Q3 2021 Energy Recovery Inc Earnings Call

Vice President of Investor Relations you may begin.

Good afternoon, everyone and welcome to energy Recovery's, 2021 third quarter conference call.

My name is Jim <unk>, Vice President of Investor Relations at energy recovery.

I am 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 $19 95 regarding future events or the future financial performance of the company.

These statements may discuss our business economic and market outlook growth expectations, new products and their performance cost structure and business strategy.

Forward looking statements are based on information currently available to us and on management's beliefs assumptions estimates or projections.

Water and refrigeration.

I'll also provide updated expectations on the vortex.

Josh will then discuss our results guidance for the next two years as well as our final talk financial targets over the next five years.

As usual, we will star was out of the water business, but I would like to preface the discussion with some context, we often speak about the growing water supply gap globally.

The world is already experiencing experiencing this effects.

This phenomenon.

And the supply gap is expected to grow to 40%.

Our 2007 hundred trillion cubic meters by 2030.

A 40% GAAP and 2007 hundred cooling for that matter is almost impossible to wrap your head around.

It's a N equivalent to nearly three quarters of the waters in the Mediterranean sea or over one trailing Olympic sized swimming pools.

Water scarcity related to this gap is not felt evenly across the world.

Areas of greatest water needs include the middle East and North Africa.

And we continue to see strong desalination demand as well as Southern Africa Asia, the Western United States in the Western Coast of South America.

January roughly 20% average annual gross.

Over the next five years, we believe we can double hour desalination revenue and this gross cause further accelerate in the latter half of the decade.

In our opinion it is only a matter of time until regions outside of the Middle East and Asia begin to look at seawater desalination.

As a political solution to their growing water needs.

We will remain diligent in our efforts to support the needs of this market grows.

To protect our position in seawater desalination.

They must invest in this business and the way I focused on three specific areas.

Purse R&D to contribute advancing hour PX technology to remain ahead of potential competition.

Second growing our sales and service her teams to be where our customers and products are.

Finally, expanding and modernizing our manufacturing where needed to address growing demand.

Now onto industrial wastewater.

Or the industrial wastewater business also addresses the world water supply gap by reducing the electricity consumption needed to filter and re use this water the industrial wastewater market is complex and touches many industries.

Everything from textiles to lithium ion battery manufacturing.

In processes will wish water is filtered by passing through multiple reversed muscles stages.

You also have the potential to expand our outcome PX sales alongside of our pet PX and Turbochargers.

There is a variety of estimates.

That's what the total amount of annual industrial water discharge today.

The United Nations for example, cites estimates as high as 620 billion cubic meters per day per year.

And one time fine estimates a fraction of.

What is more settled is that.

Roughly 80% of this wastewater this discharge into local water sources without street.

<unk> portion of this market to date, we will need to advance our product line to address the challenges that exist.

Not this additional Tam over the next two to three years. The market is made up of a variety of water.

Wastewater types.

Array of viscosities thickness size differences volume solace biopharma.

Potential and diverse.

10 minutes. Additionally, there is a strong push towards utilizing reverse osmosis.

Recover precious metals capture during these Poland.

Our product roadmap and visions multiple ultra PX.

And potential PX derivatives.

All of which are expected to incur significant R&D timelines or cost expectations.

One portion of the market.

To accelerate the unlocking of this time and to further penetrate these industries, we must commission and presume actual data supporting the value of our technology to better educate the industry that will benefit.

We should commissioning our first two to three plants over the next three to four months.

It was data points available shortly thereafter.

The investment will be required to grow our position in these markets as well as to further build partnerships not only in China, and India, but global thing first.

First as I mentioned earlier.

We will invest in R&D to increase the portion of the market that we are able to address.

Second we intend to build out our sales teams and marketing efforts in China, India and eventually.

Other regions to educate the market as interest in our products Rose Lynn.

<unk>.

Let's turn to refrigeration.

In refrigeration, we are talking about the next generation C O two refrigeration system.

I have previously referred to our PX G 13 countries.

That's a transformative technology that could help accelerate the global transition from climate, damaging hfc's natural refrigerants, such a skilled team.

