Q2 2021 Energy Recovery Inc Earnings Call
It was president of Investor Relations. Please proceed.
Good afternoon, everyone and welcome to energy recovery, 20th 21 second quarter Conference call.
Name is Jim Sakari, Vice President of Investor Relations of energy recovery and I'm here today, with our chairman President and Chief Executive Officer, Bob now 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 1995 regarding future events or the teacher financial performance of the company the.
These statements may discuss our business economic and market outlook, the company's ability to commercialize vortec growth expectations, new products from the performance cost structure and business strategy.
Forward looking statements are based on information currently available to us and Ah management's beliefs assumptions estimates or projections forward looking statements are not guarantees that future performance and are subject to certain risks uncertainties and other factors.
For your for your documents the company files from time to time with the SEC, specifically the Gulf News form 10-K and form 10-Q. These.
These documents identify important factors that could cause actual results to differ materially from those contained in our projections are forward looking statements.
Backlog is strong.
Gross outlook remains robust at 10% this year.
And 25% in 2022.
The Middle East remains our most active region and we do not foresee that changing in the near term.
However.
We are encouraged by other regions that are appearing in our pipeline.
Most notably Asia really had been generating only nominal revenues the past few years.
China's recent action plan, which calls for a 75 per cent increase in desalination capacity.
Could lead to a deceleration on a far greater scale in the region.
We remain very bullish on the potential of desalination not only for the next 2 years, but for many years to come.
Let's now turn to our growing industrial wastewater business.
As we announced earlier this week, we recently secured additional 3 awards or in China.
Related to landfill chemical and lithium battery industries.
Over the past 9 months, we have secured 5 awards in 4 industries, including dose just mentioned.
Well as natural gas.
These initial awards will allow us to accumulate the real life data, we need to show the benefits reverse osmosis message provide took.
Together with our PX and.
Outra PX as.
As we have shown in seawater desalination.
Our next focus will be to expand our brand recognition within these new markets.
We will work with our reverse osmosis partners.
To educate these markets as to why.
Our pressure exchanger together with other R. O technologies is the most cost effective sustainable solution to meet growing industrial wastewater treatment requirements.
I would like to take a little time.
To dive into 1 of these markets day list.
Jim batteries.
Yeah.
In 2020 day were roughly 450 gigawatt hours of global lithium battery capacity with.
It was 60% of this in China.
Which is expected to grow to nearly 2500.
Gigawatt hour.
By 2030.
If we conservatively assume the average battery capacity of the vehicle is 90 kilowatt hour.
Is the capacity of the Tesla model S.
And then this overall market capacity equal equates to roughly 5 mainly electric vehicles growing to nearly 30 million vehicles over that period.
While we cannot yet know the exact size of this market based on these capacity exemptions.
We estimate up to a 20 million onetime total addressable market Tam for RPX is.
In the lithium battery market today.
We expect this market to grow on average by at least $10 million per year.
Through the next decade for a total tam of up to $120 million.
This is in addition to each of the $100 million 1 time times, we previously mentioned in both China and India.
This is an example of the potential of a single industry.
But the concept can be extended to other industries as well.
We may not know exactly when an industry mix shift to more sustainable method or wastewater treatment.
However, judging by the increasingly dire freshwater concerns we have cited in many times in our calls we believe that this.
Will become an issue outside of just China, India sooner rather than later.
We're now digging deeper into these new verticals to increase our knowledge of the best strategy to expand sales in China, India and the rest of the world.
However, not all industrial water is safe.
It can vary by amounts and types of solids viscosity and other parameters that need to be addressed by our technology.
Therefore, we are also laying out a product roadmap to approach this wider industrial wastewater market.
Next quarter, we plan to share our thoughts on how industrial wastewater could potentially impact our revenue outlook over the next 5 years.
Now, we turn to work day.
At our annual shareholders meeting in June we highlighted the progress made during multiple life well field trials, where the vortex was in Florida.
Year to date, we have participated in for field trials and completed 40 frac stages.
These trials clearly demonstrated that the vortec can perform as ambition.
Without interrupting or impeding normal frac operations.
In addition, we are encouraged by the positive feedback we received from Liberty oil services and their customer.
We have repeatedly stated that.
The key to achieve profitable commercialization.
<unk> cartridge life extension.
To date our.
I'll describe a little more detail what we are trying to achieve.
Our cartridges are made from the second hardest material known to man Tom.
Non stem Carmine.
But even tungsten carbide wears.
The aggressiveness of sand at the pressures as high as 10000 pounds per square inch.
And over time, we must refurbish the cartridges.
Our skit.
To our customers with our church.
To build themselves, while we provide and maintain the cartridges needed to run the vortex in essence, we are providing them with a reference design of our system.
This will ease our supply chain.
[noise] create ownership over their system with our customers.
And ultimately enable us to focus on what we do best design and manufacture pressure exchanging cartridges.
We will continue to update you on this from.
Now, let us turn to our new product.
The P X G 3.1300.
Energy recovery device for refrigeration or PX Jeep.
Global regulations are accelerating a shift away from refrigerants such as.
