lot of turnover. We have great experience.

Speaker 3

We've had some great projects in the DJ Basin where we're working with some of the major E and Ps there to do a lot of upgrading. We see that continuing. So can it continue to this degree? We hope to be able to do it, but probably with adding a few more people, but there will be some fluctuations up and down slightly with it. But overall, it really comes down to some large projects that we were able to execute during the quarter as well as just we are incredibly busy right now, which is a great sign.

Speaker 4

Okay, great. Thank you. And then on the diversification efforts, good progress there. The pipeline is active. How would you characterize the pipeline growth and diversification and maybe what you see that playing out over time in terms of percent of revenue?

Speaker 2

Yes. Another great question. As we mentioned, we're very excited about what we've been able to achieve in the continuing increases, not only just as a percentage of revenue, but the overall revenue base increasing itself as well for total revenue. So hitting 15% this quarter, on top of a strong Q1 as well with a great start to the first half of this year is something that we're really proud of. And it continues to come as Cam mentioned in his prepared remarks that that's coming from within critical energy infrastructure in oil and gas, but also from lots of other areas.

Speaker 2

And as far as the pipeline is concerned, we're continuing to see a significant amount of our total pipeline, probably at least a third, if not more of that total revenue pipeline is coming from diversification areas. So it continues to strengthen. We continue to see a bunch of projects coming in that hopefully hit within the second half of the year, but also things stacking in already for 2025. Cam, do you want to give any further color on any specifics there?

Speaker 3

Yes, absolutely. We've talked about it before on calls of just okay, is there come a point, tripping point here where you just really laser focus on an area and put some horsepower behind it? And the answer to that is, yes, there still does come a point, but we're seeing so many like really interesting projects come our way, partly because we've been able to execute on some of these projects in the last couple of years with really notable firms in the landfill and biogas and renewable natural gas space. And we're finding we're putting some good investment into marketing. And so people are finding us who are working on these interesting projects where they're taking industrial biomass and they have to do something with it.

Speaker 3

And there's firms that are specializing in dealing with this and coming up with new and creative ways to use whether it's coal or to use feedstock of wood chips to turn it into something else or biochar. And companies are coming to us and because as we mentioned, we're able to respond very quickly, much quicker than that of the incumbents. We're able to speak their language when it comes to burner management, combustion and it's just something that is not so readily available out there to find. And so as Ryan mentioned, the backlog is strengthening. We see it continuing to go forward as we continue to put case studies out there, as we continue to execute on new projects and are able to publicize that to train our sales and service teams.

Speaker 3

As we mentioned in our remarks, we plan on expanding our sales team both internally as well as expanding our sales and service support in areas where we just don't have people. We're finding projects that we've closed on that we'll have to support that are just in areas that we never thought Profire would be. Well, we've always hoped we would be, but a few years ago, we never thought we'd have people in certain areas, but very exciting. We're looking forward to, as we talked about, as I mentioned, executing on a project here late Q3, probably into Q4 at a large chemical plant. And we see more and more some of these new customers that we're bringing on that repeat business is going to start to ensue.

Speaker 3

We already are enjoying some of that. But as we build our base here, just the number of open projects has expanded significantly quarter over quarter. So great progress. We can't really overstate how excited we are about our movement here. And we're going to look to continue to grow that while growing that legacy business, which we love and is still a great business for Profire.

Speaker 4

Okay, great. And then I guess on the legacy business, you talked about oil prices being a bit of a headwind and then some of the crosscurrents in the market. But I guess the question is, do you think you can grow kind of overall? And is the legacy business continuing to grow? And sort of what's the sort of near term, mid term kind of growth outlook?

Speaker 4

I know you don't give guidance, but sort of directionally, what sort of the growth outlook you think you can get?

Speaker 3

I'll say some remarks here and then Ryan will want to comment for sure. But you look at the rig count, quarter over quarter it's down, year over year it's down. But Profire has still been able to produce some great quarters. And there's a lot of reasons for that. One is our market share continues to grow.

Speaker 3

There's still new customers to go and get. We've seen this M and A activity. And although we mentioned it does kind of slow things for us and put things on delay, you're seeing that greater sophistication and need for automation from these firms and as they buy other companies. Obviously Exxon buying Pioneer, they're both very, I guess, sophisticated. Sorry, Chevron, not Pioneer, but they're both very sophisticated and Profire works with both.

Speaker 3

But

Speaker 2

the thing is, as we see

Speaker 3

a lot of these independents get bought, they don't do a lot of burner management, not to the degree that the majors do. So that's going to be in support of Profire. We think as mentioned in the second half of the year and into next year, drilling and completion activity is going to continue both on the natural gas front, which is spectacular for Profire as well as on the crude side of it. Crude demand is it slowing? Yes, you could say it's slowing, but it's still growing.

Speaker 3

We think that the North American play and ability to ramp up quicker than they ever have before to support energy needs. That is a tailwind for Profire. Obviously, USAI is expected to require a lot more energy. And really, if you were to put that in perspective alone, just AI, it doesn't really make up a large percentage of the total baseload that North America or United States would need. But if you're able to just increase natural gas production with existing pipeline infrastructure by 10%, which there's room, you could almost meet that whole demand.

Speaker 3

And so as that need for AI and other electrification comes on, natural gas is going to be a big part of it. And that's why we see these huge forecasts by the world's largest LNG providers. That LNG feedstock, it is going to come from the United States and Canada, not all of it, but a lot of it's going to be there. So we think there's still some really great tailwinds. Can we grow the legacy business?

Speaker 3

We believe so. Probably not at the same we know not at the same rate as we can grow our non oil and gas and industrial side of the business, but we believe that it can continue to see growth, moderate but still growth. Right?

Speaker 2

Okay. Thank you. Yes. I would just add to that. We've said for years that we believe the world needs the best of all forms of energy, all sources of energy and oil and gas is going to continue to be a critical piece of that.

Speaker 2

There may be some short term disruptions related to the election or and which direction that pushes, we don't really know. Disruptions in the Middle East will obviously have an impact and that's forecast or people are expecting a lot more of that. The tensions are certainly escalating and not deescalating in those regions. So obviously, there will be some ups and downs. But overall, we are very confident in the future of our legacy business as well as our diversification efforts.

Speaker 2

We also believe that stability in prices is more important probably than even the price level itself. Stability in the low 70s is a good thing for the industry, much better than quick rises and falls between 7090. If it stabilizes above that, obviously, higher prices are better. But kind of that ongoing stability, which we have actually seen for the last 2 years, represents a good strong environment for the E and P producers, for natural gas, for oil. And at these rates, at these levels, they will continue to invest in new technology, looking to get the most out of the existing assets that they have.

Speaker 2

As Cam mentioned, the drilling and completion activity is still 25% below where it was pre COVID. So the investment on the production side has been more in the technology and not so much in drilling new wells or adding new capacity, but over time with the decline of these shale wells that has to be considered as well. So again, we think that there's obvious uncertainty, but a lot of upside potential, a lot of upside opportunity for the industry and for Profire in the coming years.

Speaker 3

All right. Thank you. I'll turn it over. Thanks,

Operator

And with no further questions in queue, I would like to turn the call back over to Cameron Tidball for closing remarks.

Speaker 3

Thanks everyone for joining us on our call today and you for all of your continued support. As always, we are available for any discussions or questions you may have. To mention, we will be participating at the 3 part Advisors Ideas Conference in Chicago on August 29 and the Lake Street Conference in New York on September 12. Thank you and have a great day.

Operator

And this will conclude today's conference. Thank you for your participation and you may now disconnect.

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Profire Energy Q2 2024
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