Q1 2020 Earnings Call
Thursday
ladies and gentlemen, thank you for standing by our conference will begin in just a few minutes. Once again, thank you for standing by our conference will begin in just a few minutes.
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Greetings and welcome to the energy recovery quarter one fiscal year 2020 earnings call at this time. All participants are in a listen-only mode. The question and answer session will follow the formal representation. If anyone should require operator assistance during the conference, please press * 0 on the telephone key pad as a reminder. This conference is being recorded phone now like to turn the conference over to James the car D vice president of investor relations. Thank you. Please begin. Good afternoon everyone and welcome to energy recoveries first quarter 2020 earnings conference call. My name is Jim sicardi vice president of investor relations at energy recovery. I am here remotely today with our chairman interim president and chief executive officer Bob now enter Chief Financial Officer, Joshua Ballard.
During today's call.
Women make projections and other forward-looking statements under the Safe Harbor Provisions contained in the private Securities litigation Reform Act of 1995 regarding future events or the future Financial perfect company these statements may discuss our business economic and market Outlook the company's ability to achieve the milestones and commercialization under the vortec licensing agreement growth expectations new products and their performance cost structure and business strategy.
We're looking statements are based on information currently available to us and on Management's beliefs assumptions estimates or projections or looking statements are not guarantees of future performance and are subject to certain risks and uncertainties and other factors.
You refer you to documents the company files from time to time with the SEC specifically the company's form 10-K and form 10-q these documents identify important factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements all statements made during this call are made only as of today April 30th, 2020 and the company that Presley disclaims any intent or obligation to update any forward-looking statements made during this call to reflect subsequent events or circumstances unless otherwise required by law.
In addition, we may make some references to non-gaap financial measures during this call. You will find supplemental data in the company's earnings press release which was released to the news wires and furnished to the SEC earlier today. The press release includes reconciliations of the non-gaap measures to the comparable gaap results at this point. I would like to turn the call over to our chairman and interim president and chief executive officer Bob now Bob the floor is yours.
Thank you, Jim. And thank you everyone for joining us today. I want to start today's call with the sincere. Hope that everyone listening and their respective families a safe and well, I'm happy to report that the energy recovery team remains healthy and well.
You covid-19 pandemic has turned our personal and professional lives upside down.
Oh any of us can do in response is rise to the challenge that is presented.
To that end. I'm tremendously proud of our teams response. Our employees have displayed a remarkable calm and determination that has allowed us to navigate these uncertain times.
Two considerations have guided our response. How do we protect the lives of our employees while protecting our business and by extension the livelihood of our employees?
It is with great pride that I can report. We have not laid off or furlough any employee due to covid-19.
So in the fortunate position of being able to give back including donating personal protective equipment from our manufacturing facilities to Health Care Providers off the safety of our employees.
Has been our primary focus from the beginning prior to the implementation of the state and local shelter in place orders.
We had already determined that oh employees who could work remotely should do so.
As a result was the exception of our manufacturing activities nearly all of our functional business areas continue to operate fully and efficiently off still remotely in most cases.
On March 19th, when the Bay Area is Sheltering in place was announced we elected to temporarily suspend manufacturing activities at our San Leandro headquarters Monday to assess the impact of those orders.
Review additional local state and federal guidance and to implement health and safety measures recommended by Health officials to protect our own stories that are required to be present at our facilities.
where
We have since partially reopened our San Leandro manufacturing facility in full accordance with federal state and local regulations and guidance office. Also implemented the enhanced safety measures at each of our manufacturing facilities.
those measures include smaller staggered shifts to ensure social distancing between employers employees personal safety equipment for each worker including masks and gloves and most importantly cleaning between shifts
fortunately for us
those measures did not have a material impact on the company in the first quarter
As a critical supplier to the domestic and Global desalination industry. I am happy to report that we have not missed a single contract European Delivery since the introduction of the Bay Area orders. We had an ample product inventory on hand. We continue shipping customer orders a long time. In fact based on what we know today. I expect that we will be able to fulfill most if not all of our existing delivery obligation for the remainder of this year.
we're also
Can you in to take new orders for all of our products including newly awarded Mega projects in Egypt and China, which makes me hopeful that there is an economic light at the end of the tunnel in short. We're attempting to conduct our business as close to usual as we can in this new normal. We expect this new normal to be here for a while. So we are adjusting and planning for the long-term.
