Q1 2021 Energy Recovery Inc Earnings Call
[music].
Greetings and welcome to energy recovery first quarter 2021 earnings conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded I would now like to turn the conference over to your host Jim Zaccardi, Vice President of Investor Relations.
Hello, everyone and welcome to energy recovery is 2021 first quarter conference call.
Name as Jim said Party, Vice President of Investor Relations at Energy recovery, maybe here today with our chairman President and Chief Executive Officer, Bob Mao Chief Financial Officer, Joshua Ballard three.
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 on 1995 regarding future events or the future financial performance of the company.
Statements may discuss our business economic and market outlook, the company's ability to commercialize vortec growth expectations, new products from their performance cost structure and business strategy.
Forward looking statements are based on information currently available to us and on.
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. These documents identify important factors that could cause actual results to differ materially from those contained in our projections or forward looking statements on.
All statements made during this call are made only as of today may six 2021 and the company expressly 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 at this point I would like to turn the call over to our chairman President.
Chief Executive Officer Al Bala.
Bob the floor is yours.
Thank you Jim and thank you everyone for joining us today.
Once again I want to start today's call with a sincere hope that everyone listening and your families are safe and healthy.
Although there has only been eight weeks since our last earnings call. The momentum we spoke about has continued to do we.
We completed the two life well field trials in Texas, and New Mexico.
In our last call. We are currently at another.
And have two more plants.
We held another successful joint marketing webinar, which do from this time hosted in Mandarin and focused on the Chinese market.
Our R&D testing.
Has delivered compelling data on our C O two refrigeration PX.
And we are finalizing design and testing.
Preparation for beta testing.
And of course.
Our core desalination business continues to surge forward.
Delivering a new record high first quarter product revenue.
In addition, we are proud to say that we have been shortlist.
For the best first time sustainability report, which the corporate registry reporting awards.
Corporate Register is the world's largest corporate responsibility and ESG report.
Sure.
In today's call I will update you on our desalination business.
Industrial wastewater work back in our refrigeration efforts.
With that let us start with our record setting desalination business are.
Our desalination business started the year off robust fashion.
With the record setting quarterly product revenue.
The $28 $9 million, we posted 52% higher than a year ago.
And there was once again led by our Mega projects segment.
Demand for these large scale projects stance from the worlds need.
Or more what.
And that is why our desalination business, that's average solid double volume growth.
Since 2015.
Our growth outside.
Our growth outlook remains strong.
10% this year and up to 25 per cent in 2022.
While desalination is one tool to address the world's water needs.
We manage existing water resources he said another.
Which brings us to our ultra PX energy recovery device and industrial wastewater.
Over the last eight weeks, we have focused on building our pipeline for potential projects.
The sales cycle for these projects are typically between 12 to 18 months long.
Most projects in the pipeline. This year had already been designed with minimal or N. R. O process using a competitors are deep.
Therefore.
We must work hard to ensure the ultra PX in the bidding process.
The fact that we have landed two projects. So soon.
After lunch and.
Jos the focus of our sales team and the strength of our technology.
As we further educate the marketplace together with partners such as Dupont.
We shouldn't make deeper inroads as customers begin to spec in ultra high pressure, our own and our ultra on the PX into future designs.
We will have more updates on industrial wastewater in the coming quarters.
As we further define the market and making votes on sales.
Our initial ultra PX sales will help reduce energy consumption, while removing toxins from the industrial wastewater hopefully natural gas plan.
And China, and a chemical manufacturing plant in India.
The first.
True sales demonstrate the broad applicability of.
The ultra PX two different industries, Inc.
The near term, we're focused on further expanding the breadth of industries able to benefit from the use of reverse osmosis.
And our ultra PX.
Being addressing their wastewater treatment.
Yeah.
Let me now turn to the vortex.
During our last quarter call, we highlighted the tube life well.
Trials, where divorce heck with deployed.
We participated in more than 25, frac stages and demonstrated at the vortex can effectively perform without interrupting.
Or impeding normal Frac operations.
We integrated successfully with Liberty system.
Prove that the vortex, and which then by Frac conditions and unplanned events.
Such as sports pounds pressure fluctuations and other issues come on many of her doing a frac job.
We have decided to give shareholders our decision at our annual shareholders meeting on June 10th.
With our decision day nearing we are evaluating multiple options.
We generate a return on both tech investment.
Which is why.
These additional field trials are important.
So I'm gonna choices, we're considering include.
Commercialized, finishing on our own or with a partner.
A joint venture selling.
Selling or licensing the IP.
Or seeking other users of the book outside of fracking.
Our Buffalo.