Hydrofluorocarbons 4.
4 HFC.
2 more natural ones such as C O 2.
Most developed countries are making this transition within the next 15 years.
Facing out Hfc's has the potential to help avoid.
A half a degree Celsius increase in temperature globally.
This is significant.
4 energy recovery this transition could translate.
Into a roughly 1 billing dollar and new time by the end of this decade.
In commercial and industrial refrigeration alone.
Current C O 2 systems operate at pressures 4 to 5 times higher than the more efficient HFC based ones.
This means.
That is C O 2 system.
Without energy recovery device is much more expensive to operate.
Existing energy recovery technologies for C. O 2 systems can recover only about 10% of wasted pressure energy and.
Importantly, only operate efficiently.
He automatically and operate S. If it was not present.
This is a streamlined approach for customers was existing C O 2 systems already installed.
Providing them assurance that our new technology will not melt their ice cream.
Where are giving them the first hand evidence of the.
It can offer.
Wow. This retrofit approach will allow customers to achieve material cost savings.
It will not show the full potential of our technology.
To achieve this our second approach is to provide a PX G centric reference design to the industry at no cost to accelerate the adoption of our technology.
This PX G centric system will fully leverage the power of RPX G was the go off dramatically decreasing energy consumption and operating costs for our customers, thereby making their ship to sustainable C. O 2 system.
S financially painful.
Painless.
As possible.
Refrigeration technology has changed very little over the past 100 years.
We believe that <unk> has the potential to disrupt the global refrigeration industry.
Much as the PX did.
Desalination.
<unk> successful.
We could not only accelerated sale of RPX geez, but also help accelerate the adoption of seal 2 systems.
And significantly contribute to the reduction of global warming.
Asked us.
To achieve this we must educated refrigeration market RPX G and make it as easy as possible for customer to try and ultimately.
Our technology.
We have come far was the PX G over the past 15 months, we have tested.
Across a range of temperatures in our food refrigeration tests loop in California.
Build a control system to manage it in operations.
And our building our first commercial ready system as we speak with.
We truly believe this could be a game changer for the refrigeration industry.
To wrap up as you can see we continue to make solid progress each of our vertical so focus.
<unk> are adjusting or or go to market strategy based on the needs of the specific industry we approach.
As we look to next quarter's update we plan to provide deeper insight into how we view the economics of these initiatives playing out so the first half of this decade.
As well as how we intend to support the expected growth from these activities. We know that it is important for our investors to understand the growth we are anticipating and how we plan to realize that growth and with that I will hand it over.
2 Josh Thank you.
Thank you Bob.
Product revenue slow to 7 per cent growth in the second quarter as expected, but our outlook remains intact. As a reminder, a revenue this year's dumbbell shaped with our first and fourth quarter as being the highest revenue quarters and a second and third being the lowest you should expect a similar level of revenue in Q3 as in Q2, roughly between 19 and 21.
A million dollars given that last year's third quarter was our largest the year over year comparison will show a decrease in Q3, however, barring any unforeseen circumstances, our fourth quarter should be the largest 1 this year, allowing us to achieve our 10 per cent got a growth.
You should also note that we are beginning to experience clothes and OEM sales. The second quarter. In 2020 was the first fully impacted COVID-19 quarter and the 6 per cent growth in OEM reflects our first increase since the onset of the pandemic. We are currently seeing a rebound in OEM activity across most territory's in and industry sectors include.
Hospitality.
While aftermarket sales fell this quarter. The overall trend for the year is beginning to feel positive we feel a similar optimism about our OEM sales, which may lead to upside to our 10 per cent guidance for this year. However, we are hesitant to change our I will look at this time until you have a better sense of where COVID-19 is headed.
As a final total revenue. This is the last quarter, we will show year on year quarterly comparisons that include GAAP reckon recognise revenue from the old Schlumberger contract, which terminated in June 2020, and.
In Q2.2020, we recognized the remaining revenue associated with that contract, which created a large bump of non cash revenue.
On a quarterly basis this will no longer be a factor.
Our gross margin came in lower than our annual guidance. This quarter. This is a temporary phenomenon largely driven by increased sales of lower margin non PX products, such as pumps and turbocharges as OEM sales rebounded. This has happened from time to time in previous years as well.
As of today, we still expect to achieve roughly 68% gross margin for the year. It is important to note that this dip is not due to any permanent changes in our economics asp's are holding strong while we were watching inflationary pressures we are not experiencing significant inflation today, if we were to slip below 6% to 8% gross margin. This year this will be.
Owing to higher than expected OEM revenue and therefore gross profit.
[noise] Opex remains much in line with the past few quarters as we continue to prudently manage our spend as we grow even if you exclude the 1 time impairment charge from Q2 last year are opex still came in 2% below a recurring spend in Q2.2020 weeks.
We experienced growth and G&A and sales and marketing. However, these increases were offset by decreased R&D spend on board Tech has communicated previously.
Growth in our Jna spend is largely due to normal inflation and the return of some expenses as employees returned to the office travel picked up that kind of thing.