We're convinced that our PX. She can become the foundation of the next generation of C O two refrigeration systems.

That's deadlines to transition away from HFC continue to approach Europe now in the United States.

The $55 billion global refrigeration industry, including end users such as supermarkets.

Are under increased pressure to identify technologies to reduce the higher operating costs will see or two.

<unk> systems.

Our PX G does just that.

Our momentum is accelerating as we move to achieve our internal targets of commercializing any new product by the end of the second year.

We are in discussions with a number of grocery change in Europe.

America.

Potential first PX.

Deployment.

In fact, we just received our first order for the PX deep by supermarkets.

Supermarkets in southern California.

PX G will not only help me out to them.

Reduce the cost of complying with California's requirements on refrigeration, which are more stringent than the proposed to E. P. A ruse.

It also helped to lower their emissions.

We have reduced energy consumption.

We target commissioning this unit.

During the first quarter of next year.

Who says what an opportunity to a partnership with us provides.

By combining our PX G loosely.

Oh, yeah tuition expertise.

We could potentially maximize suppose OPEC and capex savings deliver by generating C O two systems.

Last quarter, we discuss a potential billion dollar annual in this industry.

By 2030.

We intend to achieve that can and we are focused on investing in specific areas to be successful.

First we have developed a roadmap of our PX development to address the total time and be this includes varying sizes of our PX G, which will allow us to deploy in different sized systems than we are targeting today we.

We will also invest in making our PX G, even more efficient and more cost effective as we expect.

Second.

Starting in 2022.

Build out our commercial.

Starting with sales and technical support.

Is delivering value similar to what we have done in detail a nation.

Wish that I will turn the call over to Josh to discuss the financial section.

And our revenue targets for the next five years gosh.

Thank you Bob.

With this quarter's results as expected or barbells take.

You to play out.

With revenue of $21 million during the third quarter relatively flat against last quarter, but more than $6 million lower the same quarter a year ago.

And we told you this would occur.

I've mentioned previously that carrying our year on year quarterly revenue results does not point to future trends. This quarter's year on year decrease is simply due to a shift in the timing of mega projects shipments compared to last year.

Barring any unforeseen delays due to the ongoing supply chain crises, we expect our fourth quarter revenue to exceed $30 million, which would be our strongest quarter ever and possibly allow us to exceed are roughly 10% guidance on the foundation revenue.

We are on track to achieve at least to 68% margin year to date.

In short the year remains strong as expected.

The beginning to focus on reusing industrial wastewater to help narrow the fast growing freshwater gas.

We see the potential to achieve high single digit to low double digit millions by 2023 in this market.

We are targeting a revenue range of $30 to $70 million by 26, the extent to which this market grows in the long term will be driven by regulatory horses, and our investor and consumer pressure as a freshwater gap continues to worsen over this decade.

Where we sit today, we believe we can achieve this overall water revenue Wyoming in a gross margin percentage in the high sixties.

As for refrigeration.

Once we clearly establish our products value in reducing energy consumption. We believe we will see demand increased swiftly from and customers.

We're already seeing that strong interest in supermarkets experienced the pain from the increased operating costs of C. O two refrigeration systems today. This.

This is evident in our first contract here in California refrigeration.

The refrigeration industry must addresses pinpoint and we believe we are well place to do so.

We're targeting a scaling up the refrigeration business to between $100 million to $300 million in revenue by the end of 2026.

The speed at which was scale. This business will largely depend on a few factors all of which were actively working on.

One educating improving actual cost savings to the end customers in stores too.

To educating the engineering contractors that define the systems that are installed in most supermarkets and.

Progress in refrigeration and industrial wastewater markets as well as strengthen our products and desalination.

Second we're investing an additional sales and marketing resources to ramp up or.

Regulation businesses next year.

Finally, we're not immune from the inflationary effect countries experienced correct.

With regards to the board Tech note that one of three scenarios will occur.

The first is that we could achieve success in the short term at the extension of Partridge lives move the commercialized at which time, we would maintain our current spend and factor in our revenue forecast 2022.

Or in the second scenario, we'd be reducing our spend on vortex, but most the low single digit million dollars next year, assuming material progress name or.

