Q4 2020 Energy Recovery Inc Earnings Call
Conference call.
The name is Jim Mccarty, Vice President of Investor Relations of energy recovery and I'm here today, with our chairman President and Chief Executive Officer, Bob Mao and our Chief Financial Officer, Joshua Ballard.
During today's call, we may make projections and other forward looking statements under the Safe Harbor provisions contained in the private Securities Litigation Reform Act of 1095 regarding future events or the future financial performance of the company.
These statements may discuss our business economic and market outlook, the company's ability to commercialize vortec growth expectations, new products and the 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.
Forward looking statements are not guarantees of future performance and are subject to certain risks uncertainties and other factors.
We refer you to the documents the company files from time to time with the SEC, specifically the company's form 10-K, and form 10-Q, and 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 March 11, 2021, and the company expressly disclaims any intent or obligation to update in the forward looking statements made during this call to reflect subsequent events or circumstances, unless otherwise required by law.
At this point I would like to turn the call over to our chairman President and Chief Executive Officer, Bob Mao Bob the floor is yours.
Thank you Jim and thank you everyone for joining us today.
Ill start todays call as I did last quarter and 94.
Since the pandemic started with issuing share hope that everyone listening and your families are safe and healthy.
Although the past year has been challenging for everyone.
I'm happy to report that the energy recovery team and our business remains healthy and strong.
Our goal has always been to protect the lives and livelihood of our team.
And the robust testing and monitoring total coty in place for all of our manufacturing sites.
Our knowledge there has the spread of COVID-19 at our facilities. It is a testament to our team that and we were able to keep everyone safe, even while producing and selling and record number of <unk>.
Beyond these achievements.
Our consumer evolution as the company is exciting.
We have settled into a long term strategy, which is <unk>.
Pending the operating range of our pressure and exchange strategy.
And and introduce it to new industries outside of desalination.
As an example, we diversified our water product offering.
Sales to the introduction of our ultra PX energy recovery device.
Are you seeing and industrial wastewater treatment.
We're now partnering with a leading global membrane manufacturing the pond water solutions to market our product in the space.
We also issued our first ESG reported formalizing the focus we have.
Oh and Chad.
And there are mental and sustainability.
Our efforts around those patents led to an a rating by and Morgan Stanley and MSCI.
And we know there is more and we can do to be a good global corporate citizen.
And we'll continue to update you all of ESG efforts in 2021.
Finally, the recognition of our achievements forms name.
Energy recovery as the number 16 list of the top 100 of small cap companies.
And the IR magazine, Shortlisted us for pop and the Investor Relations Department Force.
Small cap companies.
I'm proud of.
Of how the team responded in 2000, twenty's challenges, but I am not so price.
The evolution underway energy recovery is and what I envisioned and I get the accepted the permanent role of President and CEO.
We're now building of our momentum of 2020 and art.
<unk> positioned to deliver another great year, Inc, 2021 and beyond.
In today's call I will update you.
All of our base desalination business, the industrial wastewater vortec and.
And our emerging integration projects.
And that.
Let's begin with the desalination.
Where are we once again generated a record year of revenue.
Which by the global pandemic.
Our Mega project channel remained strong throughout the year Mega projects were the main driver of our 27%, while the revenue growth and in 2020.
Beating the 25% outlook, we had maintained throughout the year.
We anticipate this segment to lead the way again in 2020, one and 'twenty 'twenty two.
Large scale projects are built to meet the needs of a third of the world.
We're also seeing concrete proof of the technology shifts from thermal to reverse osmosis.
The revenue and backlog.
Which should further drive growth.
Yeah.
Yeah.
And we affirm the outlook of.
What do we offered during our third quarter call.
<unk>.
Okay of 10% gross and in 'twenty, and 'twenty, one and 2000 and up to 25% growth and 2022.
Over the last year.
We have repeatedly spoken of the secular shift the global water demand.
Water scarcity is growing and communities across the globe.
And and seawater.
Reverse osmosis desalination.
Just a day.
The out proof of option to deliver water and water is scarce.
Patients.
Governments around the world are seeking solutions to the water needs of their people.
And is leading to a further growth and you see the Sweetwater reverse osmosis.
