Profire Energy's (PFIE) CEO Brenton Hatch on Q4 2017 Results - Earnings Call Transcript

Profire Energy, Inc. (NASDAQ:PFIE) Q4 2017 Results Earnings Conference Call March 8, 2018 1:00 PM ET

Executives

Brenton Hatch - Chairman, CEO & President

Cameron Tidball - VP of Sales & Marketing

Ryan Oviatt - CFO

Jay Fugal - Corporate Operations Manager

Analysts

Rob Brown - Lake Street Capital markets

Jim McIlree - Chardan Capital

John White - ROTH Capital

Mark Lanier - Pegasus Capital

Operator

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Profire Energy's Fiscal Year Ended December 31, 2017. Joining us today is President and CEO of Profire Energy, Brenton Hatch; and CFO, Ryan Oviatt. Before we begin today's call, I would like to take a moment to read the company 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 ability to allocate resources to take advantage of opportunities.

The company's R&D department being able to release new products in 2018, the R&D department improving the capabilities of the 3100 product, that future projects will add significant value to company that the company will able to timely deliver products with increased sales, the company's ability to deliver products to market faster, the company achieving safety integral level or SIL certification within the first half of the year that will allow sales to larger customers.

The company's ability to capitalize on CMS product sales opportunities. The company's ability to execute on its capital allocation plan, the company's intent to execute its share repurchase program, the company's performance in 2018 will remain consistent with previous quarters, the company's ability to return to growth in 2018 and the company's ability to achieve revenue growth in 2018.

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 risks and factors identified in the company's periodic filings 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 March 15, 2018, starting later this evening. It will be accessible via the link provided in yesterday's press release, as well as on the company's website at www.profireenergy.com.

Following the remarks by Mr. Hatch and Mr. Oviatt, we will open the call to your questions. As part of the question-and-answer session, Mr. Hatch and Oviatt will be joined by Profire Energy's VP of Sales, Cameron Tidball.

Now I would like to turn the call over to President and Chief Executive Officer of Profire Energy, Mr. Brenton Hatch.

Brenton Hatch

Thank you very much. Good afternoon, everyone. Thank you for joining us and for your interest in Profire. We are pleased to provide this earnings report. In spite of the unpredictable nature of gas and oil prices throughout the year, Profire outperformed analysts, and frankly, our own expectations.

In 2017, the average price per barrel was 50.88, however, for 6 months of the year, the price was in the 40s. Many early projections predicted that the average price per barrel would be in the 55 to 58 range, where most of the year our customers felt the market volatility as oil continue to under perform.

Despite the volatility though, Profire saw a great success. This was in large part attributable to our focus on increasing our customer base throughout the industry downturn and into the recovery.

Since the downturn began in 2014, we have been able to increase the number of our customers more than 300%. Near the end of the year, the market began to stabilize and we saw an increase in sales orders throughout Q4.

Our efforts throughout 2017 enabled us to maintain our status as an industry leader and produced a healthy increase in revenues both year-over-year and quarter-over-quarter.

Profire recognized 2017 as its second-best revenue-generating year in company history. For the year, we recognized revenues of $38.3 million, which is up from $20.5 million in the previous 12 months period or an increase of 86%.

Net income in the same period was $4.4 million, which represents a dramatic increase over the prior 12 months period. Our performance is a direct result of our strategic plan and principles. The success we experienced this year is partially enabled by Profire's long-standing principle of remaining debt free.

At the year-end, Profire had zero debt and cash and liquid investments in excess of $24 million. In the beginning of the industry downturn, we enacted a cost management plan. We are committed to cost control, even now that the industry is recovering, this strategy allowed us to realize positive quarterly cash flows throughout the year.

An additional part of our overall plan is to invest in employee retention. Throughout the industry volatility, we were able to retain our sales step. This team now has nearly 100 years of combined experience. This experience and knowledgeable staff offers superior service when responding to customer requests and needs.

We also continue to allocate resources to R&D to augment our product offerings. In particular, this year, we began the process of expanding product certifications. We believe that the improved certification will allow us to service additional customers in more complex environment.

This year, we were able to leverage our position as the industry leaders as we continue to outperform our peers in the oilfield services arena.

With that said, I will now turn the time over to Ryan Oviatt, our CFO, to discuss the financial results of the year. Ryan?

Ryan Oviatt

Thanks, Brent. Yesterday, after the market close, we filed our 10-K with the SEC and discussed the year's highlights in the press release. As always, both of those documents are available on the Investor section of our website. The transcript of this call will be posted in the coming days.

In this year, we exceeded expectations and demonstrated commitment to our cost management strategy, while deliberately spending to improve operational efficiencies and investing in research and development. As Brent mentioned, we experienced great success in 2017.

