Innodata Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 2, 2023

There are 6 speakers on the call.

Operator

Welcome to the Energy Recovery Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce to you James Siccardi, VP of Investor Relations.

Operator

Thank you, James. You may begin.

Speaker 1

Hello, everyone, and welcome to Energy Recovery's 2023 Second Quarter Earnings Conference Call. My name is Jim Siccardi, Vice President of Investor Relations at Energy Recovery, and I'm here today with our Chairman, President and Chief Executive Officer, Bob Mao and our Chief Financial Officer, Joshua Ballard. During today's call, we may make projections and other forward looking statements under the Safe Harbor provisions contained in the Private Securities Litigation Reform Act of 1995 regarding future events or the future financial performance of the company. These statements may discuss our business, economic and market outlook, growth expectations, new products and their performance, cost structure and business strategy. Forward looking statements are based on information currently available to us and on management's beliefs, assumptions, estimates or projections.

Speaker 1

Forward looking 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 ks 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, August 2, 2023, and the company expressly disclaims any intent or obligation to I will 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 Chairman, President and Chief Executive Officer, Bob Mao.

Speaker 2

Thank you, Jim, and thank you, everyone, for joining us Good day. First, as usual, let me start with our core water business. Within desalination, We have now signed all mega projects that we targeted to ship this year and are now filling out our OEM and aftermarket channels, which happen closer to their shipping date. We are well positioned for the remainder of this year, and Josh will give you more specifics In wastewater, our overall signed contracts and pipelines We remain robust, and we now believe we shall land at the mid to high end of our $6,000,000 to $8,000,000 guidance The team is most importantly focused on where we need to invest to deliver another doubling of revenue In 2024, we have discussed our intent to build out this team in the regions in which we operate, And this effort continues at a quickening pace as we enter the second half of twenty twenty three. In June, we announced our expanded Ultra PX product series in the broad range From smaller flows as low as 10 gallons per minute up to 250 gallons per minute Under operating pressures as high as 120 bar or 1740 PSI.

Speaker 2

Additionally, our low pressure PX enables us to provide pressure exchanger technology in all trains But our progress continues to yield confidence in not only achieving our 2023 wastewater guidelines, We also have our 2026 revenue targets in this segment. As we look further out, We continue to pay attention to specific regions globally that may have potential for energy recovery In the coming years, last quarter, we spoke about the potential for our business in North Africa, In particular, the strength we see in Morocco, Algeria and Egypt. We have also identified potential growth markets And turning to these elements, water reuse and wastewater treatment for release. Chile, which has been dealing with record drought Conditions continue to be a leader in Latin America desalination market. In the second quarter, we announced contracts totaling over for projects in the country, all of which are scheduled for delivery later this year.

Speaker 2

Chile is projected to see growing water stress in the coming decades, which is already affecting their water supplies. According to World Resources Institute, during 2010s, Chile experienced Only low to medium water stress based on the ratio of local water withdrawals to their renewable supply. This decade, they are already in the high stress category and are expected to be classified as most extreme by the 2030s and 2040s. The rise in temperatures will likely further accelerate, particularly in the Andes Mountains, which is the source of most of the country's water supply. In addition, Central Chile, where 70% of the population lives, This quarter's stress is playing out today in the mining industry, A critical industry for Chile's economy, which supplies nearly a quarter of the world's copper supply.

Speaker 2

As of a year ago, Chile was expecting to nearly triple its use of desalination in Manic Mining From 8 desalination plants to 23 by 2028. Additionally, the mining industry uses enough water To supply 75% of Chile's population and by 2028, it's expected that over 50% of the water used in mining The need for water in Chile is appearing in our pipelines today, with sales expected To nearly double by 2026. Water reuse and recycling is another option for QIWI, which Could potentially generate material increases in our wastewater business as the decade plays out. Mexico ranked at 24th in the world for water stress is another country experiencing Significant drought and recurring heat waves in recent years. The current water crisis again in 2022 and up to 60% of the country could be under severe water stress in the coming decades.