It's the country's evaluate their path forward.
Many are prioritizing sustainable solutions.
This is where the power PX and add significant value.
The PX generates no emissions and the operating and reduces the energy intensity of seawater reverse osmosis.
The decreases and.
Energy use by up to 60%, making.
And making seawater.
The universal Samosas far more cost effective and.
And and environmentally sustainable.
And importantly, our customers do not have to compromise on quality for sustainability.
And the reliability efficiency and lifetime value proposition of RPX.
And make it.
Water reverse osmosis is.
Most of the trusted and widely use energy recovery device.
This win win value proposition and the desalination and supports our strategy to.
To apply the PX to other verticals to improve efficiency and the environmental sustainability.
I will now talk in more detail.
All of our new product applications, starting and industrial wastewater.
Since we announced the ultra P X energy recovery device late last year, we received two orders.
The first is already being shipped to India and the expected to be commercialized.
Emissions by midyear.
And the second is scheduled to be shipped to China by the second quarter.
We also hosted yesterday.
Successful webinar.
The problem and it's part of of our partnership with Google and then to drive market acceptance of ultra high pressure and reverse osmosis.
All of the for the sake of discuss the discussion are of course shortly.
Our entre PX and significantly reduce the energy costs and the environmental impacts.
Of treating industrial wastewater, meaning our own applications.
<unk> is increasingly used to achieve zero and the minimal liquid discharge treatment requirements.
Yeah, the and N.
And the systems.
To eliminate or minimize the wastewater discharge by purifying and and recycling concentrated and industrial base.
Wastewater.
And traditional E L D E and M. L D setups up to 50% of the cost come from costly and Energy Inc.
Hence the thermo treatments.
L D and and then the MLD and systems.
Opting our own kind of lower energy intensity and potentially generally the significant cost savings.
And then and I'll offer PX.
And oh become even more attractive.
<unk> two of the thermal option and give.
Given this we believe altra PX has the potential to make our own the preferred treatment option.
Cool.
Achieved E L E and M L B.
Trading.
Treatment and requirements.
Just as our PX helped <unk> to become the leading and that's.
<unk> force seawater.
And are desalination.
Where do we sit today.
<unk> adoption.
And the industrial waste water treatment and the early stages.
However, and environmental regulations are beginning to drive growth and.
And we believe the regulatory changes.
Plus companies own ESG commitments.
And I'll push this new segment forward.
Sectors, such as metals and mining.
Cannon chemicals pulp and paper promise.
Thomas to Chico's and textile and others.
Could all benefit from our <unk> as a means to remove the toxin.
The industrial wastewater.
And this demand emerges.
We expect to be in the similar position the desalination and that is true.
Preferred prepared to meet customers demands and position as the industry solution of choice.
We're actively.
Building, our team and sales pipeline and Asia and.
And the increasing our marketing efforts.
We're excited by this new business line.
And she and as further proof of our ability.
To deliver solutions that make industrial processes and efficient.
And sustainable.
Now we're trying to go attack.
Over the past quarters few quarters.
We have stated that we must successfully complete two to three light well fracs.
Elevate our value proposition and maximize the life of the PX cartridges and that's it.
A reminder, if we'd do not pass and one of the three of hurdles, we do not have a commercialized product.
Let's begin with the light well fracs.
We are pleased to announce that we have completed one.
First slide Frac, and Texas and we are currently taking part in the Frac operation for a multi well pad.
Of two trial.
And the new Mexico.
The first trial was a small non frac on the vertical growth.
Yeah.
Like the dress rehearsal for the multi well pads and lots of Frac stages.
Since March 1st.
We have been outside of the multi well pads.
By one of the largest independent oil producers and the risk.
Chris.
We have experienced challenges.
Which represent valuable learnings for us as well.
And we work to fine tune the technology.
By the end of the day on Sunday March 7th.
More tech or liberalize, the 10 frac stages.
We expect to continue for additional 50 to one hundreds of stages.
Each of these stages, we will accumulate the data to further validate our work on all three hurdles.
Kind of expect a more fulsome report.
The next earning call in and <unk>.
Eight weeks.
The Frac concludes.
