Q3 2023 Energy Recovery Inc Earnings Call
Greetings welcome to the energy recovery three Q2023 earnings call at this time, all participants are in a listen only mode.
Question and answer session will follow the formal presentation. If anyone should require operating assistance. During the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded Oh now turn the conference over to your host James Mccarty.
Vice President of a refresher relations that you may begin.
Hello, everyone and welcome to interview recoveries, 20th 23 third quarter earnings Conference call.
Name is Jim Security, Vice President of Investor Relations of energy recovery and I'm here today with our chairperson.
The word Pamela Andre <unk>, President and Chief Executive Officer, David Moon, and our Chief Financial Officer, Joshua Ballard.
Thursday's call, let me make projections another forward looking statements I need to safe Harbor provisions contained in the private Securities litigation the format that 1995 regarding.
Is there any future events for the future financial performance of the company. These statements may discuss our business economic and market outlook, great expectations, new products and the performance hall striped shirt and business strategy.
Or looking statements are based on the information currently available to us and on management's beliefs assumptions estimates and projections.
Looking statements are not guarantee of future performance and are subject to certain risks uncertainties and other factors.
We refer you to documents the company files from time to time with the S. C. C. Specifically the company's Form 10-K and 10-Q.
Documents identify important factors that could cause actual results. So just the material released from those contained in our projections are false statements.
All statements made during this call I made only as of today November 1st 2023, and the company expressly disclaims any intent or obligation to update in the foreskin statements made during this call to reflect subsequent events or circumstances.
Otherwise required by law at this point I will turn the call over to our chairperson Hamilton Girl.
Thank you Jim and thank you everyone for joining us today.
Last Tuesday October 24th My fellow directors and I appointed David mentally.
Interim Chief Executive Officer of energy recovery.
Now will remain a member of the board and I want to thank him for his many contributions advancing our business.
Over the last several years, we have introduced R. P X G and created a tremendous opportunity in C O two.
Built and established and growing business and wastewater and launched a family of new products to grow that business.
We continued to innovate within desalinization industry with our Q4 hundred.
Highest efficiency energy recovery device in the world.
The board and I understand and clearly see the opportunity to not only accelerate growth in our existing three markets, but also to expand the PX beyond these markets in the coming years.
We're pleased that David agreed to join management as interim President and CEO. During this time.
David is a seasoned leader and both his previous experience as president of carrier commercial refrigeration, a division of carrier global cooperation as.
As well as as history of developing and commercializing technical object technological capabilities provide important insight and perspective, while in this role.
Our goal is to ensure that this transition period is not only smooth and without operational disruption, but will also allow us to continue along our growth path.
I want to be clear.
There are no underlying concerned about the business or its strategy.
As mentioned in the press release, we have begun the C E O search process and hope to fill the role permanently in the near term.
The search committee includes two of energy recoveries newest members, calling Sable and David Moon, who both spring a key operational focus to the business and we are even now speaking with a number of qualified candidates.
With that it is my pleasure to turn the call over to David Mann.
Hello, Thank you Pam.
Before I start I want.
To emphasize that energy recovery fundamentals remains strong.
Neither I, nor the board are seeking any major changes in our strategy or in our executive team at this time.
I'm coming in as interim CEO do the following.
Maintain stability.
Keep us moving towards our long term goals for our water and C O two business days.
And to ensure that we continue to further build and grow the relationships, we have with our shareholders.
Mm I look forward to meeting.
Every quarter management management intentionally speaks with shareholders to ensure not only that our strategy in its execution is well understood.
But then we are also hearing your questions and concerns.
Normally the majority, which speak with either the C E O or C F O.
As well as our Investor Relations Chang.
However.
The recent unique events.
Intend to participate in every one of these meetings this quarter.
I look forward to speaking with each of you directly.
I've spent almost three decades in the cooling and he's industry in the U S Europe Asia, and Australia, most recently with carrier.
I understand what it takes to commercialize and to introduce highly engineered product into a mature market and more importantly, how to penetrate that market.
This is what energy recovery <unk> wastewater and is now what we will do in refrigeration.
I hope to share my experience with this great team cause we aggressively embark on the next chapter for energy recovery.
Joshua <unk> wastewater businesses and of course, you will update you on our 2023 and 2024 got it.
So let me start briefly with our water business.
As you've likely seen from our press release.
Quite a few tactical challenges, we face in the third quarter, our team was able to deliver a great water.
This performance points to the strength of our water and operational tanks.
Overall, I and the rest of the board of extremely bullish on our base water markets.
Longterm secular story in detail and our broader water strategy remains as strong as ever.