A fairly large percentage increase in sales and marketing spend this quarters for 2 reasons first we are seeing a rebound and trade in marketing and commissions as our base detailed business begin to see renewed life in marketing activities and OEM sales.
And secondly, we are investing in building, our teams and supportive industrial wastewater and refrigeration.
We anticipate continuing to invest in sales and marketing well into 2022 as we add further resources to ensure success in these 2 markets.
Now, let's turn to cash.
Operating cash flow grew substantially driven by strong customer receipts following very strong sales in Q1.
Not that we expect moderately negative operating cash flow and the third and fourth quarters due to the lower sales and Q2 and Q3, and therefore decrease customer receipts that will follow.
However, a large projected queue for revenue should lead to a corresponding increase in Q1.22 cash flow.
Capex is roughly half of it was this time last year for the full year, we expect capex to be more or less in line with last year's at between $6 million to $7 million or investments to date. This year have largely been in our corporate offices, as we expand and build out for future growth as well as to create a safer and socially distanced office during this pandemic during.
During the second half of this year, we are adding a kill them to expand production and to create some redundancy as well upgrading and adding to aging equipment.
Our cash and securities balance increased $121 million, despite nearly $12 million and share buybacks, we repurchased 657000 shares on the open market at an average price of $17.60 per share.
We will continue to execute our buyback program in a disciplined manner as opportunities arise to maximize the number of shares will repurchase.
Finally, a quick comment about the organization.
Overall, our team continues to execute admirably, despite the ups and downs of Covid today, roughly 25 per cent of our staff continues to work off site. While we have open the office back up to those who wish to return with not mandated a full return as of today. We continued to prepare for the growth that is coming in are excited by the potential that we can all see in our existing and new businesses. Thank.
You and I will now hand, it back to our moderator for Q&A.
Thank you.
Time, we will conduct a question and answer session. If you would like to ask a question. Please press star 1 on your telephone keypad a confirmation Tom indicate your line is in a question Q you.
You May price star too if you would like to remove your question from the queue.
For participants you can speak of equipment it may be necessary to pick up your handset before price into Sparky. Once again, that's star 1 to ask a question at this time.
1 moment, while people far first question.
And more Suez.
Very analogous to the Intel CPU since we are the central part of this energy saving.
Construct.
But we do not produce the total system.
Whether it is in Gore Tex and also in refrigeration.
We give the reference design free of charge and when they deploy their reference design of course day by the most important central parks from US which is the PX.
The entire library charging anybody for reference design, neither does Qualcomm.
Okay.
Good good comparison.
And then finally do you see any.
Reason at this stage to be testing vortex outside the Permian basin, perhaps in other shale production areas like the Bakken or even outside the United States maybe in Argentina.
We do not see a need because there is no difference fracking side as the fracking side and there is no.
No substantial difference that we can discern.
That will make 1 site so uniquely different.
Our equivalent design no.
Okay. Thank you very much guys.
Once again, ladies and gentlemen to ask a question. Please press star 1 on your telephone keypad.
Our next question comes from Neil Tom Finan with Fearnley Securities. Please proceed.
Okay.
Good afternoon, gentlemen, can you hear me.
Yes, good evening.
Good evening.
Bob just to clarify in your.
Statements regarding the expected revenues for 2022 is it.
Did I hear you correctly to say that you're now expecting revenue growth in 2022 to come into the higher end of the range of 25 per cent.
Yes, correct.
Yeah.
Great.
And then I have a question on the PX G 1300.
Because it seems like with within the industrial wastewater.
Industries, you, you'll have a bit of a need to.
To have some commercial beta test in different industries within the broader.
Interest you wastewater switch share but is that.
Less of an issue or is there less of that lead when it comes to commercial refrigeration.
I guess.
Or are these systems much more standardized so that you were able to test this.
On your own and then you can go to market with a bit more of.
If a finished product or at least have that data more comparable to what your clients are experiencing.
Our refrigeration is more of a standard design.
We will of course, our initial deployments you could also look at it is is testing out the system.
Uh huh.
We think as we have demonstrated in the industrial wastewater case that there is a pent up market demand for what we can offer so that.
The customer and us actually as shrinking the time that traditionally you would go for a beta test.
We will announce the product.
So.
We are.
We will be repeating pretty much what we're doing in industrial wastewater SC refrigeration in our initial deployments is a commercial deployment, but at the same time accumulate even more data to refine our product and our assistant.
This is a continued iterative.
Process.
I would add we also have a full refrigeration tests look downstairs. So we're doing full testing here in San Leandro as well.
Yeah.
Yes, because that was my thought.
Those refrigeration systems are more easy to build on your own rather than having to go out to the field force for testing within different.
Different wastewater.
But I think that answered my question. So thank you.
Thank you Neil.
Thank you ladies and gentlemen at this time there are no further questions in queue I would like to turn the call back over to management for closing comments.
Alright, thanks, everybody for coming and we look forward to talking to you next quarter at the end of October.
In our prepared remarks will be published on our website or already are in case, you want to grab them here early so I appreciate a rhythm.
Thank you.
Thank you ladies and gentlemen, you may disconnect. Your lines at this time and thank you for your participation and have a great day.