And we were able to fully evaluate the data.
And as a reminder, cadre of July remains the key hurdle.
The success.
Cartridges and the maintenance of them are the main cost drivers for the.
Okay.
We consider R&D too.
Now the complete on the blood typing, however, manufacturing of the cartridges and <unk>.
<unk> a real challenge.
For commercialization we used to.
And have work to do the true that we can.
The reduced contribution profitability.
In addition to.
Engineering and will continue as we work to improve the war tech in the field.
If you remember.
We committed to a commercialized by midyear this year.
And or six investing.
We remain on that schedule.
And the coming weeks, we will approve the pivotal.
True define our next steps.
Let's now move on to our future of PX applications.
Last quarter I explained how energy recovery.
Transitioning into a growth company.
And our watch the pressure exchanger.
As a reminder, this technology can handle.
Relatively clean to dirty liquids and pressures from the 1000 pounds per square inch to over 10000 Psi.
Today, I would like to talk about the work our team has done.
To expand the sandbox and push the pressure exchanger operates.
Specifically.
We have now proven.
And the P X can also expand and compressed gas.
Therefore, widen and the parameters of our sandbox.
This technical achievement opens up potential applications.
And the industries, where our technology could provide significant energy savings.
Such as refrigeration air conditioning power generation and liquid natural gas.
Our first target is to address the challenges faced in the industrial and commercial refrigeration.
The refrigeration industry is facing a shift in technology.
As regulation faces out and refrigerants like Hydrofluorocarbons.
No.
You have suits.
And we place them with natural refrigerants, such as carbon dioxide.
With me are defined and 12 months period.
We have technically proven that PX is capable of processing gas.
It's needed in the.
Refrigeration cycle.
While we do not have of commercial product and yet we.
We believe the PX can serve as a critical solution for this industry.
By helping to reduce the energy of course.
Parents and use of writing and naturally the breakthroughs such as C of O T.
The PX cash.
And then potentially create real value for the customers.
So we have and desalination.
We are of course mindful of all of two year deadline.
Commercialized and new technology, and therefore over the next 12 months.
We will provide a deeper discussion on this topic as we proceed.
In summary.
And the momentum with which we ended 2020.
And that's carried into the new year.
Our desalination business continues to ride the secular wave of the map.
We are excited to join the palm and marketing the benefits of our old.
And as a means to gain acceptance for industrial wastewater and solutions.
And one last week.
We have the war tech onsite and operating and a lie.
And as well.
And we have extended the operating sandbox and T X the handle gasses opening up of potential solutions to advance the environmental sustainability of new markets.
I look forward to providing further updates.
The progress and the nice speak wish you the next.
The eight weeks time.
And with that I will hand, it over to Josh.
Thank you Bob the dynamics and our revenue that I described last quarter with Mega projects, leading growth and OEM and aftermarket is showing weakness played out through the end of the year as expected.
Megaproject sales grew 75% and 2020, while OEM and aftermarket ended the year, having decreased 31 and 18% respectively.
As I mentioned last quarter, the weakness and the OEM and aftermarket channel was entirely due to the impacts of Covid, 19, which especially affected our travel and hospitality markets.
As we look forward to this fiscal year's revenue, we expect a different set of dynamics in 2021, we expect the MPD will continue to grow but the growth will likely be more tempered this year and the range of six months to 12% before likely accelerating in 2022.
Our revenue will also likely be recognized and a different quarterly cadence this year, whereas in 2020 revenue was more heavily weighted to the final two quarters and 2021, we expect more of a dumbbell results Q1, and Q4 should be very strong accounting for as much of 60% to 65% of revenue.
The remaining 35% to 40% of revenue will be split between two considerably smaller second and third quarters.
And this cadence of entirely being driven by the timing of Mega project shipments and is another example of the lack of seasonality and our business.
We are pleased that we ended 2020 of 69% gross margin, which is in the middle of the guidance we provided for the year the.
Despite losses due to manufacturing slowdowns early and the pandemic.
And we were able to claw back a good portion of the lost manufacturing and ended the year and a good place.
As I mentioned last quarter, we expect gross margin of between 68 and 70% of this year.