We're focused on monetizing our hard work.
And investments investments in the vortex.
And the efficiency this technology can deliver.
We look forward to updating you on our plans on June 10th.
Well those.
Who are unable to join us for that meeting we plan to publish the transcript.
Our Investor Relations website.
Now I turn to refrigeration.
Last quarter, we announced.
The PX capabilities to expand and compressed gas.
We also identified a commercial refrigeration.
Jim crudes, the stores, such as supermarkets and Mega markets.
That's our first target market.
I will now explain why this capability is so important to their commercial refrigeration industry.
In short, we believe our company Eri and played a key role in supporting and accelerating the transition.
From extremely environmentally harmful greenhouse refrigerants TSV and HFC.
Environmentally neutral natural refrigerants, the most promising of which is carbon dioxide or C O two.
More than 100 countries have signed on to the Hi, Sally and then.
And then nine months to the Montreal protocol.
And this year, the United States, and China have publicly committed to signing.
While the Montreal protocol successfully reduced Austin layer harming she has ceased.
He called gallium and then he's aiming at facing out day.
F C.
H F sees a greenhouse gas refrigerants that can contribute thousands of times more to global warming. The M. C O two.
According to the National Academy of Science.
Eliminating hfc's alone.
Could potentially reduce global warming by up to half a degree centigrade.
I'm, sorry, I have to a degree Celsius.
They go off the co Galli Amendment is an 80% reduction of H F. C used by 2047.
We're certain countries and regions are already accelerating the pace by implementing strict targets for the 2000 Twenty's in order to reach the 2047 go.
European Union is leading the way and has and sales of many types of HFC usage by 2022.
California is seeking to reduce H F C usage by 40% by 2030.
These transition away from HFC and two C O two refrigerant system.
Is accelerating.
For the $55 billion refrigeration and air conditioning industry.
Moving away from HFC means moving to natural refrigerants, such as ammonia.
Or C O two.
Ammonia is potentially flammable and explosive.
Therefore, it has been limited to large industrial systems away from dense populations.
And requires 24 by seven Carlson outside technical crews maintenance.
C O two is stable.
Benign.
And therefore, they safe choice.
Over 35000 C. O two units have already been deployed primarily concentrated in the northern parts of Europe.
Where are the ambient temperatures.
<unk>.
This regional choice is likely due to the average cost of running two systems compared to the traditional HFC system.
As the cost premium for C. O two systems increases was warmer ambient temperatures.
Energy recovery devices yard beach have been incorporated into C O two systems.
Mitigate some of the cost premiums.
On the energy recovery devices on the market, we believe RPX alone may be able to reduce the operating costs or not.
Well she O two systems to compete outside of mild crime.
Refrigeration systems work cycle.
We're refrigerant east pressurized then the pressurized to carry heat away from objects, such as food in the case of the supermarket.
But he is then this party into the atmosphere.
Which is at a lower temperature.
And the refrigerant is recycled through the system to again carry away more heat.
Ambient temperature of 90 to 95 degrees Fahrenheit or 35 degrees Celsius.
C O two refrigerant must be pressurized to 1300 pounds per square inch tsi.
To achieve this cycle.
Whereas the HFC only needs to be pressurized to Iran.
<unk> hundred per side to achieve the same result.
To reach the higher per side pressure, neither or C O two systems.
Electricity must be consumed.
The higher pressure and the corresponding increase in electricity needed for C O two systems.
It led to the use of energy recovery devices.
Without the energy recovery device, the additional operating costs of our C O two system.
Even warmer climates.
Would be prohibited.
And the transition to a C O two would likely napa per without the Lycoming and push of environmental.
Regulations.
Currency L. Two systems in the market utilize that energy recovery device.
<unk> an injector.
However, the efficiency limitations of the Jetblue.
Meaning that the economics of C O two system outside of mild Northern Europe region on.
Very good.
E R ice PX offers a potential solution to this higher temperature hurdle.
Rigorous testing on our labs have shown that RPX may reduce the existing operating cost disadvantage.
C O two refrigeration systems today.
Warmer climates, thereby allowing the system to better compete on cost.
In fact, our test results showed that the performance of the PX actually improve relative fleet as the ambient temperature gets hotter.
This relative improvement occurs because there's temperatures rise the pressure differential needed to create a refrigeration cycle also increase.
Why are the injector can only manage a 200 psi differential boost.
And therefore.
Work, we're seeing in limited temperature range.
On the PX ability.
To manage just differentiate booths.
And limited.
Meaning we improve as temperatures increase.
We're now finalizing our product of all of it.
