Q2 2023 Energy Recovery Inc Earnings Call
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Greetings and welcome to the energy recovery second quarter 20 twenty-three earnings conference call. At this time all participants are in a listen only mode. A brief question and answer session will file a formal presentation. If anyone should require operator assistance. During the conference. Please press start zero on your telephone keypad. As a reminder, this conference is being recorded.
It is not my pleasure to introduce to you James Picardie V. P of Investor Relations. Thank you James you may begin.
Hello, everyone and welcome to Entergy recoveries 2023 second quarter earnings Conference call.
My name is Jim Security, Vice President of Investor Relations of energy recovery and I'm here today, with our chairman President and Chief Executive Officer, Bob <unk>.
Chief Financial Officer, Joshua Ballard.
Today's call, we may make projections and other forward looking statements under the safe Harbor provisions.
Changing the private Securities Litigation Reform Act of 1995 regarding future events for the future financial performance of the company.
Eight minutes may discuss our business economic and market outlook growth expectations.
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 forward looking statements are not guarantee 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.
E S C C. Specifically the companies a Form 10-K inForm 10-Q.
Documents identify important factors that could cause actual results to different materially from those contained in our projections are forward looking statements. All statements made during this call are made only as of today August 2nd 2023.
Especially disclaims any intent or obligation to update any forward looking statements made during this call should reflect subsequent events or circumstances, unless otherwise required by law.
At this point I will turn the call over to our Chairman President and Chief Executive Officer, Bob Mountain.
Thank you again and thank you everyone for joining us today.
First as usual, let me style was alcor water business.
Desalination, we have now signed all Mega projects.
Okay to ship this year.
Now filling out an after market channels, which happened closer to their shipping date.
Well well positioned for the ring.
Of this year and Josh will give you more specifics on these numbers.
Mmm wastewater Oh.
Okay and pipelines.
Mangrove bus.
I don't believe we shall land at the mid to high end of our 628 million dollar guidance.
By the end of the year the team is molesey Unfortunately focused on.
We need to invest to deliver another double in revenue.
2004.
We have discussed our intent.
This T V.
<unk>, which we operate.
This effort continues at a quickening pace.
Entered the second half.
2023.
In June we announced our extended ultra PX products to is.
Mmm abroad branch from smaller flows as low as 10 gallons per minute.
Two 250 gallons per minute.
Operating pressures as high as 120 bar.
1740 P S huh.
Additionally are low pressure P X enable us to provide pressure change your technology.
Change.
The plan.
Low pressures to ultra high pressure.
We will update you more our plans for wastewater F. R next Ernie banks.
<unk>.
But progress continues to your confidence.
<unk> 2023 wastewater guidelines.
But also our 2026 revenue targets in the second.
S really look further out we continue to pay attention to specific regions globally that may have potential for energy recovery.
The coming years.
Last quarter, we spoke about the potential for our business in North Africa.
In particular distress, we see in Morocco, Algeria and Egypt.
We have also identified potential grocery markets.
America.
Which is also experiencing severe water stress.
And turning to desalination water reuse and wastewater treatment for relief.
Chile, which has been dealing with record drought.
<unk> continued to be a leader in Latin America desalination market.
In the second quarter, we announce contracts totally over eight years for projects in the country.
Which are scheduled for delivery later this year.
Chili is projected to see growing water fish in the coming decades.
Which is already affecting their water supplies.
The World Resources Institute.
<unk> Julia.
Julia Express.
Oh, no two medium water stress.
Based on the ratio of local water who squash.
Renewable supply.
Okay.
They are already in the high stress category.
I expect it to be classified as most extreme.
The theories and plugging forties.
The rising temperatures.
Likely further accelerate particularly in the Andes Mountains, which is the source of most of the countries whether supply.
In addition, central Chile, where 70% of the population Smith.
They expect us to see significant reduction.
This is <unk> is playing out today in the mining industry.
Critical industry for Chile's economy.
Which is a <unk>.
Order of the World Cup Air supply.
Instead of a year ago chili was expecting to nearly triple its user desalination.
Miami.
From a deceleration plans to 25.
<unk> 20th 28th.
Additionally, the binding industrial uses enough water.
Y 75 per cent of Chile's population and by 2028.
I expected that over 50 per cent of the water at UC mining will it be.
