Q1 2024 Energy Recovery Inc Earnings Call
Operator: Greetings and welcome to the Energy Recovery First Quarter 2024 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad.
Greetings and welcome to the energy recovery first quarter 'twenty 'twenty four earnings call.
Brief question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
Operator: As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, James Siccardi, Vice President of Investor Relations. Thank you, Mr. Siccardi. You may begin.
It's now my pleasure to introduce your host James Mccarty, Vice President of Investor Relations. Thank you. Mr. So Carty you may begin.
James Siccardi: Hello, everyone, and welcome to Energy Recovery's 2024 First Quarter Earnings Conference Call. My name is Jim Siccardi, Vice President of Investor Relations at Energy Recovery, and I'm here today with our President and Chief Executive Officer, David Moon, and our Chief Financial Officer, Joshua Ballard.
James McCarty: Hello, everyone and welcome to energy Recovery's 'twenty 'twenty four first quarter earnings Conference call. My name is Jim Shook Hardy Vice President of Investor Relations at energy recovery.
James McCarty: And I'm here today, with our President and Chief Executive Officer, David <unk>, and our Chief Financial Officer, Joshua Ballard.
James Siccardi: 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 future financial performance of the company. These statements may discuss our business, economic, and market outlooks, growth expectations, new products and their performance, cost structure, and business strategy. Forelooking statements are based on information currently available to us and on management's beliefs, assumptions, estimates, or projections.
James McCarty: 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.
James McCarty: 1995 regarding future events or the future financial performance of the company.
James McCarty: These statements may discuss our business economic and market outlook growth expectations, new products and their performance cost structure and business strategy.
James McCarty: 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 guarantees of future performance and are subject to certain risks uncertainties and other factors.
James Siccardi: Forelooking statements are not guarantees 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 SEC, specifically the company's Form 10-K and Form 10-Q. These documents identify important factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements. All statements made during this call are made only as of today, May 1, 2024, and the company expressly disclaims any intent or obligation to update any forward-looking statements made during this call to reflect subsequent events or circumstances unless otherwise required by law. At this point, I will turn the call over to our President and Chief Executive Officer, David Moon.
James McCarty: We refer you to the documents the company files from time to time with the S. D. C. Specifically the company's Form 10-K and Form 10-Q. These documents identify important factors that could cause actual results to differ materially from those contained in our projections or forward looking statements.
James McCarty: All statements made during this call are made only as of today may 1st 'twenty 'twenty four and the company expressly disclaims any intent or obligation to update any forward looking statements made during this call to reflect subsequent events or circumstances, unless otherwise required by law.
James McCarty: At this point I will turn the call over to our President and Chief Executive Officer, David Matt.
David W. Moon: Thank you, Jim, and thank you all for joining us today. The first quarter was a busy one for us. It played out as anticipated. Revenue of $12.1 million was in line with our guidance for the quarter of $10 to $13 million. With regard to the CFO transition, we've been actively interviewing some promising candidates and are making real progress. We believe we will have our candidate in place prior to Josh's last day, June 30.
David W. Moon: Thank you Jan and thank you all for joining us today.
David W. Moon: The first quarter was a busy one for us and played out as anticipated.
David W. Moon: Revenue of $12 $1 million was in line with our guidance for the quarter of $10 million to $13 million.
David W. Moon: With regards to the CFO transition, we have been actively interviewing some promising candidates and are making real progress.
David W. Moon: We believe we will have our candidates in place prior to Josh as last date.
David W. Moon: June 30.
David W. Moon: I stated on our last call that I, as well as the board, strongly believe the energy recovery strategy of PX diversification to drive growth is the right strategy and is critical to our future, while continuing to recognize the importance of maintaining our foundational market leadership and desalination. It is critical that we also continue to look for ways to accelerate our penetration into the wastewater and the CO2 refrigeration market, as this is where the lion's share of potential revenue growth will originate.
David W. Moon: I stated on our last call that I as well as the board strongly believes energy recovery strategy of PX diversification to drive growth.
David W. Moon: Is the right strategy it is critical to our future.
David W. Moon: While continuing to recognize the importance of maintaining our foundational market leadership in desalination.
David W. Moon: It is critical that we also continue to look for ways to accelerate our penetration into the wastewater and the C O two refrigeration markets.
David W. Moon: As this is where the lion's share of potential revenue growth will originate.
David W. Moon: We anticipate our strategic future will build off this perspective. We have now formally kicked off work on our strategic planning cycle and have enlisted the assistance of industry experts to provide us with additional guidance, specifically in wastewater and refrigeration. These industry experts will play integral roles in providing intelligence and hard data while challenging us on our product development and market strategy and contributing to the development of our strategic playbook. This will add significant expense in the second quarter, especially.
David W. Moon: We anticipate our strategic future will build off this perspective.
David W. Moon: We have now formally kicked off work on our strategic planning cycle, and then enlisted the assistance of industry experts to Brent to provide additional guidance.
David W. Moon: Specifically in wastewater in refrigeration.
David W. Moon: These industry experts will play integral roles in providing intelligence and hard data.
David W. Moon: While challenging us on our product development and market strategy and contributing to the development of our strategic playbook.
David W. Moon: This will add significant expense in the second quarter, especially.
David W. Moon: But I believe it is critically important work to establish a strong strategic foundation from which to grow in the coming years. Now, let's get into our update, starting with water first. We are maintaining our revenue guidance of $140 to $150 million for the year. Our current 2024 contracted project, including the revenue recognized in the first quarter, totals roughly $87 million, or 60% of the midpoint of our guided range for the year. This compares to $69 million, or 50% of the guiding range, at the same point in 2023.