Global fresh water use is trendy to increase as much as to increase as much as 30% by 25th.
Well water scarcity major growing and critical industry issue and just about every region in the world.
Or advanced solutions help bridge the gap between the divergence was the world's fresh water supply.
Increasing demand.
Dressing the energy component.
Treatment technologies.
<unk> made a critical part of the solution support to supporting the world's freshwater names.
Our water business will continue to grow in 2024.
And we remain well positioned at the core of a significant secular ship and water demand.
I'll, let Josh give you more more in depth update on our water in a minute.
Let's talk about our C O two business first.
The PX G. As one of the first truly innovative products that I've seen in quite some time and the commercial and industrial refrigeration Mark.
I believe we have the potential to disrupt this market.
I also firmly believe that this market is simply the foundation from which our C O two business will grow.
Again, that's why I'm here and why I'm, so pleased to help.
In term C E O during this period.
The C O two strategy roadmap that Bob and the C. O T have executed thus far has been highly effective.
The team is making tremendous progress in a mature competitive industry.
And may even have made a name for ourselves.
Within a very short period.
We've done the following.
Established strong relationships with major Oems and in Europe, and the U S.
Executed on installations with great Oh am in grocery partners on both.
And we want to industry Awards.
The latest being the RAC innovation of the year Award together with our good partner after group in September of this year.
One key player in this industry recently said you.
We're everywhere and everyone is talking about you.
Now it's important that we understand this market from different perspectives.
The U S and European markets are in very different phases of the transition from Hfcs.
And the U S. We have a market that's just getting started.
The regulatory tailwind are in place and only growing stronger.
Evidenced by the E P a spinal technology transitions Royal Lane.
Was issued October 6th just a few weeks ago.
This new ruling adhere closer to California's own tied HFC restrictions and expands these restrictions to many other refrigeration usage.
Insure while the C O two refrigeration market is still fairly Nathan in the U S.
Regulatory momentum the straw.
Which means that we should see considerable uptick in the U S Greenfield market in the coming years.
Now the U S market is also simpler than its European counterparts.
It is largely served by only a small number of large OEM and contractors.
Which simplifies our distribution channels.
Because we are getting known early in the U S evolution until alternative refrigerants.
Means that a C O two is further adopted we.
It should be well placed to respect into new greenfield projects from the ground up.
Which is an efficient way for us to enter the market.
However.
This also means that true volume sales in the U S is still a few years away.
Even as we began to make real progress today.
According to the North American sustainable Refrigeration Council U S is only roughly 1500 C O two based refrigeration systems.
23.
And it is expected to increase this number to over 5000 by 2027.
Luckily.
European market provided us with a strong understanding of how the U S market is likely to evolve.
Contrary to the U S.
Transition to natural refrigerants knee in the European market is more advanced.
Over 60000 C O two installations are already in place throughout the continent, and north of 10000 installations current annually.
In recent years.
Thus.
We have a large establish brownfield market in Europe.
And a strong annual base.
Greenfield installations that we can tackle.
However, this is more complicated market with a variety of regional players.
Some multinational.
This means we need to determine the resources necessary to address this market.
And the most efficient means to attain ma'am.
To accelerate our growth in Europe.
Ultimately.
This should be a low hanging fruit opportune really if we correctly approach it.
Underlying both markets as mature.
<unk> conservative industry that is typically cautious to adopt new technologies.
The most critical element of refrigeration system is that it must reliably deliver calls within.
Within the parameters it's been built.
Any deviation or shut down into refrigeration system.
Alright, large losses brand new years like supermarkets in cold storage facilities and the <unk>.
Rest of the value chain.
Therefore, we are doing the necessary upfront work to ensure that when end users press the go button.
The PX G will be a seamless introduction to new and existing C. O two refrigeration systems and the U S and Europe.
This is where we are at an R. C O two strategy.
Therefore to unlock the potential in this market our strategy is to begin with pilot installations <unk> retail chains approach church facility to build confidence in the operational and economic benefits of our PX G.
What's that confidence has been built.
We can then expand our footprint within that chain five tiny by obtaining repeat orders.
This is how we confirm our addressable market.
Move towards the volume metric orders.
<unk> to be ultimately within our reach.
We've already seen this play out.
In North America, we will soon be commissioning our second installation was very gotcha in California.
We're in discussions for multiple departments within the 2024.
We should commission our initial PX G with our first Canadian supermarket partner, Okay with over 1000 locations in the fourth quarter of this year.
In addition, we are in advanced discussions with several well known national change in the U S for potential the appointments of 2024.
