Energy Recovery Q2 2024 Earnings Call Transcript

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Provided by Quartr
July 31, 2024

There are 6 speakers on the call.

Operator

Greetings, and welcome to the Energy Recovery 2Q24 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, James Siccardi, Vice President of Investor Relations.

Speaker 1

Hello, everyone, and welcome to Energy Recovery's 2024 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 President and Chief Executive Officer, David Moon and Brandon Young, our Controller and Interim Chief Accounting Officer. 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 95 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, July 31, 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 Chief Executive Officer and President, David Moon.

Speaker 2

Thanks, Jim, and thank you all for joining us today. I'm joined today by Brandon Young, our Controller and Interim Chief Accounting Officer. Brandon has been an integral part of our financial leadership team for many years. Before I get into the 2nd quarter results, I want to update you on our CFO search and our strategic planning process or what we call playbook process. 1st, I want to call your attention to the press release that went out earlier today regarding our new Chief Financial Officer.

Speaker 2

I'm pleased to announce that Michael Mancini will become our new CFO effective August 5. Michael brings experience leading high growth engineering and technology focused startup companies, 2 of which he served as CFO. He has extensive financial, operational and capital markets experience from a diverse career including banking, private equity and hedge funds. Michael's experience will serve us well as we expanded the new wastewater and CO2 markets and work to further strengthen our relationships with our shareholders. Regarding our playbook process, we have moved from the where to play phase to the how to play phase.

Speaker 2

This how to play phase will include critical milestones and financial targets that will form the foundation for how we communicate our progress with all of you in the years to come. While we still intend to share a high level summary of our playbook during the Q3 earnings call, I've decided that a more appropriate forum would be to host a webinar in the Q4 to share the details. We will be providing the details for this webinar by the end of Q3. Now let us move to the 2nd quarter update. Beginning with water, we are maintaining revenue guidance of $140,000,000 to $150,000,000 for the year.

Speaker 2

There are four reasons why I remain confident in this guidance. First, we achieved 2nd quarter water revenue of 26 $900,000 which was $6,400,000 better than the same quarter last year, thanks in large part to strong mega project and OEM performance in MEA in Europe. Now there were several shipments worth noting that we've discussed in previous calls. We are pleased to report that we've completed shipment of the Parura project in Chennai, India. As a reminder, this was the project that slipped out of December last year.

Speaker 2

As is the case with large scale infrastructure projects, there are execution risks that are out of our control that can cause delays. It is important to note that while our position remains strong in the mega project space, we are not immune to these risks. We delivered the 1st shipment in the 2nd quarter worth $4,200,000 and the 2nd shipment this month worth 4,100,000 Once constructed this will be the largest desalination plant in India delivering 400,000 cubic meters per day. We also shipped the 1st phase of 3 phases, the Hassan IPP project in Dubai, UAE worth $5,200,000 Once constructed, this 820,000 cubic meter per day plant will be the largest desal plant in Dubai. This serves as another example of large scale project slippage.

Speaker 2

In this case, the project was re tendered and timing was adjusted, but our position to execute this project remains strong throughout the entire process. We expect the remaining two phases to ship within this calendar year. 2nd, we announced in July the signing of $15,000,000 in contracts to supply pressure exchangers to several SWRO desal plants in India, which included the Parura project. The remaining four projects are expected to ship in 2024. Altogether, these plants will provide over 670,000 cubic meters of clean drinking water to communities in India each day.

Speaker 2

As one of the most water stressed countries in the world, India continues to invest in desalination projects to supplement its freshwater supply. We continue to observe a growing divergence between the world's fresh water supply and demand and this trend can be observed in countries like India, where it's home to 18% of the world's population, but only has 4% of the world's freshwater resources. 3rd, our current 2024 total revenue, which includes revenue recognized in the first half of the year and signed projects under contract yet to be delivered, totals approximately $107,000,000 or 74 percent of the midpoint of our guided range for the year. This compares to roughly $118,000,000 or 89% of the guided range at the same time in 2023. This reflects a 9% decrease year over year.

Speaker 2

The decrease is driven by the timing of the closure of several large scale project contracts. We currently have approximately $25,000,000 of mega project draft contracts that we are anticipating finalizing over the next several weeks that we plan to deliver this year. Our strong performance of contracted activity and the draft contracts under finalization underpins our confidence in reaffirming our guidance for this year. And 4th, our wastewater pipeline continues to grow and we've increased our signed wastewater contracts by almost 5% as compared to last year at this time. As predicted, we had a slow start to the year, primarily driven by the economic conditions in China.