David W. Moon: But I believe it is critically important work to establish a strong strategic foundation from which to grow in the coming years.
David W. Moon: Now, let's get into our update starting with water.
David W. Moon: First.
David W. Moon: We are maintaining our revenue guidance of $140 million to $150 million for the year.
David W. Moon: Our current 2024 contracted projects.
David W. Moon: Clothing, the revenue recognized in the first quarter.
David W. Moon: Totals roughly $87 million.
David W. Moon: Or 60% at the midpoint of our guided range for the year.
David W. Moon: This compares to $69 million or 50% of the guided range.
David W. Moon: The same point in 2023.
David W. Moon: This reflects a 26% increase over the year and underpins our confidence in our guidance for the year. In addition, we also just signed our first megaproject deal in Brazil for shipment in 2025. In our second quarter call last August, we discussed in some detail the growing wastewater challenges in South America.
David W. Moon: This reflects a 20% 26% increase over a year and underpins our confidence in our guidance for the year.
David W. Moon: In addition, we also just signed our first Mega project deal in Brazil for shipment in 2025.
David W. Moon: In our second quarter call last August we discussed in some detail the growing wastewater challenges in South America.
David W. Moon: This project is a clear example of our growing water challenges outside of the Middle East. DeSales' Historic Growth Area is being reflected in our pipeline in new ways. The cadence of this year's revenue guidance is unchanged.
David W. Moon: This project is a clear example of how our growing water challenges outside of the middle East.
David W. Moon: T cells historic growth area or <unk>.
David W. Moon: Reflected in our pipeline in new ways.
David W. Moon: The cadence of this year's revenue guidance is unchanged.
David W. Moon: We remain heavily weighted towards the second half of the year. We are seeing real strength in both our desal OEM and aftermarket sales as we start the year and have signed most of the mega project deals for the year. Our focus today in water is to close the handful of megaproject deals remaining in the coming months, as well as maintaining our momentum in our OEM and aftermarket channels to end the year as strongly as possible. Our wastewater business is also developing well this year. And we remain confident in our range of $12 to $15 million for the year.
David W. Moon: We remain heavily weighted towards the second half of the year.
David W. Moon: Yes.
David W. Moon: We're seeing real strength in both our D cell OEM and aftermarket sales as we start the year and assigned most of the merger Mega project deals for the year.
David W. Moon: Our focus today and water is to close a handful of Mega project deals remaining in the coming months.
David W. Moon: As well as maintaining our momentum in our OEM and aftermarket channels to end of the year as strongly as possible.
David W. Moon: Our wastewater business is also developing well this year.
David W. Moon: And we remain confident in a range of $12 million to $15 million for the year.
David W. Moon: Our pipeline continues to grow, and we've increased our signed wastewater contracts by almost 40 percent as compared to last year at this time. We've also seen positive news here locally in the U.S. as it relates to the Municipal Wastewater Market. The United States government on April 10th announced newly adopted rules to address PFAS contamination, or forever chemicals, in our drinking water. The Biden administration has allocated $9 billion to help communities with drinking water impacted by PFAS. Now, one valuable tool for filtering out existing PFAS from drinking water is reverse osmosis filtration.
David W. Moon: Our pipeline continues to grow and we've increased our signed wastewater contracts.
David W. Moon: Almost 40% as compared to last year at this time.
David W. Moon: We've also seen positive news here locally in the U S. As it relates to the municipal wastewater market.
David W. Moon: United States government on April 10th announce newly adopted rules to address P fast contamination or forever chemicals, and our drinking water.
David W. Moon: The by administration has allocated $9 billion to help communities with drinking water impacted by P. Fast.
David W. Moon: One valuable told for filtering out existing P fast for drinking water is reverse osmosis filtration.
David W. Moon: While it's not the only solution to this problem, we believe reverse osmosis can play a key role in the coming years as the world tackles this growing challenge. And we will be exploring these opportunities and the timing of them in our playbook. The global attention on PFAS continues to underscore the growing focus on water quality and scarcity that is happening around the world today.
David W. Moon: While it's not the only solution to this problem. We believe reverse osmosis can play a key role in the coming years as the world tackles. This growing challenge.
David W. Moon: And we will be exploring these opportunities and the timing of them and our playbook.
David W. Moon: The global attention on PFS continues to underscore the growing focused on water quality and scarcity that is happening around the world today.
David W. Moon: Now, let's move onto our <unk> business.
David W. Moon: In the past few months, the most important activity I engaged in was to meet with major OEMs in the U.S. and Europe. I have a few key takeaways from these meetings, all of which support the approach we are taking this year. First and foremost, the interest in and feedback on the PXG was positive. OEMs can see the potential value of the PXG in their systems and remain very interested in our success.
David W. Moon: The past few months the most important activity I engaged in was to meet with major Oems in the U S and Europe.
David W. Moon: I have a few key takeaways from these meetings.
David W. Moon: All of which support the approach we are taking this year.
David W. Moon: Second, OEMs are looking for more quality, uninterrupted runtime data during the summer months, which is the goal of our activities this year. This data will provide reliable performance data in the field, which is critical to OEMs and end customers to fully accept our product in the market, to fine-tune our value proposition, and to be a catalyst to allow energy recovery to take a substantial step forward in building commercial relationships with the OEMs.