Our operating expenditures grew at a much slower pace and 2020, while overall Opex grew 6% once you factor out of the $2 $3 million impairment charge related to the termination of the slumber J agreement.
The recurring Opex grew less than 2%.
Some of that lower growth was due to reduced spend related to COVID-19, such as the 14% reduction of sales and marketing spend from less travel trade shows and other marketing events.
However, a significant portion of also came from a decrease in R&D activities related to the vortec.
Looking at the quarterly trend of oil and gas R&D spend and you'll see that we peaked in the first half of 2020.
And the second half of the year spend was nearly half of that of the first.
And I provided guidance on our Opex on the last earnings call and I have no changes to that guidance as of today.
We closed the year with and increased cash and securities balance of $115 million or.
Our cash for 2021 is expected to stay roughly level, but depending on Q4 collections could increase as high as the $120 million to $125 million.
Because of our increasing cash balances we have made the decision to begin the share buyback program. The total program will be for $50 million beginning over the next week with no specific term and place the buybacks will be done and the market and we will seek to maximize the number of shares repurchase.
I would also like to give you a heads up that the some changes coming to how we present information and our filings beginning of the first quarter, we will transition of our oil and gas business unit and to a new category that we're calling the emerging technologies. This business unit will include not only our vortec activities, but also our incubation efforts and refrigeration new of enabling technologies.
As well as the other new products that have not yet and fully realized and the markets. We believe this will better highlights of our shareholders, how we're investing and the new products and how we will create value over the long term on these investments.
Our new ultra PX product line will be rolled up into our water business units for reporting purposes if.
You will know changes and our 10-K to be filed tomorrow and our business section outlining this new structure, but new financial reporting and will start only and the first quarter.
We have also begun to include sales channel information and both our press release and financial filings and lot of the importance of these channels and how they affect our growth and profitability.
My final comments related to our team. Although every one of the bit tired of the I'm sure you are as well our team has held up admirably roughly three fourths of our employees of regular working onsite today.
We have been actively preparing our offices in California to allow the remaining members return as restrictions are eased in the coming months, including and upgrade to our HVAC system for better airflow, Inc.
<unk> office space to allow for easier social distancing temperature testing weekly testing of all of onsite employees and strict adherence to CDC guidelines.
Look forward to getting everyone back on site and the coming weeks and months.
Thank you.
At this time, we'll be conducting a question and answer session. If you'd like to ask the question. Please press star one on your telephone keypad.
Kathy mentioned total in the King your line is and the question queue.
The press Star two of you would like to remove your question from the queue for.
And for participants using speaker equipment, and maybe necessarily the pickup your handset before pressing the star of keys, one moment. Please what's the poll for questions.
Our first question comes from the line of Jason Bandel with Evercore ISI. Please share with your question.
Thanks, Hello, Bob Johnson and Jim.
My first question can you talk more about your partnership with Dupont how of the partnership formed.
How do you see yourself going about marketing and your coupon expertise the customers.
And are there other opportunities to partner and your wastewater initiatives to drive faster adoption.
Okay.
Thank you.
The partnership is just you know it takes two to do events.
Need a T X and that can push higher pressures.
But you also need of member and that can withstand this higher pressure so we come up with the.
Ultra high.
The PX and Dupont comes up portion of the next generation membranes. So it's a natural team.
So we we do have we did the joined the.
Webinar yesterday, and what we would do more of a co marketing.
And we work that when the Kansas and we would also share all of the pipeline.
Yes.
Got it okay.
And the on the water side of the business.
And it sounds like you reiterated your growth targets for 'twenty, one and 'twenty two.
Do you see potential upside and 21 for water gross and net.
Josh you talked about it and his comments that OEM and aftermarket just simply stop its decline.
As the World starts to open up do you see opportunities and the OEM channel for growth.
And I guess further and to that point, we've seen many stimulus plans announced of course over the globe have you seen any kind of actually addressed and water infrastructure that could possibly add to your underlying positive growth trends.
Yes.
Josh.
Sure.
So we are seeing I mean, we're unsure of what will happen. This year, obviously due to COVID-19, how the OEM and aftermarkets of play out we are seeing a stronger resurgence of aftermarket currently so we think we've got some good potential to to claw that back and more 2019 levels are so the old.