The strengths of our balance sheet gives us some flexibility and confidence in that effort energy recovery, like everyone else is facing more uncertainties.
But I do believe we can safely navigate these events.
Now turning to our water segment.
With so many lives depending on the water produced by these large plants operators turn to the name. They trust our Flagship PX faith is strong reputation and the lifetime value proposition Remains the technology of choice for operators who demand proven quality efficiency and off reliability. The first quarter of 2020 was the highest revenue-generating first quarter in the company's history. Our Mega project Channel continues to drive the Scrolls.
Despite covid-19 and the recent volatility in the oil Market. We have not seen a significant impact on our Mega project activity or backlog in 2020. This could still change but if history is a guy in today's environment impacts to ourselves tend to lack Market downturns. We realized that we are only a phone call away from a project delay in these uncertain times. But remains reached that Mega project customers have not yet communicated significant project delays or suspensions.
Because project in our backlog have already been financed and we typically shipped later in the schedule of a construction project.
There is a greater potential for negative impacts to pipeline projects in 2021 and beyond for example, despite the Raging volatility in the oil markets according to recent industry Publications mega-projects in oil dependent countries such as Saudi Arabia appear stage in the near-term which represent a significant source of our future Revenue.
Of our other business Channel oen our smaller project Channel which caters to a diverse source of Industries including tourism may see the month just relative impact from covid-19.
The degree of impact is likely dependent on the duration of the pandemic and subsequent economic downturn. However, we believe any effect of wage are overall guidance should be minor.
Overall, I remain cautiously optimistic as of today. The desalination industry is showing some stability in 2020 Thursday. We are there for maintaining our 2020 Outlook s guided last quarter.
Finally, I want to follow up on my comments on our water gross initiatives from last quarter despite the uncertainties from covid-19. We are continuing to prepare for product launches later this year and our water segments continue to move forward despite today's challenges bath.
I would like now to turn to our oil and gas segment where we are focused on delivering to proof points for the vortec first life will track with our product partner and a second TV Milestone one, as you know, the oil Market has changed dramatically since we last spoke late March. We identified a well in Texas with Liberty to conduct a life. Well, Frac, unfortunately sudden negative changes in the oil Market that to the cancellation of that Frac mere hours before the scheduled commencement.
In mid-april a second opportunity to conduct a life well was canceled as a result of the oversupply of oil at least midnight. We were disappointed by these cancellations but continue to work with Liberty to identify other opportunities to test our Vortex system in life real world conditions, which is critical to our stepped or commercialization.
Due to the state of the oil Market our opportunities to deploy our technology at the life. Well may remain limited for the near-term, but we will be ready when the opportunity arises.
Imperil we're focused on passing Milestone one as we mentioned during our last earnings Paul We believe the technical hurdles of em, one had cleared and our confidence in achieving certification is high while we have not had recent discussions with our product licensee regarding M1 off. Our goal is to attend and document M1 during the second quarter weather at our product licensee site our own always a third party. We look forward to updating you with the results of that test a document M1.
We're also provide a base.
Just for a substantive review was our product licensee on our respective near and longer-term Commercial and operational + Tap. In the meantime, we continue to manufacture and test at our Katie facility in accordance with government health and safety guidance. Our focus is on a moving a few operation further enhancing Vortex reliability and extending the useful life of the cartridges as mentioned during our last call. We have settled on a more simplified and effective production model and they expect
The eventual life. Well, we'll support those decision.
Our confidence is at an all-time high today while we do face headwinds in today's oversupplied environment oil and gas is cyclical in nature. We believe the vortec can ultimately deliver potentially more value during a down cycle than an upcycled as it's not allow our customers to realize meaningful cost savings relative to their peers.
What's that? I would like to comment on our incubation unit shift which we touched upon last quarter while outlining the technical boundaries within which RPX technology platform can successfully address Newmarket verticals. We have identified two or three potential verticals down here promising from a technological and Commercial perspective while our priorities remain protecting our base business in water during these uncertain times and commercializing the vortec. We're also devoting resources to expand our markets beach with financial discipline and transparency. We look forward to providing more color on these efforts in subsequent quarters.