David W. Moon: First and foremost the interest in and the feedback on the <unk> was positive.
David W. Moon: Oems can see the potential value of the <unk> in their systems.
David W. Moon: We remain very interested.
David W. Moon: And our success.
David W. Moon: Second Oems are looking for more quality uninterrupted runtime data during the summer months.
David W. Moon: Which is the goal of our activities this year.
David W. Moon: This data will provide reliable performance data in the field, which is critical to Oems and end customers to fully accept our product in the marketplace.
David W. Moon: To fine tune our value proposition.
David W. Moon: And to be a catalyst to allow energy recovery take a substantial step forward to building commercial relationships with the Oems.
David W. Moon: Third.
David W. Moon: Once the OEMs have comforted our data, it is clear that our best path forward will be to integrate the PXG directly into the rack architecture of the OEM's CO2 system. This will mean that OEMs will need to commit engineering resources to adjust their existing architectures to incorporate the PXG.
David W. Moon: Once the Oems have comfort in our data.
David W. Moon: It is clear that our best path forward will be to integrate the PX G directly into the rack architecture of Oems C O two systems.
David W. Moon: This will mean that Oems will need to kind of engineering resources to adjust their existing architectures to incorporate the PX G.
David W. Moon: This is a commitment of time and money, and therefore another reason why field data is so key to creating broader acceptance for the PXG. On the last earnings call, we discussed two ways to better position ourselves for future market penetration and revenue growth. These gates directly support the feedback we received from the OEMs in the first quarter. The first gate is the successful completion of testing of our second-generation PXG in our internal labs by the end of Q2 2024.
David W. Moon: This is a commitment of time and money and therefore, another reason while still that is so key to creating broad acceptance for the PX G.
David W. Moon: At the last earnings call, we discussed two gates to better position ourselves for future market penetration and revenue growth.
David W. Moon: These gates directly support the feedback received from the Oems in the first quarter.
David W. Moon: The first gate is the successful completion of testing of our second generation PSG and our internal labs by the end of Q2 2024.
David W. Moon: I am pleased to announce that lab performance has shown an order of magnitude increase in reliability and performance, which is critical to providing the uninterrupted runtime data we need this year. The second generation PXG has now been installed as part of a beta test in supermarkets in California and Belgium, and both installations have been operating successfully since the beginning of March.
David W. Moon: I am pleased to announce that we've achieved this milestone.
David W. Moon: So high performance as shown in order of magnitude increase in reliability and performance.
David W. Moon: Which is critical to providing uninterrupted run time that we need this year.
David W. Moon: The second generation PX. She has now been installed as part of a beta test in supermarkets in California in Belgium.
David W. Moon: Both installations have been operating successfully since the beginning of March.
David W. Moon: The second gate is the successful installation, operation, and third-party validation of 30 to 50 additional field validation sites by the end of this year. Our first step is to install roughly 10 sites this summer. Unknown Attendee, James Siccardi, Ryan Pfingst, Wally Walker, Unknown Attendee, James Siccardi, As of today, we currently have three sites running. We expect four additional sites to be commissioned by the end of June in Canada, Belgium, Hungary, and the U.S.
David W. Moon: The second guide is the successful installation operations and third party validation.
David W. Moon: 30% to 50 additional field validation sites.
David W. Moon: At the end of this year.
David W. Moon: Our first steps.
David W. Moon: Installed roughly 10 sites this summer, which is the most critical sites. This year and we will provide the key performance data that we need.
David W. Moon: As of today, we currently have three sites running.
David W. Moon: We expect four additional sites to be commissioned by the end of June in Canada, Belgium, Hungary, and the U S.
David W. Moon: The remaining three sites are scheduled for Europe and the U.S. by the end of August. I will continue to update you on our progress in August, but we are off to a strong start this year. Outside of these critical activities, I have two other updates from the market.
David W. Moon: The remaining three sites are scheduled for Europe, and the U S by the end of August.
David W. Moon: And I will continue to update you on our progress in August, but we're off to a strong start to the year.
David W. Moon: Outside of these critical activities on two other updates from the market.
David W. Moon: First, our PhD was awarded the Refrigeration Product of the Year by ACR News London. This award is a recognition of excellence and innovation from across the air conditioning and refrigeration sector. The PXG was selected for its ability to improve year-round transcritical CO2 systems performance by reducing energy costs, which is perhaps the single biggest hurdle faced by supermarkets, and Adjusting to Stringent Global Requirements. This is the third award we've received since the start of 2023 as the PXG continues to gain attention across the globe and should serve as further proof that technology is catching up to the changing regulatory environment.
David W. Moon: First <unk> was awarded the refrigeration product of the year by ACR News London.
David W. Moon: This award is a recognition of excellence innovation from across the air conditioning and refrigeration sector.
David W. Moon: The <unk> was selected for its ability to improve year round trance critical C O two systems performance by.
David W. Moon: By reducing energy cost, which is perhaps the single biggest hurdle faced by supermarkets and adjusting to stringent global requirements.
David W. Moon: This is the third award we've received since the start of 2023 as the <unk> continues to gain attention across the globe and should serve as further proof that technology is catching up to the changing regulatory environment.
David W. Moon: Second, I have a quick update on the regulatory environment. The EU came out with new, more stringent regulations on the reduction of HFCs that became effective March 11. Whereas previous regulations reduced HFC usage from 31% of the 2025 baseline in 2024 to 21% by 2030, the EU has now accelerated this reduction. As of March 11th, the EU must reduce usage to 24% of their baseline by 2025, 12% in 2027, and 5% in 2030. This is good news for CO2.
David W. Moon: Second I have a quick update on the regulatory environment.
David W. Moon: The EU came out with new more stringent regulations on the reduction in HFC that became effective March 11.
David W. Moon: Whereas previous regulations reduce HFC usage from 31% of the 2025 baseline in 2024% to 21% by 2030.
David W. Moon: The EU has now accelerated this reduction.
David W. Moon: As of March 11th the EU must reduce usage to 24% of their baseline by 2025.
David W. Moon: 12% in 2027% to 5% in 2030.
David W. Moon: This is good news for <unk>.
David W. Moon: So, to sum up, the operational deliverables that I put in place for 2024 are as follows: maintain and grow our dominant position in desalination, and grow our wastewater business to $12 to $15 million in revenue. Install at least 30 to 50 sites in North American and Europe by the end of the year and deliver our full revenue guidance for the year of $140 to $150 million. The work we do over the next several months will position us to deliver on our future in water and CO2 growth, in the interim. We remain one of the purest means to the Global Water Scarcity Story. With that, let me hand it over to the call to Josh and to update you on the finances.
David W. Moon: So to sum up.
David W. Moon: The operational deliverables that I put in place for 2024 are as follows.
David W. Moon: Maintain and grow our dominant position in desalination.
David W. Moon: Well, our wastewater business to $12 million to $15 million in revenue.
David W. Moon: Install at least 30 to 50 sites in North America, and Europe by the end of the year.
David W. Moon: And deliver our full revenue guidance for the year of $140 million to $150 million.
David W. Moon: The work we do over the next several months will position us to deliver on our future and water and C O two growth.
David W. Moon: In the interim we.
David W. Moon: We remain one of the purest means to invest in.
David W. Moon: Global water scarcity story.
David W. Moon: With that let me hand, it over the call to Josh and to update you on the financials.
Josh: Good afternoon, everyone.
Joshua Ballard: First quarter revenue fell comfortably within expectations with no real surprises and within the midpoint of our guidance from our last earnings call. Unlike the first quarter last year, our water channel mix was more balanced, with roughly half our revenue coming from megaprojects and the remaining split between OEM and aftermarket sales. Although our OEM channel shows a significant decline as compared to Q1 last year, this is simply due to the timing of project shipping.
Josh: First quarter revenue fell comfortably within expectations with no real surprises in within the midpoint of our guidance from our last earnings call.
Josh: Unlike the first quarter last year, our water channel mix was more balanced with roughly half of our revenue coming from Mega projects and the remaining split between OEM and aftermarket sales.
Josh: Although our OEM channel showed a significant decline as compared to Q1 last year. This is simply due to the timing of projects shipping. We currently expect to show healthy double digit growth in our OEM channel in 2024.
Joshua Ballard: We currently expect to show healthy double-digit growth in our OEM channel in 2024. We are reporting no material emerging technology resume this quarter, which is in line with David's comments in February with regard to our short pause to make and test the enhancements to the PXG and now launch the second generation here in the second quarter.
Josh: We are reporting no material emerging technology revenue this quarter, which is in line with David's comments in February with regards to our short short pause to make and test enhancements to the PX Jeep and now launched the second generation here in the second quarter.
Joshua Ballard: We are maintaining our estimated range for water revenue in the second quarter at $20 to $25 million. This means that we are still heavily weighted to the second half of the year. Where we sit today, we are assuming that the last two quarters will show 40% of the second half revenue falling into Q3 and 60% in Q4. However, we will be better prepared to update you more precisely in our August call as the third quarter comes into focus.
Josh: We are maintaining our estimated range for water revenue in the second quarter at 20% to $25 million.
Josh: This means that we are still heavily weighted to the second half of the year.
Josh: Where we sit today, we are assuming that the last two quarters will show, 40% of the second half revenue falling into Q3 and 60% in Q4.
Josh: However, we will be better prepared to update you more precisely in our August call of the third quarter comes into focus.
Joshua Ballard: Note that our target water revenue range of $140 to $150 million this year includes a buffer against possible movement of up to a couple of megaprocessors. David mentioned the status of our signed and shipped contracts here today.
Josh: Note that our target water revenue range of $140 million to $150 million. This year includes a buffer against possible movement of up to a couple of Mega projects.
Josh: Yeah.
Josh: David mentioned the status of our signed and ship contracts year to date, we have been getting a lot of questions on the status of our pipeline from all of you to get a sense as to how the year is progressing.
Joshua Ballard: We've been getting a lot of questions on the status of our pipeline from all of you to get a sense of how the year is progressing. Our plan is to continue to update you on this cumulative number as we move forward through the year to give you a sense as to how we are tracking the current full-year guidance. We will then reset in Q1 next year for 2025. Therefore, note that the $87 million cited for this year is explicitly for signed water projects in both our desalination and wastewater markets, forecasted to ship out in 2024, inclusive of those shipped in the first quarter. Our gross margin in the first quarter was 59%.
Josh: Our plan is to continue to update you on this cumulative number as we move forward through the year to give you a sense as to how we are tracking to the current full year guidance.
Josh: We will then reset in Q1 next year for 2025 therefore.
Josh: Therefore note that the $87 million cited for this year is explicitly for signed water projects in both our desalination and wastewater markets forecasted to ship out in 2024 inclusive of those shipped in the first quarter.