Speaker 2

In fact, earlier this year, Mexico City itself announced it will reduce water pressures We believe desalination and wastewater reuse will be critical components of Mexico's water strategy In the coming years, although we have not seen significant revenue from Mexico in recent years, our pipeline is growing And we are nearly doubling our business there in 2023. However, the future of desalination or water reuse Argentina, despite it not being a mature revenue generator for Energy Recovery, It's another South American country experiencing significant water stress. The country's worst drought in 60 years led to Argentina reporting significantly lower crop yields for 2023, which is a strain on an economy heavily dependent on agricultural exports. These three countries have a combined population of roughly 200,000,000, which is more than twice that of the Middle Eastern countries that have been driving large scale desalination growth in recent years. In 2023, revenues in Central and South America are potentially nearly doubled From single digit mailings to the mid teens.

Speaker 2

As was North Africa, How and when water stress finally pushes these countries into consideration To a considerable ramp up in alternative sources of recycling of water is not known, But that there is a growing need is clear. We have already recently deployed additional resources To continue to serve this market, we will continue to invest in the future as the coming years as needed. Now, let's turn over to CO2, where we continue to receive both market validation that our technology is being accepted as well as concrete proof points with customers. In a clear signal At our PXG is beginning to truly resonate with the refrigeration market, we will First, the PXG was awarded the Refrigeration Innovation of the Year at the Atmo America Summit in Washington, D. C.

Speaker 2

In June. This award was chosen by a vote of industry players globally, And Energy Recovery's PXG was selected over nomination of other leaders in the industry. Additionally, the PXG as well as Aptus XTE Refrigeration System Have been separately selected as finalists in multiple award categories for the annual RAC Cooling Industry Awards, including the Refrigeration Innovation of the Year Award. This award is granted to a product that provides existing refrigeration systems with definitive If and impactful change, as a reminder, the core innovation of Aptas XT refrigeration system Is the incorporation of our PXG? We're proud of both the Admiral Award And win or lose, these latest nominations are encouraging signs that our innovative Technology is becoming increasingly accepted by a conservative and mature industry.

Speaker 2

However, validation must become pipeline and pipeline orders, and those orders must become profitable revenues For Energy Recovery, for us to achieve our targets. In that regard, a few concrete actions have taken place this quarter. First, we have begun to see repeat orders from our partners as they build their own pipeline of PXG demand. Both European partners, FUEL, Koo Technik and Aptapoo, Have identified their next installations in major chains in Eastern and Western Europe. We will keep you updated And their progress as they are commissioned.

Speaker 2

2nd, our PXG is scheduled to be installed In the Canadian supermarket chain this quarter, to help support refrigeration systems under stress From the historical temperature spikes happening today, food loss due to refrigeration is a major problem in the supermarket industry, Costing 1,000,000 of dollars annually and affect the bottom lines of both supermarkets and the OEMs themselves. RPXG has shown that it can allow existing CO2 refrigeration systems To operate at temperatures up to 10 degrees Fahrenheit over their current capabilities, With average global temperature reaching their highest on record, we are well positioned to help solve a growing challenge 3rd, our partner, Boyata Supermarkets has ordered a PXG for installation at a second store in California. We recently provided presented the results of our PXG at the Boyata Supermarket in Indio, California At the Admiral Conference in June, together with Vayatam, we showcased independent assessors' findings That shows under certain conditions, RPXG helped Vyata achieve a significant reduction In its CO2 Refrigeration Systems Energy Consumption. Specifically, the study showed that At temperatures of 95 to 105 degrees Fahrenheit, the PXG reduces the system's total energy workflow By approximately 30%. These tremendous savings are comparable to those that we have So earlier this year was Eptas in Europe.

Speaker 2

And lastly, as previously discussed, Regional distributors in Europe are integral part of our strategy to approach the market in the region. As such, we continue to move forward in discussions with additional distributors With the hope of signing more of them in the coming months, such agreements are important in helping us penetrate markets Last quarter, we announced our plans to hire and train the field engineering and technical We'll soon announce a partnership with a major U. S. OEM to open a new training facility here in the U. S.