This is the groundwork that is absolutely required for us to be successful.
In Europe or partner in the Benelux region few cool technique.
There's plenty three more installations in Q4, including two Adele Hayes, a large European and U S shame with over 800 locations as.
As well as a pancake factory in Belgium.
Which we have previously announced.
He was also in discussions with three log with a large European change her for.
<unk> repeat installation with them.
And finally.
Working actively on our second appointment without the group.
For supermarket chain of over 2000 locations.
And of course, we're in conversations with other large change throughout the continent.
From my perspective. This is impressive progress for a new technology in this industry.
Is this change.
Does the change continued to see the benefit our PX G in their operation.
We can further expand into greenfield and brownfields installations.
The Greenfield market will take up to a couple of years to show volume simply due to the fact that it requires a 12 to 24 month lead time in designing and installing new systems. Therefore, the greenfield Mark as our longterm potential.
But not not are substantial near term volume opportunity.
The key to near term by your Brown.
Brownfield market.
But it's also the most complicated.
While our PX G will likely add only minimal cost or greenfield operation and the brownfield market, there extra costs and equipment to build and install.
To be successful in this market, we must be able to first delivered a standard product is plug and play.
Meaning that the install conditioning and maintenance costs must be efficient and with that risk.
And we need to commit limited time to design and deliver.
Second we must deliver a P H D with meaningful payback to the <unk>.
Users.
<unk> of course are PX G must deliver the performance needed to generate that meaningful payback.
These are the focus of our entire C O two in engineering teams of 2024.
And prior quarters and spoke about our intention is to provide more explicit explicit guidance for 2024.
During the short time I've been in the sea again belief that we can achieve a substantial first step along this path in 2024.
We are targeting at least 50 locations for next year.
No I'm still in the early days of doing my deep dive into our C O two strategy.
However, what I can say is 50 PX T locations for next year, we create a substantial foundation.
Growing a pipeline for future expansion.
As our strategy unfold and we begin.
Trade the market in a more significant manner.
And will provide a clearer sense of R. C O two revenue objectives.
It's clear that we are growing at a slower place that originally envisioned.
However.
We're encouraged by the achievements we've made thus far.
And our prospects for additional locations in 2024.
More to come.
Our plan performance in 2024 were create more clarity as to how fast we can grow from our initial install this year.
We will update you on our 2026 targets cause that game comfort operationally on our status.
And we'll update you throughout the year 2020 forecasts as needed.
Now with that let me hand over the call to Josh talk in more detail about our water business and to update you on our financials.
Thanks, David and good afternoon, everyone.
Before I get started I want to be clear that my opinion will remain a fundamentally solid company with a clear growth strategy in a base cash generating water business that remains strong.
Is David described we're achieving real progress in C. O. Two are secular story has not changed in desalination.
Therefore, I remain as bullish as ever and energy recovery prospects.
We had a great third quarter, beating expectations across the board.
We achieved $37 million in revenue exceeding the upper end of our guidance by almost 6% with nearly 70% gross margin and over 32% adjusted EBITDA margin.
Specifically in desalination sales increased over $15 million compared to the previous quarter, while our wastewater sales more than doubled.
Moreover, our emphasis on expanding our market presence in C. O two led to $100000 in third quarter revenue with the rest of our emerging technologies segment revenues attribute it to oil and gas sales for aftermarket parts.
We are beginning to see our predicted uptick in revenue after our lighter first two quarters as previously communicate.
We successfully shift one of the two projects are at risk for the third quarter.
We're able to recognize revenue from our existing pipeline to make up the difference or water in operation team did a tremendous job executing.
For fiscal year 2000, twenty-three, we now expect to land in the mid range of 131 to 138 million dollar overall revenue guidance with roughly $7 million of that coming from wastewater and the balance from desalination.
This means that we again anticipate record breaking desalination revenues and what will be nearly a decade of consecutive growth.
However, we do have a few specific risks in the fourth quarter, which I would like to address.
First $5 million a R 2023 backlog as shipping to Israel as of today. We are on track to ship in November we are closely monitoring the situation in the region.
Second we have significant levels of revenue shipped into emerging markets in North Africa and Southeast Asia.
Smaller emerging market countries make up a larger portion of our sale such as those we have described a recent calls.
Short term execution risk within a given quarter also increases due to the complexity of managing and shipping to these countries.
And the fourth quarter, we have an $8 million shipment scheduled for India in the last few weeks of the year and $11 million to Algeria in November.
We have no reason to believe these will not go out a schedule due to the late timing of these shipments in the history of delays in these regions, we are watching and managing them closely.