Josh: Okay.
Josh: Our gross margin in the first quarter was 59% much like last year, we are seeing a product mix more heavily weighted to pumps and turbochargers in a low revenue quarter, which.
Joshua Ballard: Much like last year, we are seeing a product mix more heavily weighted to pumps and turbochargers in a low-revenue quarter, which is lowering our margin on a blended basis. You will also note that our margin is 190 basis points below Q1 2023, despite a similar product mix. This is because of inflation and growing manufacturing costs that we have been describing over the past year. We also experienced slightly higher scrap in the first quarter, which, combined with the lower revenue denominator, had an outsized effect on margin but will not be material for the full year.
Josh: Which is lowering our margin on a blended basis.
Josh: You'll also note that our margin of 190 basis points below Q1, 2023. Despite a similar product mix. This is because of the inflation and growing manufacturing costs that we've been describing over the past year.
Josh: We also experienced slightly higher scrap in the first quarter, which combined with a lower revenue denominator had an outsized effect on margin, but will not be material for the full year.
Joshua Ballard: We fully expect to recover to our guided range as the year progresses and pressure exchangers take a larger percentage of sales. For now, we have no change to our guided range of 64% to 67%, and the year-on-year variance from Q1 2023 roughly falls in line with our expectations for 2024. Let's now turn to operating expenses. Our OPEX grew 11% over the first quarter of last year. However, we're reporting a decrease of 4% against Q4 2023, which is a more relevant comparison. There are two things at play here.
Josh: We fully expect to recover to our guided range as the year progresses and pressure exchangers take a larger percentage of sales.
Josh: For now we have no change to our guided range of 64% to 67% in the year on year variance from Q1 2023, roughly falls in line with our expectations for 2024.
Joshua Ballard: First, Q1 OPEX is inclusive of nearly $500,000 of what we call one-time executive transition costs, which you will note in our non-GAAP calculations in our press release. In addition, this quarter includes another $300,000 of short-term retention grants provided to some executives at the end of last year. Adjusted for these temporary charges of roughly $800,000, our base recurring OPEX grew closer to 7% year-on-year. Second, our investments in people and the organization grew throughout the year in 2023 as we increased our sales and marketing spend and added headcount in support of both our water and CO2 businesses.
Josh: Let's now turn to operating expenses.
Josh: Our opex grew 11% over the first quarter of last year. However, we are reporting a decrease of 4% against Q4, 2023, which is a more relevant comparison.
Josh: There are two things at play here first Q1, Opex is inclusive of nearly $500000 of what we call one time executive transition costs.
Josh: But you will note in our non-GAAP calculations in our press release.
Josh: In addition, this quarter includes another $300000 of short term retention grant provided some executives at the end of last year adjusted for the temporary charges of roughly $800000. Our base recurring opex grew closer to 7% year on year.
Josh: Second our investments in people in the organization grew throughout the year in 2023, as we increased our sales and marketing spend and added head count in support of both our water and <unk> businesses.
Joshua Ballard: Therefore, what we are seeing now is the effect of increased headcount and other spend in the first quarter for investments made in 2023. Now that we are further into the year and our one-time costs related to the ongoing transition are becoming clearer, I also wanted to go a little deeper into our OPEX forecast to provide some additional clarity. For the second quarter, we expect our base recurring OPEX to remain fairly flat.
Josh: Therefore, what we are seeing now is the effect of increased head count and other spend in the first quarter for investments made in 2023.
Josh: Now that we're further into the year and our onetime costs related to the ongoing transition of becoming clear.
Speaker Change: So wanted to go a little deeper into our Opex forecast to provide some additional clarity.
Speaker Change: In the second quarter, we expect our base recurring opex to remain fairly flat. However, we will have material onetime expenses related to executive transition and a significant portion associated with work in support of our long term growth strategy as mentioned by David in his opening remarks.
Joshua Ballard: However, we will have material one-time expenses related to the executive transition and a significant portion associated with work in support of our long-term growth strategy, as mentioned by David in his opening remarks. These overall costs, which will include a mix of cash and non-cash items, could be as high as $5 million in Q2, meaning our revenue will likely land between $20 to $23 million. We are expecting an additional roughly $1.5 million in these one-time expenses by the end of the year.
Joshua Ballard: These overall costs, which will include a mix of cash and noncash items could be as high as $5 million in Q2.
Josh: Our opex will likely land between $20 million to $23 million.
Josh: We are expecting an additional roughly $1 $5 million of these onetime expenses by the end of the year. When you add in the 800000 of onetime expenses described earlier. This spring these charges to a total of about $7 million for 2024.
Joshua Ballard: When you add in the $800,000 of one-time expenses described earlier, this brings these charges to a total of about $7 million for 2024. In light of some of these one-time expenses, we have made the decision to reduce our base recurring OPEX to around $71 to $73 million versus my guidance for the last quarter of $73 to $75 million. Note that these reductions are in softer non-personnel discretionary spend and will not be in areas that could get in the way of our growth plan.
Josh: In light of some of these onetime expenses, we have made the decision to reduce our base recurring opex to around $71 million to $73 million versus my guidance from last quarter of $73 million to $75 million.
Joshua Ballard: Note that these reductions are in software non personnel discretionary spend and will not be in areas that could get in the way of our growth plan.