Let's begin by looking at the income statement. In 2017, we recognized $38.3 million in revenue, which is an 86% increase from the same period a year ago. Many factors contributed to the increase in revenue, including the growing customer base that Brent mentioned, as well as the stabilization of the price per barrel of oil throughout the year.

In Q4 of 2017, we saw an unexpected increase in revenue. We previously communicated that we believe the fourth quarter would remain flat or decrease slightly. However, we recognized $10.9 million in revenue compared to $10 million in the previous quarter and $7 million in the same quarter of last year.

We attribute this increase to customer spending remaining CapEx budgets before the end of the year. With the increase in revenues, our gross profit increased to just over $20 million or 53% of total revenues as compared to $10.4 million or 51% of total revenues in the prior 12-month period.

Gross margins continue to vary a little quarter-to-quarter, primarily due to the mix of proprietary and third-party products. Total operating expenses increased to $13.4 million from $11.4 million in the previous 12-month period. This 18% increase in operating expenses is a modest increase when compared with the 86% increase in revenue over the same period.

During the year, Profire maintained its cost management plan and an insured expenses did not increase at a rate faster than revenue. Operating expenses for general and administrative increased 16%, R&D increased 72% and depreciation decreased 16% as compared to the previous 12-month period.

The increase in expenses is primarily due to higher labor costs to meet the increasing customer demand and to retain employees. The increase in R&D is delivered and illustrates our commitment to continuous innovation, to improving our products and expanding our product line. We believe this increased spending in R&D will ensure we remain a market leader for technology and automation in the oil and gas industry.

Total other income during the period was roughly 280,000, the majority of which was attributable to interest income and the impact of foreign exchange rates. Our net income was $4.4 million or $0.09 per diluted share compared to a loss of 686,000 or a loss of $0.01 per diluted share in the prior 12-month period. This significant net income increase is attributable to our staff's hard work to grow revenue, while keeping cost growth under control.

We were able to accomplish this without a drastic increase in employees or overhead cost throughout the year. Our lean management activities allowed us to increase production without a correlating increase in expenses.

Now let's look at the balance sheet. Cash and liquid investments totaled over $24 million as compared to $20 million a year ago. In the past year, we have been actively repurchasing our own stock as part of our capital allocation strategy. Since the inception of the program, we have purchased nearly 10% of the shares outstanding at an average share price of $1.29.

We believe these activities added significant value to our shareholders. These repurchases were enabled through operating cash flows. In addition to repurchasing stock, we invested minor amounts in capital improvements to update some of our facilities and assets.

Working capital management remains a focus. Inventory levels decreased slightly when compared to the previous year. We are proactively working with our vendors to manage the lead time to ensure that we'll be able to deliver in a timely fashion to our customers and react quickly to market demand.

Our accounts receivable collections remained strong and the balance of accounts over 90 days old was only 13% of total accounts receivable compared to 17% in the previous year. We plan to continue with our capital allocation strategy throughout 2018. This plan includes a continuation of our stock repurchase program.

In addition to that, we plan to invest in R&D to enhance our capabilities to bring products to market faster. We routinely discuss and explore M&A opportunities as a way for Profire to continue to grow its market share and possibly enter new markets.

In 2017, our market continue to improve as drilling remained steady and the average oil price increased 18%. However, the number of drilled but uncompleted wells continue to rise. We monitor drills but uncompleted wells because we believe this is a predictor of future sales opportunities. Our product is installed once the well is completed. While our customers begin completing these wells, we should see a significant increase in sales.

With that, thanks. And I'll turn it back to you, Brent.

Brenton Hatch

Thanks, Ryan. We plan to build on the success and momentum of 2017, and we believe we are well positioned to take advantage of this year's market opportunities. Throughout the year, we were able to outpace the industry recovery by almost 4 times.

In 2017, the oil price per barrel rose 18%, while compared to our increased revenues of 86%. Rig counts were down in the first half of the year, averaging 1,010 rigs and increased only slightly into 1,134 in the second half of the year.

In this same period, where the industry recovery was underwhelming, we were able to increase our net income by over 700%. Throughout 2017, we were able to focus on product development, thus increasing its capabilities and reach.

As I previously stated, our R&D department has worked at upgrading our product certification, while not yet complete, we believe, that we can achieve a safety integrity level or a sale [ph] certification on our product development process in the first half of 2018.

After speaking with customers and investigating opportunities, we believe this upgraded certification will allow us to quote [ph] on larger products -- projects with our products and explore other market possibilities.

In addition to the expanded certification, our R&D team is working to improve the capabilities of our 3100 BMS, product development remains a focus in our strategic plan. With input from our customers, we are constantly developing new technologies to bring to the marketplace and expand automation in the oilfield.