Could you clear any 2023 delays if they were to occur with simply increase our guidance for 2024 revenue, meaning you should have no real effect on our business.
Therefore, we will return to revenue guidance at our next call. Once this year the results are in.
Now, let's pay the gross margin.
They will be in our guidance of 64% to 66% with the gross gross margin <unk> 67.
Are focused on cost reduction initiatives in 2023 is showing some success we.
We are currently expecting to finish the year somewhat higher than our previous guidance is 65% to 67% for the year.
It's important to note that our end of year gross margin is contingent upon our final product mix, which is heavily weighted RPX and our ability to execute on our remaining sale that plan. Thank you for it.
We now expect Opex to end the year, roughly 68 $69 million. There are no real surprises here year to date and we remain focused on prudently managing our expenses as we grow.
Our current cash and investments balance grew to $106 million, primarily owing the robust customer collections.
We concentrate on enhancing our inventory turns and supporting business critical capital investments, we anticipate concluding the year with the cash and investments balance.
<unk> between $110 million to $120 million, where we land within this range largely hinges on the timing of customer receipts and the fourth quarter.
Now that we've established that 2023 is going well in his plan, let's move to 2024 and beyond and our water business.
As of today, we already already have line of sight, roughly 80% of our 200 million dollar desalination target between 26.
In addition, our wastewater business all into our expand a product line and sales team continues to surprise to the upside is our pipelines strengthens involves the interest and participation in our webinars grow and early stage signs in regions outside of Asia, and an industry such as municipal wastewater begin to show promise.
This gives us confidence that we can achieve at least the lower end of our $30 million to $70 million target for 2026.
We have discussed in prior earnings calls our visibility into our Mega project space as well as the overall water scarcity story is what drives our long term confidence in this business.
Five short term fluctuations due to the day to day challenges of operating in emerging markets.
Or the near term trends in the macroeconomic economic environment.
The inflationary pressures of the past couple of years, coupled with a relatively strong dollar and higher interest rates are.
Beginning to increase the cost of producing water.
We are seeing cost increases per cubic meter of water as high as 40 per cent and interest rates have increased from 1% to 2% in 2020% to 46% today for a high quality developer.
If we look back cost to desalinate water fallen dramatically in the past decade, or so for a few dollars per cubic meter 250 cents in some regions of the world such as in the Middle East.
The mindset of the industry has been to continually drive down costs construct larger and larger desalination plants, making decile more affordable each year.
As you well know this is one reason why our pressure exchange. Your solution is so strong in this market.
This shift in cost us create a new a new dynamic in the industry we.
We are now seeing some project has been delayed due to the rising cost to produce water as well as the challenges of end users, reaching financial closure and a high interest rate environment.
And today's macro environment water tariff expectations between large scale developers E. P. C's and end users are misaligned.
While we do not believe the dynamics will permanently altered the trajectory of the desalination market they will likely slower rate of growth in the near term, especially are more susceptible emerging markets.
For 2024, we now expect modest revenue growth for desalination the range of 128 $435 million, implying flat desalination revenue up to about 5% for next year based on this year's expectations.
The slowdown is entirely due to <unk> megaproject space, which we now expect will flatten next year and possibly even followed by a few percentage points compared to 2023.
While we see shifts in every year and projects. We are now seeing significant projects shifting out from 2024 to 2025 or beyond in countries, such as Egypt, and India, which have been hard hit by inflation growing interest rates and weaken currencies.
We're also seeing delays in the release of tenders of over $7 million in Saudi Arabia.
<unk> alone account for more than 15% of our gross from 2024.
One very positive development and desalination comes from our new PX Q4 hundred which is the highest performing an injury cover device available on the market.
Q Q for Hunter sales could exceed 20% or more in 2024.
Q for hundreds increased efficiency and capacity is resonating with customers and we believe it could make up a majority of our Mega project desalination sale by 2025, essentially supplanting the PX Q3 hundred and large scale desalination projects.
This adoption further strengthens our position in the market visa via our competitors.
Where we sit today, we believe the market has the potential to regain a double digit growth trajectory in 2025.
We could return to growth in the low to mid teens with further accelerated growth in 2026 to the high teens or even up to 20 per cent.
2024, Progressive we will get more clarity on where 2025 it had.
Update you accordingly.
Our wastewater business continues to show real strength, and we are guiding $12 million to $15 million in revenue in 2024, which would mean.
We have the potential to once again roughly double our revenue in this segment from this year.
Our greatest opportunity and risks next year or two mega size municipal wastewater projects that total roughly $4 million. These two projects show that our strategy to diversify into the broader water treatment space is working but any delays could have an outside effect on next year's wastewater performance.