Speaker 2

We are monitoring the situation closely, but have already seen an uptick in bid activity and plan to have a very active second half of the year in this sector. Based on current projected delivery schedules, we expect that 35% of the second half water revenue will fall into Q3 and 65% in Q4. This will put the Q3 water revenue at $35,000,000 to $39,000,000 and the 4th quarter at $66,000,000 to $72,000,000 Now let's move to our CO2 business. As I stated during our last call, after successful completion of lab testing our 2nd generation PXG in the 2nd quarter, Our first gate for 2024, we have now moved towards our second gate, which is the installation of 30 to 50 sites by the end of Q4 2024. We have planned to have 10 of these sites installed by the end of August to capture critical summer data that would then form the foundation for a white paper we will publish in the Q4.

Speaker 2

I am pleased to report that we now have 9 2nd generation PXG sites operating in the U. S. And Europe as of July 15, with the 10th site to start up in August. Additionally, we have contracted with a highly respected third party engineering firm, DC Engineering, to measure and verify energy savings provided by our 2nd generation PXG at 6 of the 10 sites. They will also assist us in the white paper development.

Speaker 2

These 6 sites are in California, which are Varetta and Grocery Outlet, Ohio, which is Kroger, Belgium, which is Delhaize, and Spain, which is Elda Foods. The site in Spain will be a large food processing plant. TCE Engineering is an industry leader in commercial and industrial refrigeration design, management and compliance services. In fact, many of their engineers have worked for large retailers. In such a conservative industry as food retail, 3rd party verification of a new technology is paramount.

Speaker 2

In fact, if you have faith in your technology as we do, you will proactively engage a respected third party or university to independently verify your claims in a field setting. This is exactly what we are doing with DC Engineering. The last time I worked with them was on a new ammonia carbon dioxide cascade refrigeration system for a supermarket chain in the Southeast. In fact, our results were so well received, we and our supermarket customer were awarded the EPA's Green Chill Platinum Certification for environmentally advanced refrigeration systems. Such an exercise becomes table stakes when sitting in front of end users.

Speaker 2

With DC Engineering's assistance, our white paper will become the catalyst for our OEM partners and us to accelerate PXG adoption with the end users. DC Engineering is currently in the measuring phase. Additionally, our OEM partners, Health Phoenix and Epta, will be collecting data on our behalf at 2 of the 10 sites located in Canada, which is Loblaws and Hungary, which is Ashan, respectively. We will be collecting data at the remaining two sites. And finally, we have 40 in our pipeline for 2024, including the 9 sites already operating.

Speaker 2

Now let's move to the financial update. Our gross margin rebounded from the Q1 of the year with the 2nd quarter coming in at approximately 65%. Our gross margin expectation for the Q3 is 62% to 64% as we continue to manage Q400 ramp up production challenges. We are confident we will have most of these challenges, which are largely material handling in nature behind us by the end of the Q3, including adding additional Q400 capacity by the end of the year. We had expected the Q400 would only comprise about 25% of our WaterPX demand for 2024, but have been pleasantly surprised that it's trending towards 50% for the year.

Speaker 2

Our full year gross margin guidance remains at 64% to 67%. Our operating expenses increased 21% over the Q2 of last year, primarily due to one time expenses. Now as mentioned last quarter and as expected, we continue to experience one time costs associated with the work in support of our long term growth strategy, our playbook, as well as some executive transition costs. The combined impact of these one time expenses totaled $4,000,000 in the second quarter. To recap one time cost and operating expense to date, we incurred $800,000 in the 1st quarter and $4,000,000 in the 2nd quarter.

Speaker 2

The 2nd quarter breakdown is as follows: $2,600,000 for playbook consulting and $1,400,000 for recruiting and executive transition cost. We are maintaining our operating expense guidance for the year of $78,000,000 to $80,000,000 which includes the estimated $7,000,000 in one time costs. We expect operating expense to come in at $21,000,000 to $22,000,000 for the Q3. Of the remaining approximately $2,200,000 of one time costs, expect 75% to be spent in the 3rd quarter and 25% in the 4th quarter. As a result of these one time items, we experienced a small net income loss in the quarter, though with a large sequential improvement from the previous quarter and putting us very close to breakeven.

Speaker 2

We are on track to moving to positive operating income as the remainder of the year progresses. And lastly, we continue to grow cash in the 2nd quarter, increasing our cash and investment position in the 2nd quarter from $129,000,000 to $138,000,000 We currently expect to end the year between $140,000,000 $150,000,000 So to sum up, we delivered a strong quarter supported by a growing backlog, which gives us confidence in our full year revenue guidance of $140,000,000 to $150,000,000 We anticipate our wastewater business to generate $12,000,000 to $15,000,000 in revenue. We expect to have 30 to 50 sites with our PX2nd generation PXG installed by the end of the year. And we are maintaining our gross margin guidance of 64% to 67% and operating expense to $78,000,000 to $80,000,000 With that, now let's move to Q and A.

Operator

Our first question comes from the line of Pavel Molchanov with Raymond James. Please proceed.

Speaker 3

Thanks for taking the question. No, maybe to probably start with the playbook. I know you do not want to kind of front run the specific targets that you will unveil towards the end of the year. But just conceptually, will you provide kind of revenue, earnings, any other metrics? And will it be by product line?

Speaker 2

Hi Pavel, this is David Moon. Nice to hear your voice today. So the guidance that will so we'll break out, as I said on the just a few minutes ago, we're going to break out the release of the playbook into we'll have we'll provide the $25,000,000 $26,000,000 revenue guidance as part of the earnings call for Q3, maybe a few milestones, but it will be pretty high level. And then when we get to the actual webinar that we'll have later in Q4, we'll provide more detail around not only years in terms of years out, it will be a 5 year look, but we'll also provide not just revenue, but also earnings and also a look by business unit as well.

Speaker 3

Okay. That's something for us to look forward to. When you talk about DC Engineering in the measuring phase as it relates to the refrigeration product, What exactly is being measured? Is it the energy savings or something else?

Speaker 2

Yes. So there's 2 specific metrics that were that's being they're being validated or measured by DC Engineering. 1 is just purely energy savings. And then the second is capacity extension. And I think we've talked in previous calls Pavel about how the PXG provides capacity extension in high heat load days.

Speaker 2

And so DC Engineering is confirming measuring and confirming both of those.

Speaker 3

And as you speak with prospective customers, do they have a particular threshold or target that they want to see in terms of the improvement in the refrigeration system?

Speaker 2

I think so. Largely, the feedback has been around it's a very first cost conscious industry. And so largely the feedback has been around payback period. And anything from 2 to 3 years is acceptable. And so that's been sort of the and so then you can roll in capacity extension under that, you can roll in certain energy savings as part of that.

Speaker 2

But that's the primary feedback we get or what end users' supermarkets wanting to be looking for and that's a very, very short payback period.

Speaker 3

Okay. Last questions, little bit more macro. Is there any evidence that interest rate, high interest rates, currency, oil price or anything else is structurally hindering the development of desal in the Middle East?

Speaker 2

None. I'd say nothing that we can see at this point. And our field team is as good as it gets and as close to customers as any. And so far full steam

Speaker 3

ahead. All right. Thanks very much.

Speaker 2

Thanks, Pavel.

Operator

And the next question comes from the line of Ryan Fink with B. Riley Securities. Please proceed.

Speaker 4

Hey, guys. Thanks for taking my questions. I know you don't want to get ahead of the 3Q update and webinar in the Q4 around CO2, but maybe can you talk a little bit about the recently deployed PXGs and maybe how they've performed compared to what you were seeing from the prior generation?

Speaker 2

So I think what's most important about what we've seen out of the 2nd gen is that they're just they're not running non stop. No vibration, sound levels are better than the 1st gen PXG, which were the 2 issues that we saw, wanted to solve for when we developed the 2nd gen. And so, field time so far, it's they're running like clockwork in the field. So very pleased thus far with the performance we've seen in the field. And we're starting to get in several areas like Southern California, we're starting to get really some stress tests, our PFG stress test, right.

Speaker 2

I mean, we've had 100 plus degree days in Southern California for most of the last month or so, and so far so good. So we're happy with the performance.

Speaker 3

Great.

Speaker 4

And then turning over to the Waters side, the AI theme is obviously super desalination or RO and wastewater participating there?

Speaker 2

So we are starting to push that discussion on our side. And so this is something we've been talking about the last 3 or so months about how we can we capture a lot of data. There's a lot of our PXs are data rich in terms of opportunity. And so we're talking to our EPCs and O line operators about how potentially we can go faster and some ideas we have along the AI fronts. We're not getting pulled, it's we're pushing.

Speaker 2

We're doing the pushing at this moment.

Speaker 4

Okay, interesting. And then maybe just one more. Could you potentially talk a little bit about 2025? I know you just said the macro wasn't really hindering, desal projects moving forward. But what are you seeing in terms of the visibility you have on 2025 today and the potential growth for you guys?

Speaker 2

Yes. So I think so we're confident this 2024 will be the 10th consecutive year of growth that we've had. And I would say looking where sort of where I'm standing today, I would say that 2025 should be no different. I mean that should be the 11th year of growth that we'll be looking at for ERI. So more to come when we talk in Q3 and certainly as part of the webinar, but I see the growth trends.

Speaker 2

The macro story continues to look good. So, and we're going to continue to ride that way. So, I think it looks good for 2025.

Speaker 4

Great. Thanks for those answers. I'll turn it back.

Speaker 2

Yes. That's great.

Operator

And the next question comes from the line of Jason Bandel with Evercore ISI. Please proceed.

Speaker 5

Yes, thanks. Hey, guys. First question on the Refrigeration side. I know you mentioned in your prepared remarks about Kroger testing your PXG and I saw their recent announcement that they're going to start using CO2 refrigeration system starting next year. Just curious based on your experience so far, what would a typical supermarket rollout look like?

Speaker 5

Do they typically start with new store openings and distribution centers? Do they kind of wait for the end of the useful life for older systems? