Q3 2024 Energy Recovery Inc Earnings Call
The day ladies and gentlemen and welcome to the Energy Recovery 3rd Quarter earnings call.
Our host for today's call is Lionel McDee.
At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. If a question should arise during the presentation, please press star, then number one, on your telephone keypad to enter the queue. I would like to now turn the call over to your host, Mr. McDee.
Mr. McDee: Good afternoon everyone. Welcome to Energy Recovery's 2024's 3rd Quarter earnings conference call. We appreciate your joining us.
Mr. McDee: I'm Lino Micky, director of investor relations at Energy Recovery and I'm joined here today by our president and chief executive officer, David Moon.
and our chief financial officer Mike Mansini. The pre-recorded remarks from today's call are available on the Investors' section of our website and are meant to accompany the third quarter earnings news release which is posted in the same location.
Mr. McDee: 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.
The statements made discussed our business, economic and market outlook, growth expectations, new products and their performance, cost structure and business strategy. Forward-looking statements are based on information currently available to us and on management's beliefs, assumptions, estimates and projections.
For looking statements are not guaranteed a future performance and are subject to certain risks on certain deeds and other factors.
Mr. McDee: We refer you to documents, the company files from time to time with the SEC, specifically the company's 410K and 410Q. These documents identify important factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements.
Mr. McDee: All statements made.
During this call are made only as of today, October 30, 2024, and the company expressly disclaims in the intent or obligation to update any forward-looking statements made during this call to reflect subsequent events or circumstances unless otherwise required by law.
and lastly for your planning purposes please note that our fourth quarter and full year earnings conference call is scheduled for Wednesday February 26, 2025. And with that I will turn the call over to David.
David Moon: Thanks, Lionel, and thank you for joining us today.
It's Lionel Manchins, we are joined today for the first time on our quarterly hearings call by Energy Recovery's new CFO Mike Mancini. We started on August the 5th.
I want to say how grateful I am for Mike's partnership and the work he has already done.
As I mentioned last quarter, Mike brings a wealth of experience at high growth engineering and technology companies.
Yes, how an executive leadership role in finance, where he demonstrated his ability to drop financial strategy and performance across the entire enterprise.
Additionally, his background with the institutional investment community provides him with a deep understanding of capital markets, which makes him a valuable asset to our leadership team.
Speaker Change: Now before I get into the third quarter for Nantesle results, I will make a brief comment on our strategic planning process for the playbook as we call it.
Although we won't be getting into any of the specifics of the playbook on this call, we are hosting a live investor webinar from November the 18th.
For members of my senior leadership team will present our playbook including Girl Plans for the Salination, Westwater and C02.
We will also provide guidance for 2025 and 2026.
as well as provide long-term 2029 financial targets.
Mr. McDee: The webinar will take place at 10 am Eastern time and will last approximately two hours, including the live Q&A session.
The event will be accessible virtually via the link located on the higher-order section of the energy recovery's IR website.
and a replay of the event will also be archived there.
The digital details can be found in our press release issued on October 21st.
Mr. McDee: Now let's move into the third quarter up thing.
First, let me start by saying thank you to our employees for helping deliver another very solid quarter.
Mr. McDee: But total revenue of $38.6 million, we achieved the upper end of our guidance for the corner and set another quarterly revenue record.
Mr. McDee: Now while we still have considerable work to do to deliver what stands to be the largest quarter in the company's history in the fourth quarter.
Our third corner performance, Steve create a line of sight to achieve in our four-year guidance of 140-150 million dollars.
Mr. McDee: and I've said the last couple of quarters that the man's on the team to deliver on these mega projects for only in Christy.
with that said, I'm remaining confident in our ability to deliver what will be the biggest quarter in energy recovery history.
Captain Off, what will be the 11th consecutive year revenue growth in another year of strong market share in our mega projects channel.
Let me talk briefly about our high level of stymor results before turning it over to Mike for the financial results.
Mr. McDee: Let's start with water.