In 2017, we saw increased interest in our CMS product as well. As our customer's continued to expand CapEx budgets, they are looking for a technology that can improve their efficiency and cut costs.

Profire was invited to present at a series of conferences designed to introduce production companies to new technologies. From these conferences, we have seen a significant increase in the request for trial units and sales quotes for the CMS product.

The overall market remains uncertain as we head into 2018. Oil prices are currently outperforming projections. However, such projections are inconsistent as to what may happen throughout the year. We believe drilling will stay fairly level in 2018. Should the market remained constant, we believe there is room for Profire revenue growth.

We offer proven products and plan to add to our product line in 2018 to take advantage of sales opportunities that were not previously available to us. We also plan to leverage our growing customer base into increased revenues as they execute the CapEx budgets for the year.

As Ryan mentioned, we experienced an unanticipated uptick in sales in Q4. We are optimistic that our performance in 2018 will remain consistent with our performance in the previous quarters.

Thank you for your interest in and investing in Profire. We strive to offer reliable and competitive products. Our entire Profire team is dedicated to our success in that regard. We've proven that we can manage Profire through changing industry conditions and feel we are now more capable than ever to take advantage of the opportunity before us. We believe our future at Profire is positive and as we continue to grow into 2018.

Before I turn it over to the operator for questions, I'd like to take the opportunity to thank our Profire team for making all this possible. We have built a company and culture here that I'm very proud to be a part of. And I thank each of you for contributing to our success.

Now with that, I will open up the call to questions. Operator, would you please provide the appropriate instructions, so that we can get the Q&A started?

Question-and-Answer Session

Operator

Yes. Thank you. [Operator Instructions] Our first question comes from Rob Brown with Lake Street Capital markets. Please proceed with your question.

Brenton Hatch

Hello, Rob.

Rob Brown

Hi, Brent. I just wanted to follow-up on your comment about the quoting activity in the CMS business. Could you kind of characterize the level of that, is it mostly trial units at this point or are you getting some follow-on activity there?

Brenton Hatch

Great question, Rob. I should mention as we proceed here, that we have in attendance with us, Mr. Jay Fugal, our VP of Operations and Mr. Cameron Tidball who quite often joins us, who is now our Chief Business Development Officer. But he has attended to the sales [indiscernible] this past quarter. And Cam, perhaps you could get answer that question for Rob?

Cameron Tidball

You bet. We’ve had - as announced in - I guess, or reading the - CMS is really - the last two quarters, we've seen an uptick with quoting activity, mainly because of some features we've added, some technology that we upgraded in our current platform that has allowed us to do some things that we currently - we previously couldn't do.

Then, coupled with some of these conferences that we are invited to, we are able to be in front of more E&P's at levels that we hadn't had the opportunity to have those discussions with. And so the quoting activity has dramatically gone up. We already have put systems in place quite a few in the South Texas area, where H2S, ultra fabs kits [ph] are very popular.

We're saving chemical and really keeping pipeline integrity high, is critical to bottom line. We've had some great success there with some major E&P. So it’s still very preliminary. We've got some more conferences, we've attended here, the same group that put these together in last month. And so we hope to see even more going into South Texas, Canada and into the Permian Basin. That's where those conferences were focused on.

So to quantify it, is still small numbers relatively. But the change in acceptance, the desire to try the systems and even some of the Pos we’ve got is proving to us. We've got some key studies, where it's helping our customers save on the bottom line. So it's been great.

Brenton Hatch

All right. That was impressive, Cam.

Rob Brown

Thanks, Cam. On the - second question is really on the customer demand environment. Q4 was better than you expected. You saw some, I guess, to what extent was [indiscernible] orders or do you see that demand continuing into '18?

Brenton Hatch

As I mentioned in my other comments, just as I was wrapping up, Rob, we don't see any reason why we can't continue forward. We are quite positive about what's going on. The interest in the request for quotes and so on. We're quite optimistic about this year.

We, of course, are not the world’s best prognosticators when it comes to knowing what oil prices are going to do. But, well, actually we may be as good as anybody else in the world. But nobody seems to have done much of a job of that. But given that the things stay fairly level in terms of the oil price situation, we anticipate that this will be a positive year for us for sure.

Rob Brown

Okay. Thanks for the color. I’ll turn it over.

Brenton Hatch

Okay. Thanks. Mr. Brown.

Cameron Tidball

Thanks, Rob.

Operator

Our next question is from the line of Jim McIlree with Chardan Capital. Please go ahead with your question.

Brenton Hatch

Mr. McIlree. How are you this morning?