In addition, we will begin engagement was global.
Commercial refrigeration companies.
And original equipment manufacturers.
To approve our product.
System level test.
And to establish future sales distribution.
If you would like further details on this technology.
We have published a new page.
Our corporate web.
What's that.
In summary per rate, our last year's strong momentum through this year.
Starting 2021 off being record fashion.
Our core desalination business remain strong.
We're building momentum in our efforts to educate the industrial wastewater industry.
On the benefits of reverse osmosis and our ultra P F.
We are on our third vortex field trial on a year and half two more planned as we near our vortec commercialization decision.
Finally, our.
RPX will refrigeration have shown very compelling test results.
And we are actively seeking beta test partners.
Our disciplined diversified growth is emerging.
And the opening up new potential solutions.
To accelerate the environmental sustainability of new markets.
And was that I will hand, it over to Josh.
Thank you Bob.
We achieved extraordinary 52% growth in water product revenue in the first quarter as compared to last year.
But let's remember that this year. Unlike in 2020, our quarterly results should be more of a dumbbell shape, meaning we expect to report higher Q1, and Q4 revenues and lower Q2, and Q3 revenues, whereas in 2020 in Q1 was our lowest quarter for water.
We achieved these sales with a gross margin of 69% in Q1 right in the middle of our guidance of 68 to 70 per cent for the year.
We realized a decrease of 12% and operating expenditures against Q1 last year. However, if you compare opex to the latter half of 2020, you'll see that we're right in line with expenditures in Q3 and Q4.
Later half of 2020 is a better comparison to our trend this year for three reasons.
First many expenditures fell after Q1 due to the pandemic, especially those related to travel and employee related office expenses and trade show marketing for example.
Second we had a somewhat elevated G&A expense in Q1 2020 related to the CEO search which ended in the second quarter from.
Third and most importantly, vortec spend remained elevated in the first half of last year during a heavy testing period, which is some temporary.
On a war tech spend was $3 $5 million in comparison was $6 6 million in Q1 last year.
Which is also comparable to the past two quarters.
We expect roughly to spend on vortec in Q2 and spend on the second half of the year will depend on our decision in June.
Overall, we expect our opex to grow in mid single digits, 5% to 7% per year. Once you exclude the one time impairment charge related to the termination of its from Schlumberger agreement in Q2 last year.
2021, R&D spend should remain lower in 2020, despite our investments in refrigeration.
As a reminder, we guided 15% to 20% of R&D spend as a percentage of revenue for 2021.
We closed the quarter with an increase in our cash and securities balance from $115 million in December to $120 million at the end of Q1.
Notably unlike the past few years, we posted positive operating cash flow in the first quarter. Historically, we've generally reported negative cash as high as $5 million to $6 million on the first quarter, driven by annual bonus and insurance payments et cetera.
The increased cash flow this quarter reflects our growing sales and importantly, our strong cash collections, which our team has remained focused on throughout the pandemic.
I received many questions related to our capital needs as we look to grow our industrial wastewater business and to invest in our new refrigeration product.
Unlike <unk>, which if we commercialized could demand a significant working capital and fixed asset investments to launch our ultra PX in refrigeration product will both leverage our ceramic manufacturing capabilities, thus lowering any capex needs.
<unk> investments to expand manufacturing capacity would only be made to support growth and demand.
As it relates to on refrigeration product, it's a little too early to say what investments may be needed to enter this market. Although as we proceed this year and identify partners will provide more clarity.
However, just this past Monday, the U S Environmental Protection agency announced that the U S. In terms of the phase down on the use of damaging hydrofluorocarbons, 85% by 2036.
That's 11 years before the data set on the Kibali Amendment that Bob referenced just a moment ago.
Typical commercial and industrial systems have a roughly 15 year life and very few C. O. Two systems have been installed the day here in the U S. However.
However, with this announcement and the capability and intention on the EPA to monitor the same zone it.
It means that the sale of <unk> system should pick up significantly in the U S in the near future.
That's another way of saying that our entry into this market has been very well timed.
We will clearly need to invest to keep up with this anticipated spike in demand and we have no intention of missing this critical transitional moment from a more sustainable refrigeration ecosystem in our home country.
With regards to our industrial wastewater business, we plan to invest all of our gross profit generated from sales back into developing this business as we start out.
Because we expect gross margin to ultimately be similar to our desalination business, we should have ample cash to invest in the business development sales and marketing teams that will ultimately be needed to make the ultra <unk> success.
As this business takes hold we will provide further insights into our investments.
Our share buyback program was launched and announced following our earnings call. However, we purchased less than 2000 shares in these initial weeks due to continued increases in our share price.