Water revenue came in at a 38.3 million and increased a 4% compared to the third quarter of 2023 and up 42% compared to the second quarter of 2024.
This reflects the high end of our guidance for the third quarter of $35 to $39 million. And continues the prior quarter solid growth in mega projects.
For Zoltz for Driven by Continued Strong demand in the Middle East to North Africa as well as command from India.
Mr. McDee: I'd like to highlight several notable desalchimants made during the quarter.
Mr. McDee: First.
We completed the second and final shipment of the PURR project at Tunaa India, for $4.1 million.
and we mentioned previously during our year of two July earnings call.
1 constructus will be the largest decalination plan in India, delivering 400,000 cubic meters per day.
Also as a reminder, the Perra project was just one of the projects included in the $15 million in contracts.
That we announced in July for several SWRO decalination plants in India.
For the remaining four projects under these contracts, we ship 8.3 million and expect to complete the additional 2.6 million of shipments in the fourth quarter.
All together these plants will provide over 670,000 cubic meters of plain drinking water. The community is in India each day.
Mr. McDee: We also made progress on the HotCNIPP project in Dubai, UAE during the third quarter, which was constructed, which once constructed, will be the largest decalination plant in Dubai, providing 820,000 cubic meters per day.
As of our last call in July, we had shipped the first phase.
As of today, I'm pleased to report that we ship the total of $10.5 million a year today.
and expect the ship to final $5.3 million in Q4.
Mr. McDee: In addition to these shipments, we also continue to secure major decalination contracts in recent months.
Mr. McDee: and August. We signed contract totaling $27.5 million.
REST WR OF D-SELL NATIONFUL PROJECTS in Morocco.
These projects will supply over 1 million cubic meters per day of portable water for municipal and agricultural use.
which represents enough water for more than 600,000 Moroccans.
As of today we have shipped 12.3 million of that total order.
The bounce of the order is currently expected to be filled in 2024. However, we are closely monitoring this time, given an end and end of December target shipping day.
Mr. McDee: George Averica continues to be an important driver of growth for our water business with secular trends such as ongoing drought, industrial growth, and population growth continuing the dinner at generate strong demand for SWRO with these salination plants.
We announced contract awards to only over $12 million for three SWRs of deceleration projects and the United Arab Emirates.
Mr. McDee: The plans include capacity totally cost of $1.9 cubic per day, giving readers per day.
and as a proof point has to the manufacturing improvements we have made.
Mr. McDee: our intended ship nearly all of these orders in the fourth quarter.
Mr. McDee: Both contract awards and their shipment dates were on our radar and therefore included in our 2024 financial guidance.
Based on our strong third quarter results and our expectations for digital shipments on the fourth quarter, we're maintaining our revenue guidance of 140 to $150 million for the year.
Now as we provided in previous quarters our current 2024 total water revenue.
and the end of the third quarter, which includes revenue recognized in the first nine months of the year.
Mr. McDee: and Shining Projects on the contract yet to be delivered.
Coal is approximately $137 million for 94% of the midpoint of our Gaudi range for 2024.
This compares to roughly $136 million or 100% of the gather range of the time to save time in 2023.
Mr. McDee: With this substantial progress towards our four-year guidance, underpins our confidence and reaffirming our guided range for the four-year.
We cannot control customer driven the lives or slippage.
Mr. McDee: With that said, we continue to collaborate closely with our customers. And we're remaining focused on strong execution in the fourth quarter to complete our remaining shipments and to deliver our four-year guidance.
and the event on First Seen Starkum Stance is called Swippets towards the end of the year.
I'd like to reiterate that the Associated Revenue would not be at risk, but would simply be recognized in 2025 rather than in the fourth corner of 2024.
Now, turn into wastewater.
Mr. McDee: Our wastewater pipeline continues to grow and we've increased our sign wastewater contracts by almost 46%.
has compared to last year during the same period.
and Joshua Tondreau's first vacation strategy for water is underway.
Mr. McDee: and we're making progress in our product portfolio expansion.