If we can achieve this growth next year, we will we will be well on our path to achieving our target range for 2026.
So you can see regardless of the short term headwinds, we see in detail or water business remains robust overall.
Overall, we expect to achieve $140 million to $150 million a water revenue next year, although we have short term challenges in our desalination Megaproject channel. We believe we remain on path to achieve at least the lower end of our 230 270 million dollar targets for water business by the end of 2026.
We are looking at how we can invest in wastewater to potentially accelerated areas of the world outside of China and India.
In addition, we examine our detail OEM, an aftermarket channels for opportunities to increase sales to reduce our reliance of mega projects to achieve these growth targets.
We believe our water gross margin for 2024 should fall within the range of 64% to 67%.
Will tighten this up early next year.
R. C O two gross margin will largely depend on how we achieve sale needing whether by direct PX G 1300 sales or by skip solution and.
We could show losses in 2024, as we grow into the profitability profitability of our brownfield market product.
You'll have to advise you on this further as our sales mix becomes clear.
I'm currently forecasting opex to remain at 50% to 54% of revenue in 2024, excluding any one time effects of the CEO transition.
Most investments will occur in sales and marketing and any other growth G&A R&D will be largely inflation related.
I'll be in a better position to detail or opex that our year and call February after David has had a chance to begin.
Note that due to slowing growth in revenue somewhat weaker water gross margin and growing sales and marketing spin we could see a softening of operating margin next year.
Currently anticipating an acceleration of growth again in 2025.
Therefore believe this off name will be temporary our goal of far below 40 per cent of revenue by 2026 remains achievable.
To summarize I believe despite what our share price might be saying the sky is not falling at energy recovery we.
While our acceleration in C. O two started slower than we would like we're making real and tangible progress, which should put us on our growth curve by 2025, if we successfully deliver on next year's installation.
Now with that let's move to Q&A.
Thank you at this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
Four.
You may 1st started so if you would like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the starkey.
Our first question comes from the line of available Ah Mulch autumn off with Raymond James.
Please proceed with your question.
Alright, thanks for taking our questions you you throw out a lot of guidance number so I just want to make sure.
We get them accurately for total water revenue in 2024, you said between 140 and N 150 with.
Wastewater being a bit more than 10 million is that right.
<unk> $140 $50 million total water and Hap'orth, Elton John [laughter] and wastewater between 12 and 15.
Got it and <unk> <unk> C O two weeks so Nathan.
You're not <unk>.
Giving any explicit target for for next year.
Yeah, and 50 locations well, it's it's a considerable step forward in building that foundation for growth from an actual revenue perspective, we're not talking about huge dollars right.
That would certainly be in the single digit millions so it's not gonna be.
Super waited in our piano.
We'll have we'll have more visibility next quarter every quarter. We're gonna update you kind of where we're headed with that because it's gonna be it's gonna be changing all year right as we progress.
Right and.
The sequencing of revenue recognition.
In past years, you, sometimes had a bar bell shaped, sometimes it's more back end loaded or even front end loaded what should 24 look like.
Yeah. Thank you for asking because I realized after recorded that I hadn't put that in there for you guys [laughter], it's gonna be very much like this your actual for though so it's gonna be uhm heavily weighted to the second half of the year and the first half is gonna look a lot like this year from an absolute revenue perspective.
So you know I would rough it at $10 million to $15 million in the first quarter.
$20 million to $25 million for the second quarter and then we'll update you on the second half of the year, but it's gonna be heavily weighted of course C. O two will be the wildcard for the year, but that'll be also waited to the more of the second half of the year I'm sure.
Okay. You you mentioned you.
Over $100 million cash on the balance sheet.
Needless to say.
<unk> <unk>.
Cut in half from its highs.
How old are you thinking about <unk>, maybe this is a question for.
For the D C M <unk>.
How does the board thinking about share buyback.
At these prices.
Yeah, I can start I mean, we we certainly talk about this every quarter and so this is something that we review every time, we meet with the board. So it is at the top of our mind, we we need to make some decisions about first of all where C. O. Two going next year, how fast we're getting on that curve and then how we want to invest.
We make any decisions on any any major buybacks, but it's certainly something we discuss regularly.
<unk>.
Mmk last question from my end is there a timetable for a permanent C E O to be named.
Hi, This is Pam Andre.
We hope to have the new C as in place by the.
This time of year or so perhaps first quarter, we are interviewing candidates right now.
Alright, we will look forward to that thank you very much.
<unk> <unk> <unk>.