Or in the final scenario, we would stop investing pirates. This is a decision that we will make in the short term. The note that no matter the decision our investments in support of Vortec development are fairly small today.

As we look at 2026, we maintain our longer term targets reduce opex as a percent of revenue to below 40% as the initial push into these businesses begins to realize greater revenue streams.

Our capex needs remained fairly stable in 2020, we are adding a new killing early next year to support capacity, but do not foresee the need to significantly increase further additional capacity at this time.

If refrigeration word accelerate faster than currently expected, we will have time to increase ceramics capacity in the latter half of next year or by the first half of 2023 as demand picks up.

Employees.

I should note that we are experiencing labor and energy related inflation like everyone else.

And that is having some downward effect on margin, which you are seeing reflected in our guidance. We are actively working today to mitigate future inflationary effects as we look out to 2023 and will continue to update you.

With that we can move to Q&A. Thank you.

At this time, we will be conducting a question and answer session. If you'd 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 two if you'd like to remove your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.

Yeah.

Our first question is from Wally Walker with Hana Road capital. Please proceed with your question.

Thanks for taking my question.

Thanks, Ross forgiven aggressive guidelines.

Guidelines for for future revenue.

Our roadmap how are you I guess, that's very helpful.

Much appreciate it.

It wasn't that long ago, you guys were talking about commercializing your wastewater business for that for the first time first time, we've heard about it you had a partnering with Dupont, who best I can tell I became.

Real good advocate for your your PX products now.

Now youre looking at it another huge Tam with your refrigeration do you anticipate another.

Partnership with a large household name that will help you educate the public as you stated.

Thank you.

Bob.

Yes look this is a large and as you said, there's a large industry.

Many players we are in discussion.

Potential partners.

Oh Bose.

Uh huh.

Contractors level and OEM level, and we have a funnel of potential partners.

In discussion and.

We are excited about this new market.

Configuration doesn't the housekeeping question is after the the stock buybacks could you tell me what the current fully diluted share count is including our all our issues and options.

We have roughly we purchase humanly.

It's just shy and was this is Josh my leg, just shy of a million shares.

And so throughout the year and we're still in the high I don't have the exact number in front of me, but we're probably at around 58 million.

Sure. So you would take.

That is not what we called PX centric.

Androids.

Our system is.

He is designed from the beginning.

Fact that we save energy, we should impact the other parts of the refrigeration system, but for example, we should not need is big volume of compressors, we are impacted in.

The evaporation stage and the weather impact in the valves stage so.

A PX centric system as we just said well will render both capex and Opex savings.

The end user and also ready or even in this first contract we're talking with subcontractors because either the contractors who designed the system for the end user of course right at the end of the day, we save money for the engines.

And how long do you think it would take them once you put a demonstration project in for.

Who areas every two years with a new product so that would imply through 2026 two additional areas.

Robert I Ah, what we said is not something that we entered into Ares every two years, okay accurate of course, where he hopefully entered you Ares like regular worried quite often.

What we have said is that we are bringing a financial discipline to our.

New development efforts, which is I repeat that we started a project, we must clear or technical hurdles within the first 12 months we seize.

And then within the next 12 months, we must commercialized that and that was in the third 12 months seamless abuse.

Oh that'd be.

And also we said the week, we would only embark on projects.

At least 50% gross margin.

Test our brand equity as being a high margin business.

Thanks for the clarification ketchup, we have we have we have commercialized the industrial wastewater inside.

Six months after this other project and there's refrigeration we start with.

Huh.

Oh about March April the day before.

We are well ahead of March April 2022 timeline for commercialization, we have just a couple of things.

Yeah.

But again I'm projecting.

Oh, it's a 2026.

There's no accounting for potential new.

Product development.

Colin.

Oh gosh, Joshua as a specific dimension today.

Talking about the desalination, we're talking about industrial wastewater and we are talking about the refrigeration pony.

Thank you again.

Thank you Robert.

We have reached the end of the question and answer session and I will now turn the call over to James Mccarthy for closing remarks.

Thank you everyone for joining us today, you have a good evening.

This concludes today's conference and you may disconnect your lines at this time.

Goodbye.

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You're welcome.

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