Q4 2019 Earnings Call

[music].

Greetings and welcome to the energy recovery Q4 fiscal 2013 earnings conference call. At this time, all participants are any listen only mode.

Question answer session will follow the formal presentation.

If anyone <unk> assistance during the conference. Please press star zero into telephone keypad.

As a reminder, this conference is being recorded so my pleasure to introduce your host James Hardie. Please go ahead Sir.

Everyone and welcome to energy recovery, what where and what do you like he brings.

My name is Jim said Party, Vice President Investor Relations that merger.

I'm here today, with our chairman and interim President and Chief Executive Officer about our Chief Financial Officer, Josh.

During today's call when they make projections and other forward looking statements safe.

Pertain to the private Securities Litigation Reform Act.

Regarding future events for the future financial performance.

These statements may discuss certain business economic and market out.

These ability to achieve the milestones commercialization of the board license.

Well.

Issue, new products underperformance cost structure and business strategy.

Forward looking statements are based on information currently available to us yeah.

It's beliefs assumptions estimates or projections.

Forward looking statements are not guarantees of future performance.

Are subject to certain risks uncertainties.

Yes.

We refer you to documents the company files.

Yes.

Help me is one day.

Sure.

These documents are identified backers cause actual results could differ materially notes contain our projection for.

All statements made during this call me only as of today arch.

The company expressly disclaims any intention or obligation uptick.

That's made during this call to reflect so well events or circumstances must otherwise well.

In addition, we may make some references to non-GAAP financial measure.

You will find supplemental data in the company's earnings press release at least is wires and first yes.

Today.

The press release it includes reconciliations of non-GAAP measures.

At this point ill turn the call over to our Germany.

Chief Executive Officer.

The floor is yours.

Thank you Jim Thank you everyone for joining us today.

2019 wasn't yet another great year for energy.

It was hours third consecutive year record 711.

In our water business, Oh, that's consecutive year, Oh revenue grows and our fourth consecutive year, a 100% market share the Mega project channel our fastest growing channel.

Your reputation abolish P.S. pressure exchanger.

This life time value proposition is unmatched by our competitors.

How do you compete against the progress.

I rarely if ever sales.

And no maintenance.

Very proposition is new increasingly important today.

As Mega funds, well, even larger and we'll have nearly doubled in size.

No I'm not an average of roughly under 50000 cubic meters per day in 2018 nearly 270000.

Slide 2021.

We just recently announced the contract with a larger.

Seawater reverse osmosis plan.

That will produce over 700000 pure cubic meters of water per day.

This is not only a major milestone energy outbreak.

For the entire industry.

Reverse osmosis selling mention is indeed known as evidence by DHL data as recently as.

Oh seawater reverse.

Moses Capex spend which is expected to increase now roughly $3.3 billion.

In 2018, who over 80 or 90 days.

2001.

In such large plants the costs of unplanned downtime.

And of course operators hundreds of thousands of dollars per day.

One operator knows.

That our p. extra rarely sale.

This reputation should continue to serve us well.

During what is shaping up to be yet another record year.

2020.

Where accounts attending our ability to continue to execute.

Even as our backlog and pipeline grow.

Even though our strong 2019 end of year results.

Increase the base from which our outlook was calculated.

We remain confident in our ability to generate 20% to 25% revenue gross twentytwenty.

With that additional 10% to 15% in 22, when do you want.

Additionally, we would say that there is a upward bias to this year's ranch.

Which we will address in coming quarters.

Exactly.

The largest contract warehouse was also the largest thermal conversion contract today.

Well the size of an announcement was significant or a company.

More importantly longer term evocation involves the potential trend of distorts thermo desalination capacity.

Transitioning to seawater reverse osmosis production.

In Twentytwenty and Twentytwenty won several conversions could be as high as 10% to 15% Oh are.

Total water revenue.

Has the potential switching trend started to materialize.

More than 20 million cubic meters per day of thermal water production.

It was commission from 1980.

Two 2018.

These plants will likely all be replaced by reverse osmosis plans.

Either at the end over their useful life or perhaps earlier.

You too the immense cost savings a pain.

I'm conversion to reverse osmosis.

We estimate this potential conversion to create an energy.

Every device total addressable market of approximately half a billion dollars at today's prices.