We ended a little less certain and we don't think it's going to fall anymore by any means of of whether the ROE or not is of the question.
Appreciate it.
Yeah.
And what was the second half of your question.
The second part was the we've seen many of stimulus plans actually be announced globally over the past year have you seen and its typically address water infrastructure.
Oh, Yeah, I don't think we've seen anything that specifically touches our business globally that I'm aware of it and you're right I mean, what's the.
Exception of the fact that when you look at the large mega projects the odd.
Honestly those are being supported regardless of any of the economic downturn that may be occurring.
Water is needed and those projects are moving ahead.
They were planned for the most parts.
Yes, it makes sense and.
And then my and my last question.
For Josh.
How do you feel like the timing is right here to start the share repurchase program, and then and I know you touched on and a little bit, but do you see yourself likely to use the authorization opportunistically all at once and maybe more likely over time.
And maybe I missed this but is there and exploration for the authorization.
Theres no exploration, we will do this over time.
And the reason why we're doing it today and because we see more certainty and our cash flows and the has in prior years right. We've got a better sense of where we're headed and we're coming out of Covid and.
And so we're more comfortable making this kind of commitment and with the share buyback, we can manage through our day to day of cash flow right. So we're not.
We can kind of handle that over the coming period and that makes sense.
Yeah.
At the great. Thanks for the help of I'll turn it back.
Our next question comes from the line of preferred.
And now with Raymond James Please see what the question.
Thanks for taking the question and congrats on the <unk>.
<unk> well deployment.
You talk throughout last year about making a final decision.
And <unk> by the middle of.
2021.
So three months from now.
Is that still the timetable that you are.
Working towards in terms of yes, or no on commercialization.
Yes and.
And I'll give you much more clarity in the eight weeks of different niche earning call.
Yeah.
Yes, we absolutely stick with that timeline.
Okay, that's clear.
The timing of this first well deployment in early March.
Was that related at all to the recovery in the oil market that we have seen and the last.
60 days or so.
Not not really no.
Yes.
So what drove the.
And the timing.
The timing you remember a year ago March we were literally all of the pad and hours from oil swells and yes market change stop that and then the April we did and again.
What we have learned.
And maybe the most difficult part of the integration with technology sales to get somebody willing to try and the law.
Well, we're the pumping real commercial oil and that has proven to be.
More difficult and we spots, but as we.
Continue to work and it continues to connect with the customers.
Customers.
And it finally clicked.
So.
That's the story.
Understood and finally, when you talked about.
Renaming of the oil and gas segment to emerging technologies.
Should we assume that there will be other.
Product other adjacent industries included within that.
Not just oil and gas and other words.
Well actually I mean, even though the base quote ratio of in the emerging technology include.
The ultra.
The high pressure PX for water and wastewater treatment.
Financially, we will do for that as part of the water.
Our revenue.
And we also talked about the.
The new.
The ability we have proven that the PX can push gas and that opens up.
A lot of new markets and the first of which we are addressing each of refrigeration market.
They all come and there.
The emerging technologies of course overtime and <unk>.
Any one of the emerging and technologies grow and the into substantial revenue.
This separate it out as a net.
The the dishes and Union to report and how.
Hopefully, we have more and more.
Energy technology applications to take the.
The the place of the graduations and if you will.
Understood. Thank you very much.
Yeah.
And once again, if you'd like to ask the question. Please press star one on your telephone keypad. Once again, if you'd like to ask the question. Please press star one on your telephone keypad and when.
The next question comes from the line of Nos Thompson with firm Securities. Please state the question.
Good afternoon, gentlemen, I have a question on the Dupont and partnerships.
The previously highlighted the.
The total addressable market of 100 and.
And in dollars and in China, and India, which just wondering of this partnership is and highlight the smaller markets outside of this or are the submarkets, you're part of your approach together with the compound.
Oh, we together and the fact, we're learning the market. So we just reported that the.
The industrial waste.
The water and the market.
Is it the emerging and evolving partly driven by.
Regulations, which basically for bids people two of them.
30, water and the families and the element.