For the year, we expect the General I rev new towards the lower end of our previous provided Cadden Range.
Mr. McDee: of $1.5 million.
This is primarily the result of a wastewater mega project, a neon project in Saudi Arabia. That's transition to a longer term fades project over multiple years.
However, we expect all of us to send back to continued out performance that we were staying in the OEM channel.
We will share more details on our progress and our strategy for wastewater turn our best to webinar on November the 18th.
Mr. McDee: Overall.
We feel that the airport is created by rapidly rising interest rates.
Inflationary Facts, and Concerns around the global economic activity that began to moderate.
Finally, they're still at another geopolitical surge around the globe.
with a long-term transfer press-water demand, remain intact, and we continue to see solid growth ahead.
Now let's move to our CEO 2 business.
We continue to make progress in the development and commercialization of our second generation PXG.
As I've stated during our last call in the second quarter we completed our first Katie Nite in for 2024.
which was the successful completion of lab testing.
During the third quarter, we turn our focus to our second getting item, which is the installation of 30 to 50 sites by the in the Q4 2020 floor.
Mr. McDee: I am pleased to report that we reached our initial goal of having at least 10 sites installed and operating across the US and Europe.
In fact, we've now completed the installation of a total of 11 sites here today.
With that side goal, we were able to complete the collection of critical summer data.
As I discussed during our last call, we partnered with DC Engineering, a highly respected third-party engineering firm, the measure and verify energy savings provided by our second generation PXG at six of the 10 initial sites.
and please don't pour it that in that collaboration with these scenes in airing, we recently published a white paper on these results.
which we believe will be the catalyst for our own partners, and for us to accelerate PXT adoption, but then users in the near-time.
Mr. McDee: The White Paper can be found in our website.
Mr. McDee: The results were better than expected.
Mr. McDee: Choi the PXT reduces energy consumption, increases cooling capacity, and improves system stability.
The findings showed that the PXT improved the leading metric of energy efficiency for the co-efficient of performance.
I piece up to 30% with as much as 15% in projected annual energy savings.
Mr. McDee: and addition to energy efficiency, findings estimate that the PXG increases cooling capacity for CO2 refrigeration systems by up to 15% and 95 degrees Fahrenheit.
35 degrees centigrade.
from running operational flexibility to safeguard against cheap waves.
Based on the success of the ongoing measurement and verification processes.
Mr. McDee: During the third quarter, multiple OEMs begin to process.
began the process of integrating the PXG into their CO2 transcritical ranks.
Mr. McDee: This is a necessary and important step towards full commercialization of the PXG.
Mr. McDee: We are highly encouraged by the test results and the resulting integration by our OEM partners.
Mr. McDee: At a two-hour moment, I'm with currently a 19-editional science to be commissioned for installation in the coming months.
and including the 11 sites already installed and operating.
We're on a clear path towards meeting the low end of our target of 30 to 50 sites installed at the end of this year.
Additionally, our pipeline of additional sites has grown meaningfully as the industry is getting to wear this to the PXG technology.
We're here in discussion with existing customers to expand and stall sites.
and with new Williams for new sides across the US and Europe.
Mr. McDee: Momentum for the PXG is clearly accelerating.
I look forward to sharing additional details on our progress and strategy for CO2 and wastewater during our upcoming webinar.
With that, I'd like to hand it over to Mike to discuss our financial results for the quarter.
Mike: Thank you, David. And let me start by saying thanks to you, and to the board, for your trust and confidence, and me to lead the finance function here at Energy Recovery.
Speaker Change: Before arriving, I was excited about the company's core business prospects.
and exciting opportunities to grow and expand the reach of the P.A. technology and the opportunity to drive profitability in cash flow.
After almost three months on the job, I now confident in the company's ability to create value for shareholders and I look forward to working with the team on driving financial results.
I'd like to begin by discussing our revenue, gross margin and product mix.
and all the scouts are operating expense, net income and cash position, as well as our expectations for the full year 2024.