Speaker 2

This new facility will incorporate our PXC technology and help familiarize external Service technicians with the operation of the PXG, we have already begun inviting industry participants to that opening event and look forward to formally announce it in the coming weeks. Our hope is to replicate such facilities elsewhere with other partners to ensure that demand for EPSG is not only met by product, but with the technical support needed as well. As you can see, we have had an event for the quarter and first half of the year. And I am also pleased to report that in the 2nd quarter, MSGI, CI, MSCI assigned Energy Recovery its highest ESG rating of AAA. In fact, we actually earned the top rating within our industry sector.

Speaker 2

This is quite an accomplishment for a company that only commenced on its ESC journey 4 years short years ago, And it is a tremendous testimony not only for our strategy and product, but also for the hard work and dedication of our ESG team and that of our entire company. Next quarter, we will talk about our plans and projections for 2024 in both the CO2 and Water As we continue to push forward our 2026 targets. With that, let me hand over the call to Josh.

Speaker 3

Good afternoon, everyone. We generated revenue of $20,700,000 this quarter, which was within our guidance of $20,000,000 to $25,000,000 Note that we actually shipped out over $26,000,000 in product During the quarter, but due to GAAP revenue recognition rules, nearly $6,000,000 of revenue from a specific megaproject shipment will be recognized early in Q3. Therefore, we had a strong quarter based on our expectations, which helps provide confidence that we will continue to meet our revenue targets this year. However, this delay in recognizing that mega project did cause an operating loss in the Q2 of about $2,500,000 We are confident that our overall profitability will remain in line for the year as we begin to realize a large number of mega project shipments in the 3rd and 4th quarters. We recognized $600,000 in wastewater revenue for a total of $2,000,000 year to date.

Speaker 3

While we've only achieved a portion of our target for the year Between signed contracts and our pipeline, we are comfortable that we will achieve our wastewater targets this year as Bob described. In addition, we recognized roughly $100,000 in CO2 revenue this quarter. Although we are showing a negative margin in our Emerging Technologies segment, This is related to the timing of the GAAP recognition of expenses related to this revenue, and we should see this normalize in the Q3. The balance of revenue in the Emerging Technologies segment was in oil and gas, largely related to replacement parts of projects already in operation from several years ago. As we look towards the Q3, you can expect to see growth continue to rise, but with some short term risk.

Speaker 3

Our Current revenue target range for the 3rd quarter is quite wide, between $25,000,000 to $35,000,000 The reason for this wide range is related to a few We are uncertain as to whether we will be able to ship these orders before the end of the quarter. However, we are confident these projects will ship before the end of the year. Therefore, the risk to these projects is very short term, but should not affect our overall 2023 results. However, note that if we only achieve the low end of our range in the quarter, we would be close to a breakeven operating profit or possibly show a small loss in Q3. Both our second and third quarter swings again highlight the lumpy nature of our revenue and desalination and how a small number of mega projects However, this in no way reflects the strength of our pipeline.

Speaker 3

This strength, along with the purchase orders we have in hand already, Gives us confidence in our ability to achieve our targets this year. As we look to the second half of the year, we now anticipate achieving desalination revenues in the lower half of our guidance So roughly 3% to 5%. Note that based on our guidance for the Q3, this year is now heavily weighted to Q4, which could exceed $60,000,000 Such a large quarter, of course, increases risk when so much is dependent on the final few months of the year. Of course, we've been building heavy second half of the year, which is the main driver of the increase in inventory year to date. Therefore, we are ready to deliver the product.

Speaker 3

If we experience any delays, they will likely be customer related ones. We'll know more in November and we'll update you on our progress in the Q4. Our gross margin was comfortably within the upper end of our guidance. Our product mix was a more typically balanced one, although somewhat light on pressure exchangers, Overall, putting positive pressure on margin. You should expect to see gross margin inch upward to between 65% to 7% in the 3rd and 4th quarters as this trend continues.

Speaker 3

The range we are providing is reflective of a little uncertainty in the final mix of pumps and turbo which is contingent on our OEM and aftermarket sales. However, this forecast means that we should end the year within our 64% to 66% guidance. Our operating expenditures continue to trend within the guidance we laid out last October. G and A spend is growing in the single digits and largely driven by inflation And a small increase in headcount, most growth can be seen in sales and marketing spend, which has grown 38% year to date. This growth is right in line with Expectations as we continue to ramp up investments to support growth in both wastewater and CO2.

Speaker 3

You will note a 22% decrease in research and development While we do expect R and D spending to fall somewhat this year due to the cessation of VorTeq activities, Most of this quarter's drop is simply due to the timing of some of our project spend. By the end of the year, as we stand today, we anticipate R and D spend falling year over year roughly between 4% to 8%. Therefore, our overall target to spend between 52% to 53% OpEx as a percentage of revenue based on our current revenue projections for the year remains on track and unchanged from our projections in October last year. Unsurprisingly, following a very low revenue quarter in Q1, we showed negative operating cash flow in the 2nd quarter. This is entirely due to lower collections from a much reduced accounts receivable balance at the end of the Q1.

Speaker 3

However, our overall cash balances Actually remain higher than planned due to better than expected collections in the second quarter as well as inventory levels that remain below forecast. At the last call, I stated that inventory levels could exceed $40,000,000 this quarter. We have continued to proactively manage our raw Material inventory levels down, which is the main reason for this reduction from forecast. This is a positive result as we seek to reduce the number of days we hold raw material inventories from our highs during the supply chain crisis over the past couple of years. While we think it is still possible to see raw materials fall further this year, how far they fall is entirely dependent on our CO2 buildup in the coming months.

Speaker 3

We'll have a better idea in October. Where we stand today, we see our inventory levels settling out at between $25,000,000 to $30,000,000 by the end of the year. Overall, it was another financially sound quarter and our team remains confident in achieving our range of guidance for the year. Let's move to Q and A.

Operator

Thank you. At this time, we will be conducting the question and answer session. A confirmation tone will indicate that your line is in the queue. And the first question comes from the line of Ryan Fingit with B. Riley Securities.

Operator

Proceed with your

Speaker 4

question. Hey, good afternoon, guys.

Speaker 1

Hey, Ryan.

Speaker 4

So the risk To 2024 that we spoke about on the last call, can you give an update on the potential Tendering delays there, I think it was 3 or 4 projects that you called out on the 1Q call.

Speaker 3

Yes. In 2024, we're really looking at it as we did last quarter. So it's a little early for us To really give any definitive numbers for next year, but we're seeing similar risk in those projects that we discussed last quarter haven't worked themselves out yet. Okay.

Speaker 4

And then on the CO2 training center in California, Is that something that you're creating with an OEM or an existing place that you're just going to be able to showcase the technology?

Speaker 3

Our understanding it is a new location opened

Speaker 2

To be opened soon by our OEM partner and since PAXG It's part of the newer generation refrigeration rack offer. So we are a partner in that new training center.

Speaker 4

Okay, got it. And maybe just to look a little further out, Can you remind us what the timeline might be to build another manufacturing site and what the initial Thoughts on the capital outlay could look like?

Speaker 3

Yes, Ryan. When we think about a manufacturing site, We're actually looking to 1st maximize everything we can produce out of our 2 existing facilities in California. If we hit the low end of our CO2 range, the $100,000,000 call it Sub $200,000,000 range of CO2, we think we can probably produce most of that out of our existing facilities and just Add incremental new CapEx, kilns and so forth to support that. So that CapEx wouldn't be so great. Either if we hit toward the upper end, call it $200,000,000 or above give or take or as we look a couple of years out past 2026 is when We would certainly need to build a new facility and we've spoken generally about for a new facility to add, Call it somewhere between 7000 to 10000 PXG units of capacity is Roughly around $20,000,000 $15,000,000 to $25,000,000 is usually the range I give depending how much extra space we build out and so forth and where we do it.

Speaker 3

So it's not a huge outlay of cash, but it will be later in the cycle than what we originally planned, which is good news. Also, I might add that

Speaker 2

this pushing out of the need to add CapEx It's also a result of our continued manufacturing process improvement and optimization. So we can push through more products through the same capacity.