Joshua Ballard: If you add our estimated $7 million of one-time costs, this puts our total forecasted OPEX for the year at roughly $78 to $80 million. I realize that 2024 is a bit of an anomaly compared to prior years, but we should normalize again in 2024. We'll be sure to clearly outline this one-time spend each quarter so you can differentiate between our recurring operating spend and any one-time charges that we do not expect to repeat next year.
Joshua Ballard: If you add our estimated $7 million of one time cost. This puts our total forecasted opex for the year at roughly $78 million to $80 million.
Joshua Ballard: So I realize the 'twenty 'twenty four is a bit of an anomaly compared to prior years, but we should normalize again in 2025, we.
Joshua Ballard: We will be sure to clearly outline this onetime spend each quarter. So you can differentiate between our recurring operating spend and any onetime charges that we do not expect to repeat next year.
Joshua Ballard: Now let's turn to our bottom line. We experienced a loss in Q1, as forecasted and largely in line with public health. Like the first quarter last year, this should be expected, based on our level of revenue and fixed operating costs. We expect our second quarter to remain negative, moving back into positive territory in the third and fourth quarters to end the year strong. We continue to grow cash in the first quarter, increasing our cash and investments from $122 to $129 million.
Joshua Ballard: Now, let's turn to our bottom line, we experienced a loss in Q1 that forecasted in largely in line with public estimates, but the first quarter last year, there should be expected based on our level of revenue and fixed opex, we expect our second quarter to remain negative moving back into positive territory in the third and fourth quarters to end the year strong.
Joshua Ballard: We continue to grow cash in the first quarter, increasing our cash and investments from $122 million to $129 million. We expect these balances to pause at this level in the second quarter as we continue to build inventory levels.
Joshua Ballard: We expect these balances to pause at this level in the second quarter as we continue to build inventory levels to support planned shipments in Q3 and Q4. You're already seeing an uptick in inventory levels driven by WIP and finished goods related to that. Like last year, inventory will continue to build until dipping back down to normalized levels in the 34th quarter, as I described in previous questions.
Joshua Ballard: <unk> planned shipments in Q3 and Q4.
Joshua Ballard: We are already seeing an uptick in inventory levels, driven by width and finished goods related to this.
Joshua Ballard: Like last year inventory will continue to build until dipping back down to normalized levels in the third and fourth quarters as I've described in previous calls.
Operator: With that, let's move to Q&A. We will now be conducting a question and answer session. If you would like to ask a question, please call 1-800-663-4225.
Speaker Change: And with that let's move to Q&A.
Speaker Change: Thank you.
Speaker Change: We will now be conducting a question and answer session.
Operator: We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would 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 key. One moment, please, while we pull for questions. Thank you. Now, our first question...
Speaker Change: I would like to ask a question. Please press star one on your telephone keypad.
Operator: A confirmation tone will indicate that your line is in the question queue.
Operator: You May press star two if he would like to remove your question from the queue.
Operator: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Operator: One moment, please while we poll for questions.
Operator: Thank you. Our first question will come from the line of Pavel <unk> with Raymond James Please.
Speaker Change: Proceed with your question.
Pavel S. Molchanov: Thanks for taking the question. Three months ago, you talked about a D cell project in India that was pushed into the first half of 24 versus versus last year. What's the status on that? Is that still on track to be recognized before June 30th?
Speaker Change: Thanks for taking the question three months ago, you talked about.
Pavel S. Molchanov: T cell project in India.
Pavel S. Molchanov: That was pushed into the.
Speaker Change: First half of 'twenty four.
Speaker Change: Versus versus last year.
Pavel S. Molchanov: What's the status on that is that still on track to be recognized before June 30.
Joshua Ballard: Hey Pavel, it's Josh. It has not shipped out yet. Technically, we're moving along pretty well. We got an update today. We'll see whether it's by June 30th, but still expect it this year.
Speaker Change: <unk> Josh it is.
Josh: Not shipped out yet.
Josh: Technically we are moving along pretty well, we've got an update today and we will see whether it's by June 30th but still expected this year.
Pavel S. Molchanov: Okay, so maybe in the second half, correct?
Speaker Change: Okay. So maybe in the second half correct.
Joshua Ballard: Could be in the second half, yep. Okay, understood.
Speaker Change: It could be in the second half yet.
Speaker Change: Okay understood.
Pavel S. Molchanov: I also wrote three months ago for the comment that deployments of the How is that? effort progressing.
Joshua Ballard: Also three months ago.
Pavel S. Molchanov: <unk>.
Pavel S. Molchanov: For the comment that deployments of the <unk>.
Pavel S. Molchanov: How is that.
Pavel S. Molchanov: Effort progressing.
Operator: You broke up there, Pavel. Can you repeat that question, please?
Pavel: You broke up there, but could you repeat that question. Please.
Pavel S. Molchanov: Three months ago, there was also a comment about deployments of the refrigeration product being deliberately slowed to improve its reliability. How is that effort progressing?
Operator: Three months ago. There was also a comment about deployments of the refrigeration product being deliberately slowed to improve its reliability highways that effort progressing.
David W. Moon: Yeah, hey, Pavel, this is David Moon. Thanks for the question. The second generation is progressing well. So we just passed through the first Gator Milestone, which was internal testing in the lab, and got really good results in terms of reliability and performance. And so since the end of March, or since the beginning of March, we've now been doing beta testing in the field in the U.S. and Europe with very good results. And so we are now moving on to pushing it out to the 10, 10 summer sites that I've talked about in the script, and getting through the summer testing season would be our next milestone. But so far, I am very pleased with the results.