Our next question comes from the line of Ryan I think that would be Riley to proceed with your question.
Yeah, good afternoon guys.
Alright.
It just you were just talking about how next year, you expect revenue to be heavily weighted to the second half once again.
Is that something that you expect to continue to be the typical seasonality going forward is itself. Yeah. It's gonna be a few years were received the second half comprised mostly the revenue here.
I don't think so it's.
You know, we do tend to have slightly higher Q for us I guess on average probably but these two years or a little unique at least in my five plus years here and as I'm looking past, so I wouldn't I wouldn't call out seasonally yet if it happens again in 2025 I might change my mind, Ryan, but for now how would expect us to be just 2024.
Okay. That's helpful.
And then.
For desalination could you just help us reconcile.
The 80 per cent line of site that you have to the 2026 target with the delays you're seeing in the near term, maybe just provide a little bit more color about the delays an hour. When you would expect those two days to give you confidence in that 80% number 426.
Yeah, Yeah. Most of the delays are pushing and I've got I'm, starting a list in front of me it's over it's over $30 million a delay that we saw.
For 2024, now we always see shifts in project. So I wouldn't say all of these are abnormal by any means but they are mostly shifting to 25 and 26, we have a couple of projects shifting the 27, but the vast bulk of them are moving to 25 and 26.
If you review you know really in the industry data, saying the same they're really expecting these upticks back in 25 and 26, you know barring any major macroeconomic headwind. So if you go from where we're at M.
M D S L and assume you know that that teens and high teamed up to 20 per cent kind of range, it's going to get you up to that 100, and 890 million dollar ish range of revenue by 2020 at the end of 2026, and frankly, we can see that 80% I talked about it in the script is really.
Based on what we see in our Mega project space and what's in the pipeline is you know that we see quite far out with.
So and then assumptions on our on our smaller projects based on aftermarket. So we we have you.
Where we sit today some real comfort in that no granted the macroeconomy can play with US the time like we're seeing next year, but.
But if things revert back to normal and start normalize I think you should see that uptick.
Got it thanks for that and then and then I'll just sneak one more in it and stick with water.
For the geographical breakdown middle East and.
North Africa, obviously comprised a majority of revenue in recent years could you just talk about.
Going forward.
How much of the overall revenue or maybe just how much of the growth is expected to be.
Yeah. When you look out the 2024, it's actually not the middle East, we're seeing a slowdown in the middle East in 2024, and we're seeing other areas, especially Asia and South America make up that difference.
As we look further out though the middle East is going to be it's a little it's a little <unk>.
Because we have some large project for example, like need home in Saudi that we're gonna see fall into these these upcoming years and some other countries as well so it's a little lumpy, but we still see some strong demand in the middle East and also importantly, because we're still going through this transition from thermal desalination plants to reverse asthma.
Detailed plan. So we still have a a pretty big pipeline of that to come forward in the coming years, and we expect that took her as well so it's gonna be a little bit lumpy, but we are seeing a shift to other regions of the world almost certainly next year, although I think the middle East are so pop back up pretty strong in 25 or 26.
That helpful.
Yep Super helpful. Thanks for the answers will turn it back.
Yeah.
As a reminder, if anyone has any questions you May press star one on your telephone keypad to join the question in nursing queue.
Our next question comes from the line of <unk>.
<unk> wood.
Oh It was a private investor. Please proceed with your question.
Hi, Good afternoon first of all thank you very much for a lot more clarity and transparency do you have provided on this call. My question is more and the C O two market and the other adjacent verdict calls that you guys have.
Can you kind of give us a better sense of what the regulations are and how required is it to.
The for the refrigeration and potentially a H whack to.
Switch to C O two and maybe if you can also comment you know given the price increases in energy how have the economics changed just too so we can compare.
Wow economic it is for the industry to switch introducing you technologies given you know how economical it was for the water to switch into reversal small so send music using your.
PX exchangers.
And then I have a second question that that's you know your cash is increased and you know you have purchased stock repurchase stocked higher done. This you know and if there's a specific reason why you wouldn't do it now.
Thank you.
He probably will I'll start with the easier one and then I'll I'll hand, it over to David for that the other question upon question on the buyback.
You know again, it's something we're certainly discussing so if I'm not saying it's off the table level, but it's it's.
We need some we need to make some decisions for next year, there's been a lot of changes here recently.
And we will certainly be returning those to those discussions with the board Ah clearly if we have extra cash we're not going to use then we ought to give it back right. So that's that's something will be reviewing regularly.
Always looking for the best returns for investments and for our shareholders and that's that's when we looked at as well and for this you have two questions I'll hand, it over to David.
Yes, so good afternoon, David Ma'am.
On the regulatory environment. So as you would know in Europe.
Regulation, which was passed by that you use.
That's been in place now for a number of years and so the ultimate goal is to reduce traditional refrigerator <unk>.
Reduced by 80%.
There are 2014 base levels.
That transition is well under way.
In Europe, we've got roughly 60000 C O two license already adding 10000 every year and so as you are now not only is C. O. Two are much more ozone friendly much more environmentally friendly refrigerate. That's also a much more efficient refrigerant.
And so we're giving out five regulation.
We've had we've had been getting help in the U S.
And now that it's an established technology.
It's you know for no longer having to push there's a lot of pull already.
So where are we come in.
As energy prices rise and you're in Europe and as he.
Continue to.
Continue to get hotter this is where our P X G campaign, because we are best when refrigeration systems are working their hard work their hardest when it's hot outside so what <unk> is improve energy efficiency he transfer.
So this is a perfect application at the right time for our PX G and it's a minimal cost and if the payback is a very good story and so the brownfield market in Europe is what we're that's our near term opportunity and that's what we're really working hard on.
And the U S. It's a bit of a different story. So the seal the transition from H S. D. C. O. Two is really just started and so the E. P. A just pass some final.
Last month.
And the target and the U S will be a 70% reduction in hfcs by 2029. So the curve is steep are getting started let.
Later, but the curb his fever, so what does roughly 1500 C O two installations and the U S. Today, and that's going to increase dramatically by 2029 until the opportunity for us.
Going to be Greenfield Oh by the way you know if it continues to get hotter in the U S.
Perfectly 74, so the timing.
Regulatory action. The fact that the plan. It gets hotter plays right into our PX shoe store and a really really good payback story, so more to calm and can I get a chance to.
Dive into the to the.
Have you got into the C O two story and our strategy, but we've got a very very good start.
So to summarise it sounds like this is not a luxury type of a thing for these companies just as a absolute necessity because there will be some kind of penalties if they do not decrease their their.
<unk>.
Yeah. The the bottom line is hfcs will just will.
Will not be available.
Of course of the next six to seven years and where are they are available the price will be astronomical that's what happened in in a European market and so it's forces.
Large supermarkets large called Schwartz facilities food processors to completely rethink.
<unk> infrastructure.
Not as much already happened in the U S and Europe excuse me and so it's going to play out the same in Europe.
For Europe, it's our opportunity that there's a brownfield market already and it continues to get hotter.
The U S. It's going to be the greenfield opportunity and Oh by the way and continued to get hotter.
You know this place to the strength.
<unk> Yeah, we're early days in our our my immersion into the the C O two refrigeration market, but.
Alrighty Winnie industry Awards, we're getting a lot of talk and you know it will have a solid 50 at least 50 installations next year with the Premier Retailer's in Europe, and U S and it's just the jumping off point into 2025, and 23 shakes alright, sorry, if I may one more.
You know in terms of reliability that's.
Huge consideration when you have a freezer full of goods right. You know you have been testing these.
The PX exchange or in the C O two markets for awhile now.
When do you think the industry and the individual players feel comfortable with the data.
That you know they can pull the trigger for any sort of a general general application across the whole chain and also use it sort of for their competitive advantage in marketing.
So that's just so that's a good question. So just just.
Mindful that this is a very conservative.
Industry, it's an industry that has billions of dollars of assets tied up in traditional appointments.
So it's a very cautious center Street you have to you have to do your work upfront and testing, which leads to another round up even increased site.
Before you get the point where <unk>.
Retailers are are are satisfied and ready to go and feel comfortable I'm moving from you know.
<unk> technology to the other the fact is is that we're already we've completed step one.
So step two is 50 locations across Europe at least a few locations across Europe and the U S next year.
And from there you know given who are targeting and who we've got commitments from for new locations for next year.
<unk> Ah next really good jumping off point to get into you know what will be more rapid commercialization and 25 and 25th and just remember that.
The.
Just remember that the.
No the opportunity U S is further down the road, it's greenfield the opportunity in Europe is going to be brownfields or or retrofit. So we provided guidance. We provided guidance on C. O two in the range of $100 million to $300 million by 2026.
And so you know from from the work that we've done thus far in the time that I've been able to do I can see a path for security to $100 million.
2026.
I think we have the opportunity and a potential to do that as long as we continue to deliver step by step.
Yes for this industry.
I believe that the 200 to 300 million sort of top end of the range is going to exist.