Speaker 4

Okay, got it. And then maybe just one final one to touch on the second half here. I understand it's a timing issue for 3Q in terms of when you might be shipping out For some of the mega projects, but you're confident in the full year. Can you just talk about what the main risks are? Are you actually seeing delays in the projects?

Speaker 4

Is it just your customers waiting on Other pieces, can you just give a little more color around kind of the risks to 3Q and then especially 4Q?

Speaker 3

Yes, I'd say, well, for 3Q, it's very specifically a few of these projects. And it's just it's typical operational issues we deal with, whether it's Getting paperwork signed or getting witness testing completed, sometimes folks like to come witness test and see the quality of the products. So it's kind of just kind of operational Gives and takes that occur during the usual process. As we look out at the whole year, there's nothing in particular That's telling us we're going to have delays. I'm highlighting the risk because when you're talking about $60,000,000 in 3 months, it's just A lot is in the last couple few months of the year.

Speaker 3

And so if you have any delays such as we're talking about in Q3, it pushes it out to the next year. It's entirely unconcerning to us. It doesn't mean anything from a cash flow perspective. We don't expect anything to be canceled this year like occurred last year. None of that's going It's just a heavy quarter.

Speaker 3

It's a lot of mega projects. Mega projects are over $40,000,000 of that $60,000,000 which is good. So we feel pretty confident that there's When you load that much in 3 months.

Speaker 4

Got it. That's helpful. Thanks for the answers, guys.

Speaker 3

You bet.

Operator

Thank you. And the next question comes from the line of Pavel Molchanov with Raymond James. Please proceed with your question.

Speaker 5

Thanks for taking the question. I was fascinated that you started the remarks with Latin America, when I look at your 10 ks for 2022, the entire Western Hemisphere Was only $8,000,000 of revenue and you guys got $8,000,000 of Desalination contracts from Chile alone this past March. So is there Kind of momentum in the Latin American market that you guys are observing And anything outside of Chile that you can point to?

Speaker 2

We already mentioned, yes, we do see New momentum coming out of that area, specifically, we mentioned here Mexico And as well as Argentina. So we think this whole region is moving And we'll constitute, percentage wise, a larger percentage in 2024.

Speaker 3

And we're seeing Pavel this year, last year we did in Americas roughly $8,500,000 or so. And we're seeing Not quite a doubling of that potentially this year, if all those projects deliver as we're expecting. So it's a pretty significant increase. It's still A smaller part of our overall revenue, but growing for sure.

Speaker 5

Okay. On the CO2, dollars $100,000 in Q1 that built up to $300,000 in Q2. Are you close to a point where you might begin to have kind of decent visibility and perhaps Start giving financial guidance for that revenue line?

Speaker 2

We'll do that as we said, we'll do that in the November earnings call.

Speaker 5

Right. But for, I guess, in 2023, should we assume, what, dollars 1,000,000 Total for that for the year?

Speaker 2

Probably none.

Speaker 5

Okay. Okay. Last question, it's been a while since we've talked about Kind of M and A opportunities, you still have about $100,000,000 of cash on the balance sheet. I'm curious if there are any Kind of adjacencies that perhaps you can look to fill through a bolt on acquisition?

Speaker 2

But as we also touched upon before that we also want to Protect our high margin brand equity, so that puts a, You will see a floor on what kind of M and A we may be looking at. As of this moment, while we are always on the watch out, We don't really have anything close enough to even mention about it.

Speaker 3

At that 2,000,000, we're pretty focused on delivering what we've got. So we're not spending a lot of time on that. We got a lot on our plate currently making sure we get CO2 and wastewater up and running real fast.

Speaker 5

Understood. Thank you, guys.

Speaker 3

Thanks,

Operator

One moment please while we poll for any questions. At this time, I'm not seeing any questions. I'd like to pass it back over

Speaker 1

Thank you everyone for joining us this evening. We look forward to speaking with you on November 1. Take care.

Operator

Ladies and gentlemen, that does conclude today's teleconference. You may disconnect your lines

Speaker 5

at this time.

Operator

Thank you for your participation and have a great day.

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Earnings Conference Call
Innodata Q2 2023
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