As David mentioned, we had a solid quarter revenue, generating $38.6 million at the upper end of our guidance.
The project driven lumpy nature of our mega project channel has become quite evident to me, even in the short time I have been here.
Q4 revenue is expected to be between 62 million and 72 million dollars, which will represent over 45% of our full year revenue at the midpoint.
In the fourth quarter alone, five projects represent approximately 50% of the revenue, with a single project representing over 20%.
Any delays and shipment dates on those projects could have an impact on our full-year revenue, although there would be a minimal impact to the intrinsic value of the business of such delays.
and Victor Margins.
Our gross margin improves 50 basis points when compared to the second quarter of the year. But the third quarter coming in at 65.1%. A ball of our previously guided range of 62% to 64% for the third quarter.
We believe we turn the corner in our efforts to manage and resolve challenges related to our ramp up and production of the Q400.
and our gross margin expectation for the fourth quarter is 64% to 68%.
which would put our full year gross margin guidance within our guidance range of 54% and 67%.
Speaker Change: We're guarding politics.
On our last call, we stated that the Q400 was trending towards 50% of our water px demand for 2020-24. Up from our original expectation, 25%.
During the third quarter, the Q400 comprised approximately 45% of our water px demand. Reinforcing our expectation for 50% product mix for the full year.
is faster than expected adoption of the Q400 highlights our product leadership position in the mega project desalination space and underscores our ability to line our solutions with customers evolving needs.
Our operating expenses for the third quarter are $18.1 million, which came in below our previously guided range of $21.2 million for the quarter.
Speaker Change: One time cost for the quarter of a $1.1 million.
As a result, thanks out back for the quarter with 17 million.
A 1% increase from the same period last year.
So while our focus on cost and capital efficiency are working, we do expect to continue to experience some one-time costs associated with the work and support of our long-term growth strategy and to add it in pointy count to support our growth.
Still, we will be able to capture the benefit of our cost efforts and are reducing our full-year operating expense guidance to $76-$78 million from the previous $78-$80 million.
Speaker Change: which still includes the estimated $7 million in one time costs we have indicated before.
Disemplies expected Alfred Aixbett for the fourth quarter of approximately $20 to $22 million, and fully year 2024 base-op-X of $69 million to $71 million.
Additionally, we reported any come from operations for the third quarter of $7.1 million. Inline with our expectation provided on our last call to move to a positive operating income as the year progresses.
We also reported that income for the quarter of $8.5 million, reflecting a substantial increase compared to the second quarter.
Lastly, we maintain our cash balance during the quarter, with cash investments of $140 million as of the end of the third quarter compared to $138 million at the end of the second quarter.
We're remaining a very strong financial position and we expect to end the year at between 140 and 115 million dollars of cash, depending on collections.
with that I'd like to turn it back over to David for a few closing remarks.
David Moon: Thank you, Mike. To sum up, we delivered a record third quarter.
David Moon: and while there is still work ahead of us to execute the fourth quarter.
Speaker Change: We were made confident in our four-year revenue guidance of 140 to $150 million.
We remain on track to generate $12 to $15 million in revenue from our wastewater business. Although we anticipate this will come in towards the lower end of that range.
We are on track to deliver the low end of 30 to 50 sites with our second generation PXG installed by the end of the year.
where maintaining gross mortgage and guidance of 64 is 67%.
and we were reducing our operating expense guidance from $76-$276-$78 million.
Speaker Change: with that knowledge-movedic urnay.
Speaker Change: If you would like to ask a question at this time, please press star then the number one on your telephone keypad.
Speaker Change: and I'll be placed in the queue in the order received.
Your first question comes from Ryan Thanks with B Riley. Your line is open.
Hey guys, thanks for taking my questions.
Speaker Change: Coran.
Not to get ahead of the webinar, but what are you if you could talk about the competitive landscape in CO2? Is anyone else attempting to do what you guys are doing with the PXJ?
Speaker Change: No, no other pressure exchanger.
Speaker Change: Competition that we see today. Now as you know we compete against other technologies for applications in the space, but no one with a pressure of said.