As a coming decade plays out our goal is to capture as much of that new market as possible.

The mid reduce growing demand.

We began to double our manufacturing capacity in 2019.

Where copying the second phase of this guy expansion.

Who come to be completed.

During the summer of this year.

However.

The second phase our expansion will be located are our new facility Tracey, California.

Okay that about our east from our headquarters in semi Andrew.

Wes Commission, we will produce about 20% our pressure exchangers at this new plan.

In the first who your production.

With respect to Corona virus.

We're not currently seeing a significant effect.

Our revenue I look or supplies.

However, as we source some components from China, we are continuing to monitor this situation.

In summary.

Water business remains strong and highly profitable.

Were excited by the immense grows we see upon us.

The team is excited executing and we are confident.

Our ability to deliver on bad gross.

What should be yet another record year.

Now I'd like to turn to our oil and gas business.

Where we have made tremendous progress.

The vorteq transitioning.

From an R&D project.

To a commercialized products.

Yes, a year ago, we secured our own testing location today.

I will update you own the progress made.

Due to our increase of capability to test said, well is our own crews and equipment.

During the final week, so the fourth quarter.

We successfully phased he.

We've successfully passed.

2.1 million pounds of sand so the vorteq the equivalent of roughly seven frac stages, using Iran jokes sense sizes, including 30 to 50 mash 40 to 70 mesh and hunker match.

We did this to be consistent was most frac job today.

Which uses multiple send types.

Depending on the Frac design.

Moreover, we successfully test the vorteq well passing sand concentrations of four to eight pounds of sand per gallon.

The ability to handle a higher concentrations as the possibility of expanding that.

Technical capabilities of the Vorteq pressure exchanger.

The warfare cannot be the cost of unplanned downtime I know frac site.

Therefore, the meantime, two fairly or of our technology must be longer than that of the equipment already onsite.

Based on our results in the fourth quarter. We believe this is achievable was our technology.

The investment to procure our own Frac side I.

Let's be integral to our progress.

Testing continually while making design enhancements or in our own facility, let us rapidly identify and resolve critical issues, there's no for tech and the system or on it.

We have being able to replicate most of the aspects of working frac side.

And the Vorteq has responded well to the challenges of this environment.

We have spent the better portion of 2009 PM has seemed a durable worthy of the vorteq and its ability to work using his simulated frac side.

In addition to simulate it testing our own yard. Our next steps will include life Frac testing, which is critical to pass to commercialization.

With the assistance of our product partner, where in the process of identifying potential wells to approach.

We look forward to providing updates once we and our park a lot of partner.

Successfully identified like wells.

Where we can deploy our brought more tax system.

We have well utilize the resources of our testing facility.

And are ready to tackle this next challenge on the pass to commercialization.

In addition to our progress in the water, what's the Vorteq, we officially commissioned an open our Haiti excess production facility.

We now have a full operational testing and machining facility that will enable us to more efficiently support the vorteq. During this critical phase of testing as well as upon commercialization.

I am pleased was the team and the progress we have made in recent months.

However, I have never lost sight of this significant investments that this company has made the vorteq.

And on the need to create real value.

Our shareholders or to stop investing.

As such were focused on getting the vorteq commercialization and beginning to derive a return.

Our investment as quickly as possible.

I look forward to what is to come.

Twentytwenty.

Finally, we recently completed a reorganization of our team intended to strengthen the ability of our business units to execute and grow their businesses.

As well as enabling a disciplined approach.

Who longer term rose.

And to assure we deliver commercialized products.

Greatly enhance the value of energy recovery.

In the near term, we remain focused on putting new water products into beta test this year.

And advancing the vorteq toward commercialization.

The imperil.

This reorganization creates a centralized corporate development and the R&D function.

Now, we'll focus on incubating new products and businesses.

Outside our existing water and oil gas business units.

R&D is that the heart of who we are as a company.

Now we believed in the potential of our pressure exchange technology.

This technology is uniquely capable of handling columns of fluid.

I'm relatively clean seawater too harsh tracking from Cowen.

And was in the pressures trial 1002 10000 Psi.

The development of the Vorteq pushes a technology boundaries or pressure exchanger technology.

As we further expanded technology the functional envelope.

It is becoming apparent.

This potential industrial application using the current.

Andres are significant.

We will continue to explore new applications of our technology the delivered the next level or value to our shareholders.

You can see that we ended 2019 confidently and was strong momentum as we step into Twentytwenty.

We as a team continue to execute at a high level focused on building this business for the long term.

There is no slowing down I am excited by what Twentytwenty and the future has in store for us.

And I'll handover the call overcome Josh to discuss the financials.

Thank you Bob we ended the year strong and somewhat above our Q3 2019 guidance generating total revenue of $19.5 million, representing 10% growth year over year for the fourth quarter ending December 31st.

For the full fiscal year, we achieved total revenues of $86.9 million, 17% growth over the same period in 2018.

Our water business generated $16 million in revenue during the fourth quarter, representing growth of 14% year over year.

We achieved revenues of $73 million for the total fiscal year, 20% increase over the same period 2018.

Our megaproject channel led this annual growth, increasing 40% and 29 team, we expect Mega projects to continue to drive growth in 2020 and 2021.

The significant annual growth in a Mega project channels Roberts revenues up to 52% by water sales an increase from 45% in 2018.

OEM was 32% water sales an aftermarket 16% year.

While the majority of our water growth was in the middle East more than 20% of our 2019 to increase occurred in Latin America, where we're seeing increased project activity related to industrial sectors is water needs increase in the region.

We couldn't be prouder of our water team for this tremendous growth as Bob mentioned, we're currently guiding growth of 20% to 25% 2020 off these higher end year results, which increases our guidance $3 million to $4 million for 2020 were about 4%.

We hope to adjusted guidance further in the coming quarters as bookings finalized in any potential effect from the cronto virus becomes clear.

You recognize total revenue of $3.7 million for the fourth quarter, and our oil and gas business.

An increase back to normalized levels from our decline in the third quarter.

Fiscal year 2019 recognize the totaled $14.1 million in license round.

This revenue of course is entirely related to the assay six so six recognition of more tech license revenue.

Note that while we currently expect to recognize between $12 million to $14 million in 2020.

This revenue will be more weighted to the second half of the year as we focus on performing live well testing with our product partner in the first two quarters.

We expect our quarterly license revenue to be in the range of $2 million to $3 million in the first half the year, none to increase the three and a half to $4.5 million in the second half.

We reported a GAAP net loss for the quarter zero point $6 million or one cents per diluted share.

This loss is largely due to a onetime expense related to the resignation of our CEO.

However, we achieved 19 cents diluted EPS for the year two cents less than 2018 once adjusted for the large onetime tax benefit related to our prior international tax structure.

Our product gross margin ended the year at 72.1%.

An increase of 60 basis points over fiscal year 2018, due to our strong Mega project sales.

This increase was realized despite a decrease in the fourth quarter relative to Q4 2018.

300 basis points to 71.5%.

Due to a larger percentage of non PX sales as a reminder, we do expect some slight weakening of our product margin.

2020 in 2021 between 68% to 70% due to pricing pressure and tariffs related to China.

We do not see any effect in our product gross margin from the Corona virus as of today.

However, if we were forced to rely more on our suppliers outside China, we could potentially see some downward pressure on our gross margin.

We do not expect any significant reduction that margin as of today you will update you on these numbers in the first quarter to call.

Overall operating expenditures grew 21% in 2019 right within the guidance. We provided the last few quarters over half of that increase was due to research and development spend related to the vorteq as well as new products and improvements to existing technologies and our water business.

Note that of the total $56 million an operating expense.

Early $10 million is related to non cash items, such as stock based compensation depreciation and amortization.

We do not have an update to our 2020 guidance on operating spend at this time, except to note that as we turn to new projects outside of water and oil and gas. We will begin to break out these numbers in our filings to provide a sense as to the size of the investments we're making.

You are taking a vigorous commercial based approach to these projects focused on achieving specific research and commercial milestones prior to investing significant funds.

This is also true in our water business as we that all projects to ensure that they will create real value for shareholders.

In terms of Vorteq, our investments in 2020 are focused on introducing an initial production ready prototype.

Note that once we begin to transition into the commercialization phase of this business.

We should see a significant drop in our R&D spend.

Testing should decrease as we move to the field in a significant portion of our costs in Kt will move to cost of goods.

We will provide further guidance on this when appropriate.