The need for water in Chile.
I'm fine today.
It is expected.
Double by 2026.
What are we use and recycle them is another option for cheap, which could potentially generate material increases in our.
Wastewater decisions is dedicated place huh.
Mexico ranked 20, forcing the world for water stress, it's another country experiencing.
Okay.
We currently huge waste in recent years.
Mclaren water crisis began in 2022 and up to 60% of the country could be induced severe water stress.
In the coming decades in fact.
This year, Mexico City itself announced reduce water pressures S reserves in the main reservoirs.
Below 50 per cent.
We believe desalination and wastewater reuse will be critical components of Mexico's water strategy.
In the coming years, although we have not seen significant revenue from Mexico in recent years.
Our pipeline a squirrel.
We are nearly doubling our business there in 2020th Street.
The future of desalination or water, we use in Mexico will depend on their ability.
Bill sufficient water distribution networks.
Argentina.
Despite.
Not being a mature revenue generator for energy recovery is another south American country experiencing significant water stress.
The country's worst describing 60 years, that's who.
Argentina reporting significantly lower croppies.
<unk>, 20th 20th Street, which is a strange.
Heavily dependent on agriculture exports.
These three countries have a combined.
Population of roughly 200 million.
Which is more than twice that out the middle eastern.
Middle Eastern countries.
The large scale desalination groceries in recent years.
<unk> revenues Central and South America potentially.
<unk>.
I'm single did you immediately.
Change.
Escalation North Africa, how and when the water stress finally pushes these countries into consideration.
To a considerable wrap up.
Sources of recycling of water is not known but.
That there is a growing need is clear.
Alrighty recently deployed additional resources.
To continue to serve this market.
To invest in the future.
<unk> estimated.
Now, let's turn it over to C O two.
We continue to receive <unk> market validation that our technology is being accepted.
Concrete proof points with customers.
Clear signal.
P. S. G is beginning to truly resume.
Refrigeration market.
Recognizing two significant ways.
In the second quarter.
First the.
<unk> was awarded refrigeration innovation of the year at the ethanol America.
In Washington D C in June .
This whole war was chosen by a vote of industry players global.
And energy recovery P. H D was selected over nomination of other features.
Street.
Additionally that P. A C. S. S. S. S. S T E refrigeration system.
And being separately so that it is fine.
Mmm multiple awards categories 40, and you are a C cooling industry awards, including the refrigeration.
<unk> of the year War. This war is granted to a product.
That's it.
Nice existing refrigeration systems wish to finish fifth and impactful change.
As a reminder.
Innovation of F. S S T refrigeration system.
The incorporation of our P. S G.
We're proud of both the <unk>.
And one of our loose.
Latest nomination are encouraging signs that our email <unk> technology is becoming increasingly interested.
By a conservative and mature industry.
Alright.
Nation must become pipeline M I five orders.
Those orders must become profitable revenues for energy.
For us to achieve our taxes.
In that regard a few concrete actions have taken place this quarter.
First we have begun to see the pic orders from our partners.
Oh, hi, applying a Phd Max.
Oh sure European partners.
<unk>.
Cool technique in Africa.
Have identified there next installations in major change eastern and Western Europe .
We will keep you updated.
Their progress S. The commission.
Secondly, RPX G is scheduled to be installed.
[noise] supermarket chain this quarter.
To help support refrigeration systems and their stress.
From the historical temperature spikes happening today.
<unk> you too refrigeration is a major problem in the supermarket industry.
Cause the millions of dollars annually and affects the bottom lines of both supermarkets and aliens themselves.
R. P. H E has shown.
Can allow existing C O two refrigeration systems.
Operate at temperatures up to 10 degrees Fahrenheit.
Over their current capabilities.
Average global temperature reach into your highest on record.
Ah well positioned to help sofa <unk> challenge.
Supermarkets move to seal between refrigeration.
Third hour Parker.
Supermarkets has ordered a P H G for installation at a second store in California.
We recently provided that presented the results of our PX G as it.
[noise] supermarket in Indio, California.
At the <unk> conference in June .
Together with.
We showcase of independent assessors finally that shows under certain conditions.
R. P H G helped.
A significant reduction.
C O two refrigeration systems energy consumption.
Specifically this study shows that at temperatures of 95 to 105 degrees Fahrenheit.