So.
What we have said previously and we identify the.
$100 million.
One time market.
I guess one of the initial.
Sub verticals the regime that verdict, though if the world, but as I mentioned and in mind.
The earnings call just now that we say the industrial water actually cover us from metals and mining.
The two textile to of tanning that's ledger.
And so.
The problem of church go and.
And if it is.
Et cetera, and the and we continue to to identify true measure.
This market for example of our <unk>.
First order from India was in the chemical industry and all of it.
This order from China Boise, Inc.
And the natural gas industry. So we don't have all of the data and how large this market is and why were you pushed the pick China and India is at the moment the regulations are tightest, and China, and India, but we expect the rest of the world to follow.
Yeah.
Okay great.
And then just another question on the last quarterly call you mentioned and some progress on your zero and makes PX is this any way related to the E. T X and you can apply for gas purposes or is this of different vertical.
Yeah.
Zero mix, it's not a vertical zero and makes us enlarging the sandbox, we can play and where.
Or are you must not have of.
Look forward to.
The team back in force and.
And we have.
New vertical applications as does <unk>.
And you are mixing techs.
Technology is complete.
For the moment.
Great. Thank you.
Although I've said, it pushing gas and social enlarge and but sandbox, which we see what we said and covers the.
Many sectors of refrigeration and air conditioning, and or the initial slug of new verticals.
And we can now address.
Yes.
And our next question comes from the line of Tom Curran with B Riley Securities. Please proceed with your question.
Hi.
Bob a few follow ups on the vortec.
First is this multi well pad.
What are you currently utilizing the vortec with with one of the biggest independent of oil producers and it sounds like it's in debt.
The new Mexico side of the Delaware.
Is is it with liberty.
Yes.
And then.
Are you counting this as.
The first of the two to three light well fracs or the second.
And do you already have the next one lined up.
And if you do is there anything about the outcome of this current <unk>.
Job of.
That will determine.
If and when the next one moves forward.
And I'm actually.
The debt when Congress and the election or one second.
As I mentioned, it is and multi well pads and in fact, we move from pad to pad.
And we expect to go.
By the outside of the time, we finish.
And maybe 50 to one hundreds of stages. So that in itself is a multi life Frank and.
And I stayed on one on top of wonderful [laughter].
Continue the cause harm right of way ahead of ash as of the end of day yesterday, we have.
The 25 stages, so in a way.
And we're fortunate.
What is the tremendous interest.
As shown by this.
The largest independent oil producer.
We are actually most of your Fracs if you will.
Yes.
Great and then.
It does that's the key.
Technical challenge when it comes to.
Getting the the cartridge durability and life span two to where you needed to be.
Does it remain the the total volume of Frac sand at the Carter's compressed before it needs to be repaired or replaced.
And to the extent that does remain is the defining and.
Technical issue.
Could you give us a rough estimate of of how far along do you think you are solving are you 50% of the way 75%.
Actually dishes and new technologies, so in some ways Tom until you.
When you get into assumption of an entirely new it's not just the new for us four hours of suppliers and.
Until you finish and you don't know what is hundreds of sense. So it's hard for me to say, 30% of 50% and we may be literally at 95%, but we don't finish that 5% use of digest. This was 5% and was 95 per cent of the Gulf, but in eight weeks I and gives you much more clarity.
Yes.
The cartridge life is the most important part of our of course.
And as I mentioned before what is needed is to have validation of the value proposition that is what's of the savings not only savings of about the improvement and and.
Hum on track the safeties.
Et cetera, and that is what I call X.
But then what is the cost for us to provide the equivalent of as well as the service to allow the vortex will be part of the Frac that is Y and X minus Y equaled the Z that Easter and mix contribution.
And that.
We will give you much.
Better.
And the reports in the eight weeks.
Understood and makes sense. Thanks for doing the best you can as of now with with those questions.
Thank you.
Yes.
And with that we've reached the end of our question and answer session and I would like to turn the call back over to Mr. Bauer for closing comments.
And everyone. Thank you for joining us today.
That's helpful and you can find our prepared remarks on our Investor Relations website, and we look forward to speaking with you and eight weeks' time. Thank you.