Jim McIlree

I am well. Thank you, Brent and Ryan, good to hear from you as well. Ryan, the inventory turns have improved significantly over the past couple of years. So good going on that. But I'd like to know if this is kind of - is this the goal or is there more improvement to come?

Ryan Oviatt

Yes, its great question, Jim. There is still some areas of our inventory, where we think, that we can make some improvements. Some items that are slower moving. And obviously, the CMS would fall into that category as we ramp up in CMS activity as Cam mentioned and that would pull down some inventory there a little bit.

There's a few other areas of some product, that we think, we can continue to improve upon. But at the same time, as we're ramping up sales and other activities for the 3100 and for 2100 and other key components that are selling quite actively, and we anticipate will continue to do so.

We're working with vendors right now on lead times and trying to figure out exactly what is the right amount of that inventory to hold. So as we see sales activity increase, I think, good - the value of inventory might go up a little bit, again, especially, related to 3100 product as that moves forward. But overall, we're happy with what we've achieved recently related to inventory turns. And working very closely with our vendors and Jay as well with the overall ordering quantities. We have made some improvements in our ordering to where we're working with -- what we referred to as release time PO.

So we're kind of scheduling out of our orders throughout the next 6 months or even year and getting inventory in smaller quantities in - at the time when we think we're going to need it as opposed to taking really large orders all in at once.

Jim McIlree

I think in prior calls, you talked about lead times for some of your components being extended, particularly with the recovery from the downturn, a lot of your suppliers were just no longer in existence. Is that -- has that been -- has that ameliorated somewhat over the past quarter, are we still looking -- are you still looking at kind of tight supply chain?

Brenton Hatch

I think I'll actually past that to fairly new name here Mr. Jay Fugal, who is VP of operations and who is very actively involved with these groups you're referring to and with the whole inventory control process. Jay?

Jay Fugal

Thank you, Brent. And I think as move forward strategy on the release PO will be key to ensuring that we keep this product coming in and flowing in at the rate that we needed to. We do experience some longer lead times than what's comfortable for me and in the day to day. But the great news is some of our vendors and suppliers that we've had partnered with over the past couple of years even have really been able to react well to what we need moving where we need them to getting product in on time.

But we have our purchasing and procuring teams that is actively looking for alternatives -- alternative product, in case we need to backfill some of this area. But it's definitely a very strong area of focus for operations team as we look forward. And we're very, very aware when the products supposed to arrive and how the sales are impacting day to day.

Jim McIlree

All right. That's helpful. And then kind of a broad question on R&D. I think in the long list of warnings about all the things that could go wrong in 2018 and it was mentioned new products not been developed on time. And Ryan, you mentioned an increased level of R&D. And so I'm just trying to understand kind of either as a dollar amount or is percentage of sales or is growth from the prior year, what your goals are for all R&D dollars?

And then I know that you are spending it on certain things like CMS and 3100. But that warning at the beginning think that there's a new product coming out in 2018. So if you could address those, that would be great? Thanks.

Brenton Hatch

Yes. Be happy to. I didn't hear that, Jim, because I always fall asleep during that part of the presentation. But actually, I did here. We do have new product that we anticipate releasing, hopefully, this year and we are quite excited about. We think it will be certainly very accretive to what we're doing here. I would not, even though you heard that potential warning, I would not read into that too much. We certainly believe that the time line that we have projected is very accurate.

We anticipate, in the coming couple of months, to have completed the whole SIL certification process. And we feel like by Spring, that will happen, which will allow 3100 sales to augment significantly. As far as this other new product and others we are working on, we think we're very close to the time lines that we have originally intended. So, yes, nothing was intended by that to the negative.

Jim McIlree

And as far as the R&D dollars or levels or percentages or growth going forward, Ryan, can you address that?

Ryan Oviatt

Yes, certainly. We've increased R&D quite significantly during 2017. A lot of that was due to the focus on SIL, the focus on adding new capabilities to the 3100 and then also what Brent has just been talking about the new products. So I think, the best assumption would be to kind of look at the Q3, Q4 run rate as far as R&D spending and assume that that continues throughout 2018.

We think that we're well-positioned with that R&D department right now. Don't anticipate needing that significant people or anything else for the department. But would anticipate kind of that same run rate throughout 2018.

Jim McIlree

Okay, great. Thanks, guys. And I’ll get back in line.

Brenton Hatch

Thanks, Jim.

Ryan Oviatt

Thanks, Jim.

Operator

The next question comes from the line of John White with ROTH Capital. Please proceed with your question.

Brenton Hatch

Morning, John.

John White

Good morning, guys. Congratulations on a very nice year. I know you are happy about it and so am I. On the oil and gas side, did you experience particularly strong growth in any certain region or basin that you'd like to about?

Brenton Hatch

Actually, I could respond to some of that. But cam, why don't you address that. You're very actively involved, obviously, with sales.

Cameron Tidball

So Q3 and Q4, we had strong growth in the Permian Basin, which we did for the majority of 2017. With the focus we've put in that area, obviously, with it being the focus of many of our customers who're putting a lot of dollars there. We've seen significant growth there. The DJ Basin continues to be incredibly strong for Profire in terms of the market share, and especially in Q4, we saw a large uptick in the DJ Basin there.

So those would be the main two areas that we've seen some great growth. We've had some big orders in heavy oil country as well in Q4 that, as Brent mentioned, we weren't expecting heavy oil been Northern Bakken region. And so those have been the primary drivers for the growth in Q3 and Q4.

John White

Thank you. Excellent positioning, no doubt the Permian is the place to be. Thanks for that detail. I appreciate it.

Brenton Hatch

Thank you.

Operator

Our next question comes from the line of Mark Lanier with Pegasus Capital. Please proceed with your question.

Mark Lanier

Hello. I add my congratulations to all to a very strong recovery across the board. It's great to see. I'd like to return to the CMS side of the business. Help us frame the market potential there as you become increasingly close to customers and prospects in trial units? And also, looking out 2 years, what's the reasonable goal for what that might be as a percentage of the business, all other things being equal?

Brenton Hatch

Cameron?

Cameron Tidball

CMS is obviously been the thing that we brought on when we bought under the great stock price and then the market collapsed, and then the we had lots of interest, easiest we could get, to be honest. But no one would pull the trigger, no one would champion it from a customers' perspective. It seems like no one wanted to really step out of line and to say, hey, this is something it could help because of fear of job loss, which we get that. With the last -- last 6 months, we're feeling a lot more excitement about this. We've got customers settled down a little bit to a degree, that focusing on optimization of all business and automation as a whole.

Adding the features we did, that allow us to do these ultra fast which is used mainly in gas applications; pump splitting, which allows them to take the sites where they have several pumps and use 1 controller to take care of it. In terms of what the market potential is, we see a strong opportunity, very strong in the Eagle Ford. We see a lot of opportunity in the Duverney play in Canada just because of the amount of different petrochemicals being used to treat. Permian is obviously the place we want it. In terms of quantifying the market potential, we still think that there's an opportunity -- with every well that goes in, there's almost always chemicals being used.

Now not always does it make economic sense, that's as of today. We remember years ago, when BMS didn't make economic sense and now it's you have to have it. So to qualify it, it's still somewhat learning. We're working towards understanding. But we still believe that every end-user needs to be using these at every injection point they have. And so the realization of that, that's going to still take some time, probably need to evolve the product, but it's on our road map to figure out what Profire's place is in that niche. So I didn't answer your question completely, Mark, so I apologize for that. I don't have a projection for 2 years, but Ryan does, for sure.

Ryan Oviatt

Mark, I'd add to that, when we initially brought the BMS unit down from Canada, they've been quite popular in the Canada, partially because of government legislation. But it took years before we were able to settle our first product here, and then it was a very slow ramp up. But as we put out these trial units and people used them and saw the advantage of it, it now, as cam says, everybody needs it, everybody wants it, it's in on virtually all equipment.

And we anticipate that it's going to take a year to -- for the CMS to ramp. But we think it will follow the same trajectory pattern that our BMS units did as well. So we're being patient with this having seen once before, but also seeing the end result of that patience with the BMS unit.

Mark Lanier

Follow on, how would do with sales. Talk a little about what your plan changes are the margin in terms of sales force size and allocation, I'll be curious how you planning for that?

Ryan Oviatt

Sorry, can you clarify your question, are you talk about numbers of salespeople?

Mark Lanier

Numbers of salespeople and allocations to different areas, but, principally numbers, what the and...

Ryan Oviatt

I could answer that, but I don't know if Cam would like my answer. So I would let him address that.

Cameron Tidball

Sure. We're still at the stable force of 17 revenue-generating positions, we call. Now when you also add in the fact that we have our close to 20 service technicians who are also revenue-generating, sales promoting, that gets our team quite large. Now as where we're going to allocate.

We have this last year, we've got kind of 2 divisions. We have our legacy product, which we need that transactional basis account sales person in boots on the ground in the area, where we need them the most. There's really not another area that we need to get someone into.

Currently, we're far outperform our peers in customer support, customer accessibility, that ability to get a hold of someone quick Profire itself. That's one of our main customer experience strategies to deliver that. Now the other line that we have is our 3100 business development, which we have put a person in place to lead that. And he obviously still works with our existing sales team, but we will be looking to grow that team this year, we plan for it.

And that leg will not only have direct sales, but it will also be eventually we envision distribution management of system integrators. So that's yet to be seen. We want to do our best, first of all, to get out there and take business direct, learn direct from customers and really then have our at the for distributors down the road.

In terms of where we go from there? Obviously, as our road map unfolds, as people -- as we release new products and things like that, we fully anticipate growing sales channels in the future. So it will be exciting for Profire.

Mark Lanier

That’s helpful and congratulations to you all.

Brenton Hatch

Thank you, Mark. Appreciate the call.

Operator

Our next question from the line of [indiscernible] with Capital. Please proceed with your question.

Unidentified Analyst

Question number one. Just highlighting oil prices, as you mentioned, average about $56 in the fourth quarter, WTI that actually risen here in January and February, averaging about $61, so that's up about 9% from the fourth quarter? So I'm just trying to understand, if you look at your sales in January and February, to what degree have the higher oil prices and implicitly the higher profits that your customers translated into sales in January and February being above the levels you had in the fourth quarter?

Brenton Hatch

It's an interesting question, we have tried to track this over the years. And just the how directly our sales were connected to that. And we feel like there is usually, about 6 or 8 months lag time after prices go up that the -- most of that is related to the CapEx spend. The EMPs take a while to ramp. Now the fact that, that as Cam suggested earlier, that we are on virtually every piece of equipment now at least the need for it is expecting by the engineers, and so on. When the prices are at $40, most of these are starting to break even.

And so as we get into the 40s and 50s, 2 quarters last year, the prices averaged in the 40s. And yet our -- you saw that we made some significant sales. So I think, that some of this, especially for products that are considered necessities, happens whether we have $58 oil or $62 oil. And I don't think we necessarily see a huge but typically, we follow if we had to pick a time about 6 months after the rise in oil prices that takes the flow through to us.

Unidentified Analyst

Okay. And then secondly, I'd call it -- I wouldn't call it an answer. But on tax rate, asking Ryan, can you just clarify what your federal and state taxes are going to be 2018 in light of the new law?

Ryan Oviatt

Yes, certainly. In the U.S., we expected the federal rate will be 21% number that everyone is aware of. And then with other state factors, we anticipate another 5% there. So combined rate of around 26% for the U.S.

Unidentified Analyst

Got it. That means you can have a bigger Christmas party?

Brenton Hatch

Exactly, and you're invited.

Unidentified Analyst

And then one last thing. your 10-Q, Ryan, much of how the accounting works in terms of allocation of cost, but I was surprised to see that Canada lost money in 2017 and I would assume the way you allocate expenses, all your corporate G&A kind of goes into the U.S. segment. So can you try to explain why Canada in spite of $7 million or $8 million of annual sales, I think, that's right, lost money last year and what's the prognosis for 2018?

Ryan Oviatt

Yes, good question. So there are quite a few different factors that come into play there. The overall margins that we realized in Canada are a little bit lower because services are bigger percentage of our total revenues there. So that has some impact. We do have the majority of our R&D -- all of our R&D group is up there now in Canada. So the costs are there. But we do allocate portions of those into the U.S. based on the nature of those costs.

So overall, it's kind of several different factors that are contributing to that. Without going into all of that detail, we are continuing to look at ways to either be able to allocate more costs into the U.S. appropriately and also where we locate employees in hiring and so forth. So we hope that we can see some improvement there.

Overall, the rate of improvement in the rebound for Canada has been slower than in the U.S. as well. But we do anticipate things continuing to increase and improve there. So hopefully for 2018, we will be able to have positive figures in that income for Canada.

Unidentified Analyst

Okay. And then lastly, on your OEM channel, some of your OEM partners have been -- had not been -- has been a little backordered. And what delivering orders as fast as you would like. I mean, how is that performance now if you'd to rate them, A, B, C, D in terms of how they're doing? And if they need improvement, how are you trying to help to become even more effective?

Brenton Hatch

Mr. Tidball?

Cameron Tidball

Well, the OEM business, I would say to the degree in Q3 and Q4 last year, they are starting to somewhat catch up. But the loyalty that they received from is -- well, they don't enjoy what we enjoy. They -- it's a business. There's not a lot of science that goes into rolling steel. And if anyone is OEM don't mean in that way, it's just -- lots of people can roll steel and Profire in there. And it seems like shops will spring up and shops will go away very quickly or companies who are in businesses, think it's an easy thing to get into because they have a connection of the company that from them. So their ability to deliver, they struggle to a degree because their outlay of capital is very high in order to manufacture.

They need a lot of space, they need a lot of equipment, yet their return on being paid is slower. And so their ability to order product, to keep things going. For some of them they struggle for sure. We deal with, probably, I would say, Canada, U.S., very strong relationships with approximately 50 of the -- and that would represent, I would think, 95% of the major, if not more, OEM/fabricators in The United States in Canada.

So can I keep up to a degree? They're keeping a lot better now because there's more of them in the business than they were at the end of 2016 and early in '17. But this will continue to be a struggle for them to keep up as end-users will continually beat them down on price points. Again, it's low except for cash to get into that business. There's not a lot of technology.

Operator

Our next question from the line of Samir Patel [indiscernible] Capital.

Unidentified Analyst

I had one question, ‘17 follow ups, but somebody already asked about tax rate. So I guess, I only have ‘16 follow-ups now. So first of all, I know we talked about this a little bit previously. I'm aware that basin kind of had different intensity levels for how many burners are needed depending on the type of hydrocarbons that are coming out of the ground.

That being said, one of the trends is obviously longer laterals, more frac stages. So when you guys are looking at completions as a barometer of sort of market opportunity, is it the number of completions or the number of completed stages kind of as completions intensity increases, that you guys are looking at our side of the top line driver?

Brenton Hatch

Well, that's a good question. Mr. Tidball?

Cameron Tidball

The longer laterals is somewhere obviously watching. We want to see how that impacts production path infrastructure. They're trying to get it tight as they can with spacing and then shoot those laterals out, that does creates issues for drilling. You can wreck formations, a lot easier, there's a lot more risk now. We know they're good at it. North America is great at shell production, so they're going to good at it. How does that change things, could it reduced burners?

Yes, in some areas, definitely can, especially, unconventional areas, which is part of it. So it's something we're watching. When we look at deductions, we're not looking at lateral any sort of scientific method right now. It's not easily obtained data. You get a sense of it from when they present to this big conferences of what they plan to do. But it's not published data yet.

We're not sure whenever will be or if it will be, but it's things we definitely we've got to watch it. The production strategy, of course, we know. Eventually, one day there will be a lot more pipelines as governments get out of the way. There will be a lot more pipelines and they'll use more central facilities.

We also see that as an opportunity to increase in the future, we're talking year's out here on a road map to provide different types of automation, site monitoring. There's so many opportunities that can come from that. There's probably -- burners are going to be used for a long time.

We know that. However, we also know that we have to diversify. And so I think, we can look to years ahead here and how we're going to tackle that. So that's the laterals. We are watching it. It's yet to be seen how that's going to impact construction.

Unidentified Analyst

Okay. I appreciate the color. On the side, it looks like you actually had a pretty strong Q4 on both the revenue and margin side. I don't know if you -- -- sorry, if you already mentioned it, but can you give any comments on that, Ryan?

Ryan Oviatt

Yes, I can't comment a little bit and maybe Cam can add a little color there as well. We have seen a really good uptick in service activity. In Q4, there was a lot of activity in Canada, especially, and then also here in the U.S. We had some good success with our preventative maintenance programs that we rolled out with a couple of our customers, where our teams are going out every 6 months or so in servicing all of the equipment in a particular field.

So those elements of success have impacted the service activity for us, but its increasing and the margins have improved a little bit because of that activity as well anything to add there?

Cameron Tidball

Not really, you hit it there on the head, Ryan. The big customers, that we had pushed in the fourth quarter to get things taking care of and maintained. So I think, you had it right on.

Unidentified Analyst

Okay. And I think, again, -- sorry, if I missed this. I know you mentioned that there's little bit of the upside in Q4 from the spending of the CapEx budgets. Does that -- you see any of that as a pull forward from Q1 or do you think that will continue to be off that?

Brenton Hatch

We're very confident given the general atmosphere in the oilfield and what we are sensing from requests for quotes and so on, that we will not see a significant drop. We'd anticipate that.

Unidentified Analyst

Okay. Cool. And then finally, on the 3100, again, -- sorry, if you mentioned this already. Did you -- do you think that you're going to have the certifications in time for the selling season this year. Because I know there was a specific time of the year when a lot of these products go up to bid?

Brenton Hatch

Yes, we really do. We expect, in coming months, within the couple of months to see this hopefully coming to a close and allowing us to move forward with that. Having said that, we are moving forward. We're selling a lot of request for quotes for the 3100 even without the sales certification.

So we're, by no means, sitting and waiting for that. It will just augment what we're presently doing, taking into a little different space, into some of the refineries, and so on. So yes, we think that will happen by springtime for sure.

Unidentified Analyst

Okay. And I know I said finally, but actually one more, which is between your cash balance and obviously improved cash flow from operations and the tax-cut, what are you guys planning to do more the same, do you circle it to more M&A activity, what are you guys thinking?