In summary, our employees are safe. Our business is successfully adjusting to our new normal. Our finances are secure and our plant or evolution of our core competence into new technologically and commercially viable vertical is moving forward.
List of that, I will turn the call over to Josh to discuss the financials.
As Bob mentioned this was a very good quarter. We generate a total revenue of 21.5 million dollars representing 9% year-over-year growth our water business generated $19 off new or 19% year-over-year growth Mega project Revenue grew 50% for both OEM and aftermarket experience decreases of 20% and 48% respectively wage decreases an oem and aftermarket should not be attributed to covid-19 or any other macroeconomic challenge, but we're simply normal quarter-to-quarter fluctuations. No mega projects were delayed covid-19 and the value of any delay orders in our other channels were in material in the first quarter.
Do these decreases?
Mega projects made up 76% of our water sales OEM was 19% and aftermarket 5
recognize two and half million dollars of revenue for the first quarter of our oil and gas business. This is lower by nearly 32% over the last quarter, but is in line with our guidance for this year as a team leader. This decrease was planned as we expanded more resources on achieving a Live Well flagged with our product partner, which is not directly related to the ASC 606 recognition of the vortec license Revenue off this time my guidance of twelve to fourteen dollars and license revenue for the year has not changed. However, Revenue recognition is highly dependent on use of our resources on Live Well tests with our office and on M1 test directly related to Vortec license Revenue there for Revenue will likely increase for a more typical three and a half billion dollar level in the second quarter. Assuming we pivot away from live. We'll test and back to Milestone one.
This would be good of a moving Target than the coming months.
Our product gross margin was 70% an increase of 80 basis points over the first quarter of 2019. And that's the upper end of the guidance. I provided in Prior quarters. However, despite Landing with a guidance. We did experience a negative effect on our gross margin to the covid-19.
Because we underutilize our plan at the end of March and chose not to furlough our Workforce. We experienced an increased cost of goods during that period which decreased gross margin by approximately two and a half percent of the quarterback.
How do we not that affected by covid-19? We would have exceeded guidance by that amount. We will likely continue to feel this drag on our gross. Margin while we remain underutilized. However, the effects should be more often now that we're back to producing note that assuming we get back to full production in Q2. We do have the opportunity to call back a portion of this loss of margin during the second half of the year.
In addition the potential change in the mix of our revenues this year due to covid-19 May mean that our gross margin will experience a positive bump as well. Orion sales have a product mix that is higher and pumps and turbo our lower-margin products. The sales are OEM Channel decrease in 2020 pressure exchangers may make up a higher percentage of sales. Thereby increasing margin. We'll have to wait and see how this plays out in the house. But despite the effect of covid-19. We have a reasonable chance of staying within our guidance for the year.
Overall operating expenditures were fifteen point seven million dollars reflecting 29% growth in the first quarter when compared to q1 last year the relatively flat against last quarter and well with a guidance for the year. Please note that it's promised last quarter. We have expanded our disclosure of segmented operating expenditures in our filing as well as in our press release to include a break out of corporate spend money within that number you will see a significant increase in corporate R&D spending year on year which reflects our work on new incubation initiatives.
report a gap that
For the quarter of $621,000 or $0.01 per diluted share.
For the cash and liquidity perspective. We remain in a good position are negative operating cash flow to the quarter had nothing to do with covid-19. The first quarter is typically negative at these levels and this is reflective of Life of your payments such as bonuses and 401k.
About $93 in cash and securities thirty-three million is in cash or liquid money market funds another $41 is in short-term corporate Securities largely maturing in the next three to four months and the remaining $19 is a longer-term corporate Securities between twelve to eighteen months in duration.
We have a very diverse portfolio invested only a highly rated investment-grade Securities. We have no current need to trade in any Securities as our cash reserves are sufficient for operations and Thursday for the illiquidity of the markets. We experienced in the first few weeks of this crisis had no effect on our operations.
Where we stand today, we feel comfortable on our liquidity. We have not drawn on any debt, you're taking advantage of the lines of credit made available by the laws recently passed by Congress. In fact, it is in part for a certain times such as these that we've kept a healthy amount of liquidity on our balance sheet, and I think that Prudence is paying off today.