We do expect these purchases to grow and remain committed to utilizing the entire $50 million from repurchases at this time absent any unforeseen circumstances.
We plan to execute our buyback program on a disciplined manner as the opportunity arises to maximize the number of shares we repurchase.
Finally, as I discussed last quarter, we adjusted the presentation of our financials of the combined low or non revenue generating products into our emerging technology segments.
In addition, we have taken a close look at how our corporate spend the lines with our water segment.
Reallocated some expenses from the corporate to the water segment to give shareholders a better sense on how we're using our opex resources.
For ease of comparison, we have also included recasting prior year numbers.
As a reminder, the goal of this change to our emerging technology segment is the better highlight to shareholders. How we are investing in the new products and how we will create value over the long term on these investments.
As business units become more independent and substantial in terms of revenue.
We'll break them out in the future as appropriate.
However, I have committed to ensuring that we continue to highlight our allocation of ascent abort test within our notes to provide your appropriate context as we progress our new ultra PX product line is being rolled up into our water business unit for reporting purposes, and we will.
Likely break this out into a new channel in the future as it grows more substantial.
Thank you and I will now hand, it back to our moderator for the Q&A.
Okay.
At this time, we'll be conducting a question and answer session.
To ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is on the question queue.
You May press Star two if you would like to remove your question from Kim <unk>.
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One moment, please while we poll for questions.
Our first question is with Jason Bandel with Evercore ISI. Please proceed with your question.
Hi, Good afternoon, Bob Joshua Jim.
Okay.
Jason.
First question.
On your earnings release, you talk about sustainable disciplined diversify growth and how the company is at a key inflection point here.
So it's more of a high level.
Look out a few years can you discuss your vision for what the company looks like and how you achieve diversification. While also protecting your strong position in a day salad create value.
Got you I don't think zone.
Sure.
We have a.
Strong b cell base, which we plan on protecting and we have dedicated teams to that desalination business that we invest into and we're also investing into the technology in order to stay ahead of any potential competitive threats and so forth in the future. So we're actively investing in and protecting that base business.
But our margin financial do allow us to invest in other areas and so as we look forward, we would like to diversify and Derisk. Our revenue, we're very concentrated obviously on one industry today and by expanding and diversifying outside of these industries, we can derisk that revenue create much.
More growth as well as.
Create a more stable growth if you will right.
In addition, we're looking at really building, we're focused on our PX platform technology, which is focused almost entirely on sustainability right. I mean, we started out our business, reducing energy costs and diesel.
Looking at how we can reduce waste and oil and gas with the vortex, but the other things that we're working on currently today are very much sustainably focused very much focused on reducing energy costs in other industries. So we're expanding on that story with our technology as we look forward and then hope to really do that by diversified manner here in the coming years.
Does that answer your question.
It does thanks for that.
Now turning to your water business, obviously, you reiterated your 2021 and 2022 growth rates.
First on opportunities they are seeing to further grow your mega projects backlog.
And also just another thing aftermarket revenue was also up strong in the first quarter are.
Are you seeing opportunities in aftermarkets and has that strength already included in your current guidance.
Got it.
Sure.
Let me start with aftermarket we are seeing a return to our aftermarket business.
We did assume that in our guidance.
So that has been included.
This first quarter is definitely evidence of that.
If I understood your megaproject question correctly.
We are very focused on building.
Building up that backlog in the Mega project space as.
Early as we can as you know, we typically sign contracts about 12 to 18 months out.
And sometimes a little bit shorter, but on average 12 to 18 months.
We're off to a very strong start with that this year.
For not only 2021, but also 2022.
And in terms of growing that.
We have haven't lost a project in about seven years, and so we were sort of capturing that market and growing with it as it expands globally, whether it's on the middle east or in Asia, where we're seeing lots of growth as well.
Perfect and then our reported.
Affirmed that the after market has really bounced back from the COVID-19.
Yeah.
Understood Thanks for that clarification.
And then the lag.
Last one from me just touching on ultra PX capabilities.
How do you guys can talk more about your education process to the marketplace.
Require.
Some results from the products you have in the first two contracts in the field itself or it can marketing education and partnerships kind of be enough to get potential customers to understand what you're trying to do with it.
One part is indeed, the DSO webinars and other markets.
In communications, we do.
But secondly, Jason is that.
Well as we said just.
A few minutes ago.
We will attempt to.
Secure initial projects commercial projects.
In different industry verticals.
And thereby it was.
What should it be parliament and actual field themselves.
Well educated the market what are the real.
Efficiencies.
And the value that on.