Pavel: Yes, hi.
David W. Moon: This is David Moon.
Speaker Change: Thanks for the question so.
David W. Moon: The second generation is progressing well so we just pass through the first.
David W. Moon: Gate or milestone, which was internal testing in the lab.
David W. Moon: <unk> got really good results in terms of reliability and performance and so since the end of March since beginning of March we've now been doing beta testing in the field in the U S and Europe with very good results and so we are now moving onto.
David W. Moon: Pushing that out to the 10.
David W. Moon: 10 summer sides that I've talked about in the script.
David W. Moon: And getting through the summer testing season would be our next milestone, but so far very pleased with the results.
David W. Moon: Yes.
Pavel S. Molchanov: Okay. And David, another question for you, kind of big picture strategy. When you came in, as you know, there were some targets for 2026, which were, kind of, on the aggressive side. When do you think you will be ready to put out some updated targets?
Speaker Change: Okay and David another question for you kind of Big picture strategy.
Speaker Change: When you came in as you know there were some targets for our 2026.
Speaker Change: Which as you acknowledged three months ago were.
Speaker Change: Kind of on the aggressive side.
Speaker Change: When do you think you will be ready to put out some updated targets.
David W. Moon: So we're in the middle of our strategy work now, what we're calling our playbook, and I expect the latest that we'll be talking about the out years, 25, 26, 27, by the time we get to the third quarter earnings.
Speaker Change: So we're so we're so we're in the middle of our strategy.
David W. Moon: Now, what we're calling our playbook and I expect latest that we'll be talking about the out years 'twenty five 'twenty six 'twenty seven by the time, we get to the third quarter earnings call.
Pavel S. Molchanov: Okay, that's helpful. Last one for me, you mentioned a minute ago, a D-Cell customer in Brazil, which sounds interesting because we really do not think of Brazil as a particularly kind of water-scarce geography. Can you talk about how big that project is and how it came about? Yeah.
Speaker Change: Okay. That's helpful.
Pavel S. Molchanov: Last one from me.
Pavel S. Molchanov: You mentioned a minute ago.
Pavel S. Molchanov: D cell customer in Brazil, which sounds.
Pavel S. Molchanov: Interestingly, because we really do not think of Brazil.
Pavel S. Molchanov: As it particularly.
Pavel S. Molchanov: Had a water scarce geography can you talk about how big that project is and how it came about.
David W. Moon: Yeah, so it's a part of Brazil's government's initiative to increase potable water, the potable water supply by 12%. And so this is our first DeSAL mega project. It's in Fortaleza, which is in the northeast part of Brazil. It's the fourth biggest city in Brazil.
Speaker Change: Yes, so it's a part of Brazil's the government's initiative to increase potable water potable water supply by 12%.
David W. Moon: And so this is our first D cell Mega project, it's in Fortaleza, which is in the northeast part of Brazil. The fourth biggest city in Brazil, it's going to be roughly I think 86000 cubic meters per day, it's planned to be online by the end of 2026.
David W. Moon: It's going to be roughly 86,000 cubic meters per day. It's planned to be online by the end of 2026. And this will be all Q400s, which will be our new product, our newer product. And so we're very excited about our first large DESOP project in South America, and given the government's initiative, hopefully, more to follow.
David W. Moon: This will be our Q4, hundreds which will be our new product our newer product.
Speaker Change: So we're very excited about our first loss.
David W. Moon: <unk> <unk> project in South America, and and given the government's initiative hopefully more more to follow.
David W. Moon: Yes.
Speaker Change: Alright, thanks very much.
Pavel S. Molchanov: You're welcome. Thank you, Bill.
Speaker Change: Well, thank you bill.
Operator: Thank you. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question will come from the line of Ryan Pfingst with B. Riley Securities. Please proceed with your question.
Speaker Change: Thank you.
Speaker Change: As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Ryan James Pfingst: Our next question will come from the line of Ryan <unk> with B Riley Securities. Please proceed with your question.
Ryan James Pfingst: Hey, good afternoon, guys.
Ryan James Pfingst: Hey, good afternoon guys.
Ryan James Pfingst: For the further.
Ryan James Pfingst: Hey, for the PXGs getting deployed ahead of this summer, if all goes well, would you expect these customers to place meaningful additional orders later this year, potentially, that could translate into some, some, you know, [inaudible]
Ryan James Pfingst: For the PX G is getting deployed ahead of this summer and if all goes well would.
Ryan James Pfingst: Would you expect these customers to place.
Ryan James Pfingst: Meaningful additional orders later this year potentially that could translate into some some yeah.
Ryan James Pfingst: Significant revenue in 25 or is the focus here really on getting that data.
Ryan James Pfingst: A hand of the Oems.
David W. Moon: You know, it's the latter first, and that's getting that, you know, getting at least three months worth of data, which will turn into a white paper sometime in Q4, into the hands of OEMs first. So that's, you know, my trip over the last few months to visit OEMs in the U.S. and Europe. I mean, that's what they paneled the table for was summer data, summer data. And once that's in the hands of the OEMs and they feel good about it, then they'll start going to their end users and start talking up the PXG more so than what they're doing today.
Ryan James Pfingst: It's the latter first and Thats getting that getting at least three months worth of data, which will turn into a white paper sometime in Q4 into the hands of Oems first.
David W. Moon: My trip over the last few months to visit Oems in the U S and Europe, I mean, thats, what they pound the table before was with summer data summer data and once that's in their hands of the Oems and they feel good about it then they will start going to their end users and start talking up the <unk> more so than what theyre doing.