It is a Financial Health of our balance sheet and the resiliency and the desalination industry to date that has allowed us to forgo the difficult Personnel decisions that so many others are currently facing.
Well, our cash position is strong and our balance sheet remains flexible on these challenging times. We are being prudent with our spend. Although we have not furloughed any employees. We have scaled back operating and capital expenditures possible for the time being Global uncertainty today. We're putting in clear contingency plans. If a situation were to deteriorate, however, we see no need to implement these plans as of today. It was that let's move to the question and answer portion of our call.
Thank you. At this time. We will be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star to if you would like to remove yourself from the queue off for participants using speaker equipment and maybe necessary to pick up your handset before pressing the star Keys. One moment, please while we pull for your questions.
Her first questions come from the line of Pablo all turn off of Raymond James. Please proceed with your questions. Thank you for taking the question urea-formaldehyde guidance. And and I just want to be very clear on this in March. You were targeting water segment Revenue growth of twenty to twenty-five percent versus last year's levels, and that's Still Remains the case, correct?
That's correct.
And what gives you the confidence that even with the reduced utilization or or the slower pace of manufacturing in San Leandro you can accommodate
All of the customer demand, you know at at the levels, you know prior to the pandemic.
First of all, we have a healthy inventory. Secondly. We also expect our Tracy facilities to come online the second half of the week.
And also we were working on one ship before.
Understood what one last question. Are you aware of any?
Diesel construction projects that have been delayed or slowed because of lockdowns wage or other social distancing regulations.
No, we are not aware of any that's why we have the confidence that that we would deliver the guidance.
Very clear. Thank you again.
As a reminder, if you would like to ask a question, please press star one on your telephone keypad.
Our next question comes from the line of Mills Thomas's of burnley's please proceed with your questions.
Hi Bob, thank you for taking my question. Just just to make it clear cuz last name is coral call you you got it for 21 Revenue ten to Fifteen wage growth in in the water segments. So given that you're not mentioning anything now, it does that mean you're obviously retracting your your guidance for a 2021 revenues.
We are not retracting at the same time. Yes, we're not reconfirming because we do see dead.
Some delay to the three months in some of the announced the bidding, although we have not seen any consolation of the announcement bidding. So we should have a better picture at the at the July call.
Okay. Thank you.
Our next question comes from the line of problem option off of Raymond James. Please proceed with your questions. I just one about the the Schlumberger wage relationship. You you mentioned not having any any dialogue with Schlumberger recently, but you're planning, you know to to attempt M1A in the next thing you said 60 days to given that oil prices right now are are obviously, you know, twenty-three your Lowe's is there a risk that the same kind of cancellation may happen with em one as what happened with Liberty where that Frac was canceled.
First of all, the m one we can do em one on our own and document and one presented to Shalom we can request that slow. I will do in one with us after we documented our own em one that has to do with facilities and this is not a live track. So therefore it does not contribute to the oversupply of oil.
Okay.
Betancourt Pablo we will do in one first ourselves Justice just to be sure that we pass all the requirements and then we will evaporate contract we would request to do a M1 which Loom although the completion of em one is not dependent slumped M1.
But we need the document that we have done.
And what who determines whether you get the 25 million dollars?
Of course eventually is shown who has to pay it. So there yeah, that's they determine right? But first thing is we have to demonstrate that we have accomplished and more then as I said just now that we really long it's been a long time since signed original contract which Loom much have changed particularly much have changed in recent weeks off and that affects the outlook for the next year or two or maybe longer. So therefore I expect that we will actually go into a comprehensive discussion review our respective operational commercialization plans. So em one will be dead.
will be
viewed in that overall context
Okay, but first thing we have to demonstrate with an M1.
All right. Thank you again.
As a reminder, if you would like to ask a question, please press star one on your telephone keypad.
We have reached the end of the question and answer session. I will now turn the call back over to management for any closing remarks.
Well, this is my I will thank you all for joining us this afternoon. In fact, we see close to eighty participants joining us this afternoon. We look forward to speaking with you in July. In the meantime. Please keep yourself, and your family is safe month lease. Also, check out our website for updates. Have a good day and evening. Thank you.
This concludes today's conference.
You may disconnect your lines at this time. Thank you for your participation and have a great day.