Our overall 2019 Capex spend ended the year at a totaled $7.4 million slightly below our guided minimum of $8 million due to the timing of our Houston facility spend.

Our expectations for 2020 or slightly higher than our prior guidance with investments of up to $12 million.

This increase is due to the decision to expand our capacity in a second location and Tracy, California.

You should not see significant Pat Capex investment in our oil and gas business until we begin to ramp up for commercialization at which time will provide additional guide.

Our cash and securities balance increased to $101 million at the end of that of the year and of course, we remain debt free with that we can move to the question and answer portion of our call.

Thank you will now be conducting a question answer session.

I'd like to be placed in the question Q. Please press star one of your telephone keypad.

A confirmation told will indicate your line is in the question Q.

You mean press star to if he'd like to move the question from the Q.

For participants using speaker equipment, they may be necessary to pick up or handset before pressing the star keys.

Once again that is star one to be placed into question Q.

One moment, please what we pull for questions.

First question today is coming from Pavel Molchanov from Raymond James Your line is now live.

Thanks very much.

First a question on the on the water revenue guidance.

You said up 20% to 25% opt for the year as a whole do you anticipate any a front end weighted or backend weighted a cadence or should it be fairly stable from quarter to quarter.

This is Josh type of though I'd assume awaiting a probably 40 to 60, 40% in the first half and 60% of the other in the second half.

Okay very very clear.

And on me testing progress.

With regard to board tax.

Given that 2020 marks the five year marked a milestone from.

The original Schlumberger agreement are you committing to get too.

Leased up M. One.

For the year without.

Yes.

Okay.

Yes.

And what gives you the confidence in that.

As we described in my.

Update.

We passed 2.1 million pounds of sand as seven stages.

I'm sure you remember M is five stages.

And.

Also we have frozen our production prototype so we are not.

It is still tinkering around in R&D.

And Furthermore, our product partner has enough confidence.

Yeah, what they have seen and we are actively.

Sourcing potential life Frac.

These are the data points.

Okay, well look forward to hearing more about it. Thank you.

Thank you for next question today is coming from Tom Curran from FBR. Your line is not alive.

Good evening.

Bob.

It sounds as if so in your prepared remarks, the product part of your reference.

Presumably with slumber, Jay and them by life well my understanding is said.

One.

What's gonna be conducted with a slumber J crew in Frac spread.

I believe it originally intended.

Kelly Bill.

Is that what you mean by lied one is that is that a reference to the original plan for M or has that changed and are you referencing.

I live well, a frac job site that.

Would include an actual operator.

That's a customer.

It is our product hardener is liberty in this effort.

And.

You will be add a life frac side, that's where we're searching a life frac side at the end customer.

Of liberties.

I see so you expect over the course of this year.

To both move forward and conduct testing with Liberty.

Lie frac job site with one of liberties.

Actual customers.

As well as resuming and completing and one was slumber Jay you expect to move forward with both this year.

Thats correct, yes.

Great and then regarding recent full scale testing you've done in Katie.

The Sandy shared was very helpful.

Would you perhaps quantify what your recent testing ranges had been for EM.

Many flow rate and then pressure.

Pressure.

Pressure is up to 10000 Psi.

A slower rates.

The more important one is I've mentioned is that.

The we're testing four to.

Six and eight pounds of sand.

Since you are apparently quite familiar was m. wine and one in fact.

Was only envisioning two pounds of sand.

And with the sand was the sand.

Density view well changes the the flow rate would also very.

Because of that.

Says send density.

Right makes sense and that all sound technically very encouraging.

When it comes to milestones wanting to.

Have you get agreed to or or do you expect to happen negotiate any changes, including potential modifications to the K P ice for each test it it doesn't sound as if those capabilities have changed.

No we are not contemplating nor are we negotiating any changes to those caveats.

Great.

Thanks for fitting my question.

Thank you as a reminder, that star one could be facing the question Q1 moment. Please poll for further questions.

We appreciate of our question answer session, let's turn the floor back over for any further closing comments.

Well it is a Bob and thank you for joining us. This afternoon, we look forward to providing an update our next earnings call in eight weeks. However, the day. Thank you.

Thank you that does conclude today's teleconference. You may disconnect your lines as time and have a wonderful day. We thank you for your participation today.