P. H D reduces the system's total energy workload by approximately 30%.
These tremendous savings are comparable to those that we have so earlier this year was at.
And lastly.
As previously discussed regional distribute distributors Europe .
Integral part of our strategy.
Approach the market in the region.
As such we continue to move forward in discussions with additional distributors.
The hope of signing more of them in the coming months.
Greens are helping.
Healthiness penetrate markets.
The dishes manner.
Last quarter, we announced our plans to hire and train a few engineering and technical staff.
To support a rollout this quarter or taking this a step further.
Wilson.
[noise] announced a partnership with a major U S. L. A M to open a new training facilities here in the U S.
This new facility will incorporate RPX C technology and health familiarize external service technicians.
The operation of the Th G. We have already begun inviting industry participants to that opening.
And look forward to formally announce it in the coming weeks, our hope is to retro pay such facilities elsewhere was the other partners.
To ensure that demand for the P. S. G is 90.
Byproduct.
But with the technical support needs it as well.
As you can see we have.
Eventful quarter and first half of the year.
And I am also pleased to report that during the second quarter M. S. G. I C. I M. S. G I assign energy recovery.
Its highest E S G rating of Triple eight.
In fact, we actually earn the top bleeding, losing our industry sector.
This is quite an accomplishment for a company that only <unk> <unk>.
You sure years ago.
Is a tremendous.
Testimony not only for our strategy and products, but also for the hard work and dedication of our E. S. G team and that of our entire company.
Next quarter, we will talk about our plans and projections for 2024.
Most of the C O two and water businesses as we continued to push forward or 2026 targets.
Was that let me hand over to call through Josh.
Good afternoon, everyone.
Generated revenue of $27 million this quarter, which was within our guidance of 20% to $25 million.
Note that we actually shipped out over $26 million in product during the quarter, but due to gas revenue recognition rules nearly $6 million of revenue from.
From a specific mega projects shipment will be recognized early in the third quarter.
Therefore, we had a strong quarter based on our expectations, which helps provide confidence that we will continue to meet our revenue targets. This year. However.
However, this delay in recognizing that Mega project to cause an operating loss in the second quarter about two and a half million dollars. We are confident that our overall profitability will remain in line for the years, we begin to realize a large number of mega projects shipments.
Third and fourth quarters.
We recognize $600000 and wastewater revenue for a total of $2 million a year to date.
We have only achieved a portion of our target for the year between sign contracts in our pipeline. We're comfortable that we will achieve our wastewater target. This year has been prescribed.
And additionally, recognize roughly $100000 in C O two revenue this quarter.
Although we are showing a negative margin and emerging technologies segment.
This is related to the timing of the gap recognition of expenses related to this revenue and we should see this normalize in the third quarter.
The balance of revenue in the emerging technologies stagnant with an oil and gas largely related to replacement parts of projects already in operation from several years ago.
As we look towards the third quarter, you can expect to see growth continue to arrive, but with some short term risk.
Our current revenue target range for the third quarter is quite wide between $25 million to $35 million the.
The reason for this wide range is related to a few specific mega projects. We are uncertain as to whether we will be able to ship. These orders before the end of the quarter.
However, we are confident these projects will ship before the end of the year.
Therefore, the rest of these projects is very short term.
It should not affect our overall 2023 results.
However, note that if we only achieved the low end of our range in the quarter, we would be close to a breakeven operating profit or possibly show a small loss in Q3.
Both are second and third quarter swings again highlight the lumpy nature of our revenue in desalination and how a small number of mega projects can swing a quarter, one way or another.
However, this in no way reflects the strength of our pipeline strength along with the purchase orders, we haven't hand already gives us confidence in our ability to achieve our targets this year.
As we looked at the second half of the year, we know anticipate achieving desalination revenues in the lower half of our guidance or roughly three to five per cent.
Note that based on our guidance for the third quarter. This year is now heavily weighted to queue for which could exceed $60 million such.
Such a large quarter of course increases risks when so much is dependent on the final few months of the year of.
Of course, we've been building for this heavy second half of the year, which is the main driver of the increase in inventory year to date.
Therefore, we are ready to deliver the product and if we experienced any delays they will likely be customer related ones.
Well no more November and we'll update you on our progress in the fourth quarter.
Gross margin was comfortably within the upper end of our guidance our product mix with a more typically balanced one although someone lied on pressure exchangers, but overall, putting prep positive pressure on margins.
Would expect to see gross margin upwards of between 65% to 67% in the third and fourth quarters is this trend continues.
The range, we are providing is reflective of a little uncertainty and the final mix of pumps and Turbocharges, which is contingent on our own am an aftermarket sales.
However, this forecast means that we should in the year within our 64 and 66%.
Are operating expenditures continuing to travel within the guidance, we laid out last October G&A standards growing in the single digits and largely driven by inflation and a small increase in headcount most girls can be seen in sales and marketing spend which is growing 38% year to date. This growth is right in line with expectations as we continue to ramp up in <unk>.
<unk>.
For growth in both wastewater and C O two.
You'll notice 22% decrease in research and development spend year to date, while we do expect R&D spending the false somewhat this year to the cessation of vortec activities.
Most of this quarter's drop is simply due to the timing of some of our projects then.
By the end of the year as we stand today, we anticipate R&D spend falling year over year roughly between four to eight per cent.
Therefore, our overall target to spend between 50, 253% Opex as a percentage of revenue based on our current revenue projections for the year remains on track and unchanged from our projections on October last year.
Unsurprisingly following a very low revenue quarter Q1, you showed negative operating cash flow in the second quarter. This is entirely due to lower collections from a much reduced accounts receivable balance at the end of the first quarter.
However, overall cash balance is accurate actually remain higher than planned to do better than expected collections in the second quarter as well as inventory levels that remained below forecasts.
The last call I stated that inventory levels could exceed $40 million this quarter.
Continued to proactively manage our raw material inventory levels down which is the main reason for this reduction from forecast.
This is a positive result, as we seek to reduce the number of days, we hold raw material inventories from our highs during the supply chain crisis over the past couple of years.
While we think it is still possible to see raw materials fall further this year, how far they fall is entirely dependent on our C. O two buildup in the coming months.
Have a better idea of October .
We stand today, we see our inventory level settling out at between $25 million to $30 million by the end of the year.
Overall, it was another financially sound quarter and our team remains confident in achieving our range of guidance for the year, let's.
Let's move to Q&A.
Thank you at this time, we will be conducting the question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tell them will indicate that you're lying as in the queue. You May press start to if you would like to move your question from the queue for participants using speaker equipment it may be necessary.
Sorry to pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
And the first question comes from the line of Ryan.
With be Riley Securities. Please proceed with your question.
Hey, good afternoon guys.
Right right.
So the risks to 2024 that we spoke about on the last call can you give an update on the potential tendering delay there I think it was three or four projects that you called out on the <unk>.
Yeah I'm 2024.
We're really looking at it as we did last quarter. So it's a little early for us to to really give any definitive numbers for next year, but we're seeing similar risk those projects that we discussed last quarter haven't worked themselves out yet.
Okay and.
And then on the C O two training center in California.
Is that something that you're creating with an O E M or an existing place that you're just gonna be able to show.
Showcase the technology.
Our understanding it is a new location opened.
<unk>.
By our.
Partner and since P. A X G is part of the newer generation refrigeration rack offer. So we are a partner in that new training center.
Okay got it and maybe just to look a little further out can you remind us what the timeline might be to build.
Another manufacturing site and what the initial thoughts on a capital outlay could look like.
Hey, Ryan when when you think about a manufacturing site.
We're actually looking to first.
Maximize everything we can produce out of our two existing facilities in California.
If we hit the low end of our C O two range.
The 100 million call. It sub 200 million range of C O two.
We think we can probably.
Produced most of that out of our existing facilities and just add incremental new capex killed and so forth to support that so that capex wouldn't be so great.
Either if we hit you know towards the upper end, the call 200 million or above give or take.
Or as you look a coupla years, now past 2026, and when we would certainly need to build a new facility.
And we've spoken generally about.
For a new facility to add.
Call It similar 27 to 10000.
P S G units.
Pasadena.
Roughly around 20 million about 15 to 25 is usually the range I guess, depending how much how much extra space, we build out and so forth and where we do it.
So it's not a huge outlay of cash, but it'll be later in the cycle than what we originally planned which is good news.
Oh, sorry, I might add there's this pushing out.