Speaker Change: and then I guess.
for my second question on your capital allocation strategy.
wondering how you're thinking about the potential for share repurchases with the strong cash balance you have now and maybe if you could remind us.
of the Capitol requirements needed for the CO2 opportunity. I know it's still early stage, but is there any meaningful cash needed as that's opportunity ramps?
Speaker Change: Ryan, this is Mike. So I think we're going to get into that on the webinar. We'll lay out all of our growth strategy plans, capital needs, and roll out a capital allocation policy so we will be talking about that on February 18th.
Speaker Change: and I'm just saying thanks for taking my questions.
Speaker Change: Thanks, Brian.
Speaker Change: Your next question comes from Pavl Bokanov with Raven James. Your line is open.
Pavl Bokanov: Yeah, thanks for taking the question. Let me start with kind of a high level one about diesel. Are you observing EMEE?
Geographic diversification of your customer mix away from the Middle East and towards newer diesel markets.
Hi, I'm Evel, this is David, and I'd like to talk to you. No, still, you know, the concentration still.
and this favoring Middle East Africa.
and the third quarter is just done. Really, they're both all this year. We're up over 70% of our revenue.
for the quarter came from NMEA and then about 60% came from for the first time months of the year, came from NMEA, so we're still...
Barry, reliant on that part of the world and will look to continue to be that as you'll hear in the webinar, is a mid-Midmittal International Africa, will continue to play a very important part of our mix over the next five years.
On the refrigeration side, I remember this is now a couple years ago you signed a strategic partnership in the Netherlands with a few old techniques.
and a single Edoxtop. They're going strong.
and Italy with Edna Group. Have there been any other European partners that you've signed up?
No, that's where we've got a number of new faces that we're talking to up of hell at the moment, but in terms of...
of a visual sort of partnership that's after and it's few at the moment in Europe.
and the go-to-market strategy for refrigeration. I'm sure you'll touch in that in a few weeks either, but is it going to remain centered around a select list of...
Parkers or is there a better approach to getting the word out about this product?
To get to the old lady to get to the end-user. It doesn't mean we're not talking to end-user directly.
But ultimately the OEMs is where we have to get our PXG.
and a great idea to get ourselves back officially, with a supermarket. And so, to do that, we've got to go through the OEMs.
Speaker Change: Alright, we'll save the rest until November 18th looking forward to it. Thank you. Thanks, Pavel.
Your next question comes from Jason Bando with Evercore ISI, your line is open.
Great, thanks for taking my question.
My first one is for Mike, even the CFO seat now for almost three months like he said. And in the parody marks he touched on, what attracted you to the company. Just curious, what were some of your initial impressions being inside the company so far? And what are some of the initiatives that you've been focusing on, of course, in addition to the Playbook work?
and I thank you for the question, Jason.
So, you've been here almost three months now and I think largely what I expected coming in has been true. And that really is the key word for me as opportunity. There is opportunity for efficiency in manufacturing, opportunity for efficiency in cost, opportunity for growth.
and his opportunity for Capitol and how we allocate it. And just a lot of things we can bring my expertise and finance to the team along with the other new executives here to really focus on profitable growth going forward.
and I got it. Makes sense. I'm looking forward to working with you. Next and referred to refrigeration David, I'm just curious, not white paper, but the performance of the PXU you consistent across the six sites that were monitored by DC Engineering.
The Assistant, depending on temperature variation.
Right, whether you know we can't have that mercy.
and some southern California. So there's a bit of that variation, but what was consistent was the interview savings as the capacity to increase.
Now it differed the amount of energy savings.
and Capacity increased different depending on location. But we got both of those out of all the locations that we've been tracking.
In terms of the remaining sites for the year, now that you have to perform status in hand in this white paper, how are you prioritizing the deployment there for the reigning sites?