Brenton Hatch

Talked about expanded Christmas party for this coming year. So we're considering all things. But certainly, M&A is something that we're constantly considering. We have been actively involved in the share buyback program and so on. And we don't anticipate a lot of changes in our approach to that.

If we find some interesting M&A opportunities, we feel like we're in a position, where we can move on that. And other than that nothing to startling. Thanks, so much for calling. We have a long list and we're short of time. So will move forward.

Operator

Next question is from the line of Jim McIlree with Chardan Capital.

Jim McIlree

Just one more on the CMS. Can you talk a little bit about the time line of the sales cycle? And when I say that, I think, there's 2 time lines I'm interested in it. One is what it's like right now? And then once the setting is up and running and successful, what kind of sales cycle you think there's going to be?

Brenton Hatch

Cameron, you want to continue? You've built most of the CMS that your most with it, so...

Cameron Tidball

Sure. I would say timeline 1 is that kind of usually 3 to 6 months from the time we meet them, on the concept, get management change process in place, get the installed books, monitor it and then get a decision to proceed forward. So that 3 to 6 months. We've had quicker once, we've had longer ones. And then after that, the plan to will be similar to that of BMS, where it becomes a specified piece of equipment, where certain coming out, they're going to come with it.

We've seen some small -- 1 small producer in the Eagle Ford has already done that. Unfortunately, they're not ordering 100 a month, if they were, that would be great, but they don't have the base field. We do think that there are some companies that they have hinted at, that they advertise, they will retrofit the field.

And then we get into the circumstance where its how quickly more weak and how quickly can we install become have enough in the capital budget or have to go back and say, hey, this makes sense and lets spend more on the capital budget. So we're not sure how to look.

We do think that if we get an end-user to spec it in as we have for some small larger ones that they would put it in with their new drills. And again, it's not a large expense when you consider what they're spending. So I think, that we should be able to have a better report and perhaps we can even touch base on this, Jim, as it progress. But very interesting to see how this quarter and really next quarter pans out with some of the things we've got out there.

Operator

Our next question is from Anthony with [indiscernible]

Unidentified Analyst

Just a couple of quick ones, mainly Brent. Looking over the releases that you gave, have you used up all your net operating losses, it looks like you're fully taxed in '17?

Ryan Oviatt

Yes, we haven't actually had net operating losses to carry forward because we've been profitable throughout all the downturn.

Operator

Our next question is from John with [indiscernible]

Unidentified Analyst

I just need to remember what it was, just getting -- At the recent conference you're talking about, introducing or looking into applications and other industries outside of traditional oil and gas petrochemical.

And just wondering if you could say anything about how that is, some of this is, I guess, touched on some answers in some previous questions to some extent. But could you put some color as to say on that?

Brenton Hatch

You bet. The more -- the further we develop the 3100, the broader it get in terms of its potential for other industries. But you might have noticed that we just very recently changed the title of Mr. Tidball from VP of Sales to Chief Business Development Officer. And falling squarely on his shareholders now is the responsibility of augmenting of speeding up this effort that we have been making to look to see where our products can be useful in other industries and how those could what we're presently doing. So we're very interested in this. But that is one of the steps that we're taking towards making that more of the reality.

Operator

Next question comes from Richard [indiscernible]

Unidentified Analyst

[indiscernible] your company, but a number of the earlier questions. What was your R&D in the second half in dollars?

Ryan Oviatt

Oh, very specific question.

Brenton Hatch

Second half answer the questions, somebody has to steal over it.

Ryan Oviatt

I apologize, but I don't have the second half R&D numbers.

Unidentified Analyst

How about the fourth quarter?

Ryan Oviatt

Now you're really testing me, hold on.

Unidentified Analyst

How about the year?

Brenton Hatch

For the year, I believe, the number was about $1.4 million.

Unidentified Analyst

Oh, okay. Great.

Brenton Hatch

Richard, one of the things that you can do is reach out to us directly, and with a little time, we can get you all of those numbers. And we would say to anyone that's listening here, if they want further information on anything, where we want to be available always to you, so feel free to reach out to us at Profire at any time.

Operator

I turn the call back to Mr. Hatch. Mr. Hatch, please proceed.

Brenton Hatch

Well, thank you so much, Rob. We appreciate your help today. And thanks everyone for joining us on this call to discuss the results of fiscal year '17. We'd like to thank our loyal customers, our employees, our shareholders for continued support and encouragement. As I just mentioned, we are available at any time to discuss any questions you might have. So feel free to reach out to us. Thank you so much for your attending today, and have a great day. See you.

Operator

Again, I would like to remind everyone that this call will available for replay as to March 15, 2018, starting later this evening by the link provided in today's press release and in the Investor section of the company's website. Thank you, ladies and gentlemen, for joining us today for our presentation. You may now disconnect.+