From PX Springs, So you will see that in the coming months that.
We expect.
To penetrate into additional verticals.
That is I think that's the most effective from a pulse on way of educating the market.
Makes sense great. Thanks for the time I'll turn it back.
Our next question is with <unk>.
Small caps with Raymond James. Please proceed with your question.
Great question.
All of your testing has been.
In one basin, the Permian and obviously, an important oil producing area, but by no means the only one.
Has your E&P.
E&P company partner or Liberty suggested that it might make sense to do some field tests outside the Permian maybe in another shale play or even in a different geography altogether.
Eventually we would do that.
However.
The Permian.
It was a pretty large place.
And it just so happened the.
On this particular.
And customer.
<unk> has a lot of.
Wells in that.
Region and.
We are getting including the two addition on the one we're doing now and the two additional ones we plan in May.
We should have.
Sufficient data.
For not only the <unk>.
Our customer value proposition.
Occasion as well as they.
On a.
<unk> cartridge.
No.
<unk> test.
The qualitative or they're coming on a couple of months or if you will for the coming.
45, 60 days until we make the.
Reported to you on June <unk> debt.
Premium shows the total purpose that we need.
And just to clarify on June 10, you will announce.
Whether the board cash will be commercialized.
And if you commercialize debt.
In which manner or what using what strategy.
Like a JV.
Both parts of that decision at the same time right.
Correct, yes.
Okay.
My follow up question is on <unk>.
Your water kind of capabilities broadly obviously in the last several months.
A lot of discussion in Washington about infrastructure, including.
$100 billion proposed.
Water infrastructure spending and binding proposal.
Do you anticipate any.
Desalination project B.
Incremental in the United States.
In the context of debt infrastructure program.
We hope so but as you know.
Washington push is one thing.
Respective state level requirements for birds eye.
Yeah.
For like a day return attractive Smith of <unk>.
T cell to the environment for example, California.
We will continue to play a very important growth. So we're hopeful that this bush.
Will result in more initiatives of T cells in the United States.
Okay.
About <unk>.
Net in Washington, as well taken so thank you very much guys.
Thank you.
No.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Okay.
Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back over to Bob Mao for closing remarks.
Oh excuse me actually I mean, do you have no book.
Oh, Okay go ahead.
I have one more question.
From Wally Walker with Hana Road. Please proceed with your question, yes. Good afternoon. So the gross margin percent continues to be.
Namely high extraordinary really from manufacturing business, assuming that your customers can also read the financial statements could you elaborate a little bit on what day.
Value proposition they see it makes them larger ships.
That kind of pricing.
Drive a 70% gross margin.
Gosh.
Sure Hey, Wally.
Our product.
Delivers incredible savings to our customers right. So if you look at <unk> and this will apply also in industrial wastewater.
Wastewater and we believe in refrigeration, but if you take these sales are concrete example, we deliver 60% energy savings within the <unk> process for our customers, which is pretty tremendous in electricity energy costs are they are the highest one of the highest cost not the highest cost of a of an operating b cell plant.
In addition, our product we like to say is near perfect growing personally I'd like to do because we sell them on a product they put it in their plant.
It basically lasts for 25 years or so you know basically the life of the plant.
Don't have to touch it they want to maintain it they don't think clean it right. It just runs and runs and runs so the lifecycle value on our lifecycle lifecycle cost is the lowest in the industry.
Over the life of our product.
And that's why it's so valuable are valuable to our customers and why we can get the margins that we can it's just tremendous value for our customers and theres no competitor out there right now who can deliver that kind of low lifecycle costs that kind of life value that we do to our customers.
To follow up as you grow your volume and moving to adjacent markets. Do you think you can sustain at anything close to current margins.
Absolutely if we can continue to create this kind of value for our customers I see no reason why we can't have great margins on the other industries. We are looking at we believe we'll achieve similar margins in industrial wastewater.
The duration will see but certainly we're going to have great margins on refrigeration as well for successful debt product.
Okay, great. Thanks, Josh Congratulations guys great quarter.
Thanks, Brian.
Yeah.
And now we've reached the end of our question and answer session I would like to turn it over to the call back over to Bob Mao for closing remarks.
Well again, thank you for joining us today, and we're happy that we're able to or not.
Not only are great.
So performance, but all the exciting things, we're doing which will.
I'll come back to Bruce.
Those further.
The value of <unk>.
<unk> U S a.
Esters.
And we look forward to.
Talking with you again in May.
July or early August.
Next earnings call. Thank you.
Goodbye.
Yeah.
This concludes Tonight's conference you may disconnect your lines at this time. Thank you for your participation.