Pushing out of the.
Need to add Capex.
Is also a result of continued manufacturing process improvement and optimization. So we can push through more products.
The same capacity.
Okay got it.
And then maybe just one final one to touch on the second half here.
I understand it's a timing issue for three Q in terms of when you you might be shipping out for some of the mega projects, but you're confident in the full year can you just talk about what the main risks are.
Are you actually seeing Ah delays in the projects is it just your customers waiting on other pieces can you just give a little more color around kind of the risks to three two and especially for Q.
Yeah, I'd say well for three Q, it's very specifically a few of these projects and it's just it's typical.
Operational issues, we deal with whether it's getting paperwork signed or getting witness testing completed you know sometimes folks like to come witness test and see the quality of the products those kind of just kind of operational.
Gives and takes that occur during the usual process.
As we look out at the whole year, there's nothing in particular.
Telling us we're gonna have delays I'm highlighting the risks because when you're talking about 60 million Bucks in three months is just a lot. It's in the last couple of months you know a few months of the year and so if you have any delays such as we're.
Talking about in Q3 pushes it out in the next year, it's entirely unconcerned ing to US you know it doesn't mean anything with cash flow perspective, we don't expect anything to be cancelled this year.
Like occurred last year, you know none of that is going on it's just just a heavy quarter. It's a lot of mega projects Mega projects over $40 million 60, which is good.
So we feel pretty confident but there there's risks when you when you load that much in three months.
[noise] got it that's helpful. Thanks for the answers.
You bet.
Thank you and the next question comes from the line of <unk> Mulch on off with Raymond James. Please proceed with your question.
Thanks for taking the question I was fascinated that you started theme.
Remarks, with Latin America, when I look at your 10-K for 2022, the entire Western Hemisphere was only $8 million of revenue and you you guys got 8 million of.
Ah desalination contracts from Chile alone.
This past March so is there.
I kind.
Kind of momentum in the Latin American market that you guys are observing and anything outside of chili that your complain too.
Well, we already mentioned, yes, we do see.
New momentum coming out of that area specific.
Specific date, we mentioned here in Mexico.
And as well as Argentina.
So we think this whole region is is moving and.
Will constitute percentage wise or larger percentage.
In 2004.
And we're seeing avail. This year last year, we did in the Americas, roughly eight $5 million or so.
And we're seeing not quite a doubling of that potentially this year.
If all those projects deliver as we were expecting so it's a pretty significant increase it still.
Smaller part of our overall revenue.
But growing for sure.
Okay.
On the C O two $100000 and and see one that built up to 300000 then.
You too.
Are you close to a point, where you might begin.
To have kind of decent visibility and perhaps start getting financial guidance for that revenue line.
We'll do that as we said the way to do that in the November earning call.
Right.
Sure I guess in 2023 should we assume what a million dollars.
Total for that for the year.
Probably not.
Okay. Okay last question.
It's been awhile since we've talked about kind of M&A opportunities you still have about $100 million cash on the balance sheet.
I'm curious if there are any.
Jason sees that perhaps you can look to fail.
A bolt on acquisition.
Oh always always look for.
<unk> Besides that we actually also touch uhm before.
That we also want to protect our hi.
Margin brand equity.
So that was a you would say a floor what kind of M&A.
We look for that.
As of this moment, while we are always on the watch out we don't really have anything close enough to even mentioned about it.
<unk>, we're pretty focused on delivering what we got.
So you know we're.
We're not spending a lot of time on that and we got a lot on our plate.
Currently making sure we had C O two and wastewater.
Up and running real fast.
I understood. Thank you guys.
Thanks, well.
And ladies and gentlemen, if you would like to ask a question. Please press Star then one on your telephone keypad, a confirmation tonal indicate that you're lying as in the question you May press start to to remove a question from the queue for anyone using speaker equipment and may be necessary to pick up your handset before pressing the star keys, one moment, please only Paul for any.
Question.
[noise].
Okay. At this time I'm not seeing any questions I would like to pass it back over to James for any closing remarks.
Thank you everyone for joining us this evening and we look forward to speaking with you on November 1st take care.
Ladies and gentlemen that does conclude today's teleconference. You may disconnect Goodbye. Thank you for your participation and have a great day.
[noise].
Mhm.
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