Question is going to be you know what is it going to take for us to be able to get there and how fast that we can do it and the answer is at this point is I don't know I've been in the seat for a couple of weeks and so I need time to work with this excellent manager Mccain to further explore you know.
<unk> did you get it says and how we wanted to get some homemade won't be by 2026.
Our next question comes from the line of Larry Mccall with with a private Investor. Please proceed with your questions.
Thank you very much for taking my question and.
Is that two questions actually one in reference to the bypass I know, it's been discussed already but Josh you said something in reference to.
You're not sure how much money, you're gonna be spending on the C. O. Two next year thereafter, and I'm just wondering if we can take that much cash flow, we have 106 million in the bank right now or cash or cash equivalents.
Do you foresee that you're gonna really have to hold on to that much cash you can just buy it back a few million shares wouldn't make that huge of a dead in the.
Cash holdings.
Yeah, well, we'll see.
Talking about inventory build which takes a lot of cash we're talking about building new capacity, which takes a lot of cash.
More importantly, David with describing the European market and as we kind of that out what it'll take to truly conquer that market is those are the questions that are at least half of my mind in terms of how we can use cash.
Suggesting this will take us a year to figure out, but it's something that I think together with the board were budgeting sees them. These are things that we need to dive into an <unk>.
Before we start.
Making decisions around our cash for next year.
Okay Uhm.
My second question is as you mentioned you had great numbers for the quarter. Congratulations on that so glad to hear that and you're also acknowledged the stock being down so much. It seems that the stocks reaction was due to a lack of communication by management and especially with the C E O transition.
I'm sure maybe that's been brought to your attention.
But what do you have to do in the future. What did you plan to do in the future maybe she made a K on such major events going forward.
Yeah, Hi, this is Pam <unk> wait til, we apologize for any worry cause everybody the topic of C. E O succession had been on the boards mind for a year.
We had already engaged ahead hunter, but this is not the type of thing that gets discussed until it happens uhm. Unfortunately.
We feel good about where we are and the company we feel good about having David no unable to step in as interim C. L and we ask you to check with us and.
Let us show you that we know what we're doing here.
I appreciate that but also other companies when they start to going to C. E O transitions, they do bring that up on calls or or maybe if you could have just brought it up in today's call, but it's just this lack of communication PS.
<unk>, we're just thinking the worse, obviously, because the stock was down over 50% so.
I appreciate your response.
Okay. Thank you.
And again as a reminder, if anyone has any questions you may <unk> to join the question and answer session.
And our next question comes from the line of volume Walker with Hannah <unk> Capital. Please proceed with your question.
Yeah. Good afternoon. Thanks for taking my questions first of all the payment David Thanks for your expression your confidence in the underlying business sensitive.
Mmm previous question or comments, yeah, stating that in last week.
Would have gone a long way to <unk>.
<unk> certainly have created and the restoration of stock price. So I appreciate your apology and perhaps a lesson learned Josh question for you on the gods more near term to force I'm trying to make sure I correctly understand what you said about <unk>.
<unk> rescue attached to put away.
What is it you detailed <unk>.
<unk>.
Deliveries actually all get your leg.
My mask still shows you a record quarter for the company of all time and actually <unk> marches, you prescribed we'd be very profitable quarter also <unk>.
Without you away and also add to your your cash balance so long question, but.
And my <unk>.
Correct correct.
Yeah, no I appreciate that while you're exactly right actually yeah cause I I decided about $90 million.
If you do the math for at 60, plus that's remaining for Q4 and you're right. We would still we should still even with that if those were to move out have a record quarter a record quarter. If I'm remembering right about 42 million last year, and we should still beat that regardless, so yeah, I would still be an outstanding quarter.
Absolutely from from a profit and they.
Revenue perspective, no doubt yep.
And within a stroke.
<unk> your margin profile as well you want to protect.
Protect your device.
Yes, but we fall back into we wouldn't exceed that guidance, which is what I'm signing now if everything goes out at 65 to 67 per cent, we'd fall back within that Guy.
We'd still be within the guidance, though so we wouldn't exceeded because all those shipments are all very pressured to change your heavy which are higher margin. So we were naturally C as come down a little bit, but we would still we should still be within guidance regarding this yet.
Okay Alright. Thank you good luck.
You bet. Thanks, a lot.
[noise] and just conclude this we have reached the end of the question and answer session I'll now turn the call back over to James Pickard before closing remarks.
Thank you everyone for joining us this evening and we look forward to talking to you in the near future.
And the ZIP by this concludes today's conference and you may disconnect. The line at this time. Thank you for your participation.
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Mmm.
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