Yeah, so, at the sort of mining side, you're going to be a combination of Europe, U.S. O, O, existing OEM, OEM customers versus new OEM customers.
and so...
and so we've got a science selection tool that we use to ensure that we optimize the science that we work with on the OEMs on selecting.
and so we're ensuring that we're using that site selection tool, optimization to make sure we get the right sites early on. So we'll continue to use that process. But otherwise it's, you know, we've got the capacity to do these, you know.
and these other 20 sites yourself are the remainder of the year.
and just one last book one for me here on Opex, good cost control there. Which anything particular kind of drove to the performance in the third quarter and how much is left to spend at this point of the one-time cost?
Speaker Change: and John.
Speaker Change: Yeah, this is Mike. So, I'd say the largest driver of cost coming in.
was more of a cost of avoidance of not growing in certain non-corporal areas that was planned for. So some cost cutting but also just cost of avoidance. And in one time costs we expect to do 7 million in total for the year and we have about 6 million of that in cash and non-cash already done. So about a million left.
Perfect sounds good looking forward to the webinar. Thanks guys.
Speaker Change: Thank you.
Speaker Change: Your next question comes from Jeffrey Campbell with Seaport Research Partners. Your line is open.
Jeffrey Campbell: Thanks and thank you for taking my questions. My first one is a white paper question. You recently white paper noted that the DXG 1300s
Transcritical System Energy Savings, and increased cool in capacity.
did not require any water cooling. So I was wondering if this suggested that a system using the PXG might be able to avoid an adabiotic cooling, choose a dry cooling instead.
Yeah, it's a good show. Hey, this is David. That's a good question. So, there are a number of sides across.
Jeffrey Campbell: and what that refers to is there are a number of signs across Europe and even in certain parts of the US, especially southern California.
that required you about cooling or for high heat load days.
Now, see you.
Jeffrey Campbell: and I have a reply to the A-tablet controller.
As a best case, or as a worst case, can reduce the amount of 80 of that cooling neck that goes on in your high needle days. Because reducing water usage does reduce the energy savings and so on.
Jeffrey Campbell: and so what this means is that if you're putting in a greenfield side where you've got an any about it, if you would have put an any about a cooler before.
You know, if you're going to put it in the P.F.C., you know, long require that. You don't have to go to the expense of putting in that.
and $20,000 of putting in any of that a cooler. Nor do you have to, you can promote the $5,000 to $10,000 a year of operating costs as well. So we're a nice replacement for that aiveatic cooling system.
Speaker Change: Yeah, that's that that that that that's not out as a pretty good argument for the the airs J from one. We hope we hope that the case is others read it, especially in user so.
and we can get ready to expand at the same time so that's the ejector it's using it at the same time. So it's pretty good argument. I want to ask you one other kind of thinker root question. The recent EPA snap decision in June.
Allow us to continue to use the HFO and HFO HFC blends in new equipment designed for these refrigerants in the US. Just want to know what are your thoughts or maybe what you're hearing or.
Speaker Change: You know, what are the animals spirits on continuing competition between HFO and CO2 refrigeration, particularly with the BXG's ability to strengthen the CO2 case as we just discussed.
Yeah, I think CO2 is still the outright winner.
that will choose the HFO blends, and maybe even in stand-alone
cases that you can move around the store freely, but everything that we're hearing in the U.S. from our OEMs, our OEM customers we've been working with, is that it's full speed ahead on CO2, full speed ahead.
Speaker Change: Okay, great. Thank you. I appreciate that.
Speaker Change: You're welcome
David Moon, Michael Mancini, David Moon, Michael Mancini, David Moon, Michael Mancini, David Moon
Speaker Change: Thank you.
Once again, to ask a question at this time, please press star then the number 1 on your telephone keypad.
It appears there are no further questions at this time. I'd like to turn the call back to our presenters for any further remarks.
and many more. Thank you for watching. I hope you enjoyed this video. If you did, please like, comment, and subscribe. I'll see you next time.
Alright y'all, appreciate your time. Bye-bye.
This concludes today's Energy Recovery 3rd Quarter Earnings Call. Thank you for attending and have a wonderful rest of your day.