David W. Moon: So first steps first, let's get through the summer. Let's get our white paper done, prove the fact that we're getting good energy savings. And I think we'll start to see some momentum build in the last half of the year for 2025. But what that revenue stream looks like at this point, it's too soon to tell.
David W. Moon: So first steps first let's get through the summer, let's get our white paper done proves the fact that we're getting good energy savings and then I think we'll start to see some momentum build in the last half of the year for 2025, what that revenue stream looks like at this point too soon to tell.
Ryan James Pfingst: Okay, that's helpful. Thank you, David. And then for water, you guys have signed $87 million in contracts for shipments this year. Curious if you have a number handy of what that might look like for 2025, just to try to get some visibility early on on how next year is shaping up.
Speaker Change: Okay. That's helpful. Thank you David.
Ryan James Pfingst: And then for water.
Ryan James Pfingst: You guys have signed the $87 million in contracts for shipments. This year curious if you have a number handy of what that might look like for 25, just to try to get some visibility.
Ryan James Pfingst: Early on in how next year shaping up.
David W. Moon: I don't have that number off the top of my head, but it wouldn't be very big yet. I mean, we're still a year out, right? So it wouldn't be a large number anyway.
Ryan James Pfingst: Okay.
Speaker Change: I don't have that level of type of inhibitor wouldn't be very big yet.
David W. Moon: And its still be fairly small I mean, we're still a year out right. So there wouldn't be a large number anyway.
Ryan James Pfingst: Okay, what about more general visibility, Josh, about next year? Just what you're seeing in terms of projects out there? Are things getting delayed? Kind of, you know, what you expected given we only spoke about two and a half months ago? Any changes since then?
David W. Moon: Okay, what about more general.
Josh: Visibility about next year, just what youre seeing in terms of projects out there.
Ryan James Pfingst: Are things getting delayed kind of.
Ryan James Pfingst: What <unk> is.
Ryan James Pfingst: Expected given we already spoke about.
Joshua Ballard: No, no real changes since then. We're not seeing any new delays or any new strange movement in our pipeline or anything like that. Things are moving on track generally. And I would probably point you to the industry Data Source for DECAL, which is DECAL data coming out of the GWI. They've got some good industry data that still shows pretty strong growth over the next few years. I'll point you to that for now, and then when we get to the November call, the Q3 call, we'll be talking more about 2025 in the future, more explicitly.
Ryan James Pfingst: Six months ago at any changes since then.
Joshua Ballard: Okay.
Joshua Ballard: No no real changes since then.
Joshua Ballard: We're not seeing any new delays or any any new strange movement in our pipeline or anything like that things are moving on track.
Joshua Ballard: Generally and I would I would.
Joshua Ballard: Probably a point too because we're not we're not ready yet to talk about 2025 number that I'd point you to the industry.
Joshua Ballard: Industry data source for <unk>, which is T cell data coming out of the GWI they've got some good industry data that still so pretty strong growth over the next few years.
Joshua Ballard: Thank you there for now and then when we get to the November call. The Q3 call, we will be talking more about 2025 in the future more.
Joshua Ballard: More explicitly.
Ryan James Pfingst: That's helpful. Thanks, Josh. And maybe just one more question on water. In the past, you've talked about an estimated PX TAM of half a billion dollars solely for replacing thermal with SWRO tech. What does that opportunity look like today?
Joshua Ballard: Yes.
Speaker Change: That's helpful. Thanks, Josh and maybe just one more for you.
Ryan James Pfingst: On water in the past you've talked about an estimated PX tam of half a billion dollars solely for replacing.
Ryan James Pfingst: Thermal with SWR attack.
Speaker Change: What does that opportunity look like today.
Joshua Ballard: We've done, we've already covered about 20% of that. So we're at somewhere around $400 million left, which will play out over the next 10-15 years. You know, coming as plants age out
Ryan James Pfingst: Yes, we've done we've already.
Joshua Ballard: Covered about 20% of that.
Joshua Ballard: So we're at somewhere around $400 million left which will play out over the next 10 15 years.
Joshua Ballard: Coming as plants age out.
Joshua Ballard: Yeah.
Ryan James Pfingst: Got it. Thank you guys. I'll turn it back. Thank you. Once again, if you'd like to...
Speaker Change: Got it. Thank you guys I'll turn it back.
Ryan James Pfingst: Yes.
Operator: Thank you. Once again, if you'd like to ask a question, please press star 1 on your telephone keypad. One moment, please, while we pull for questions.
Speaker Change: Thank you once again, if you'd like to ask a question. Please press star one on your telephone keypad one moment, please while we poll for questions.
Operator: Thank you.
Operator: Thank you Lord level.
James Siccardi: We have reached the end of our question and answer session. And with that, I would like to turn the floor back over to James Siccardi for any closing comments.
James Mccarthy: We have reached the end of our question and answer session and with that I would like to turn the floor back over to James Mccarthy for any closing comments.
James Siccardi: Thank you everyone for joining us today. We look forward to speaking with you again in late July.
James Siccardi: Thank you everyone for joining us today, we look forward to speaking with you again in late July and good evening.
Operator: Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good evening. Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation. Goodbye.
Speaker Change: Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.
Operator: Goodbye.
Operator: Okay.
Operator: Yes.
Operator: Yes.
Operator: Yeah.
Operator: Okay.
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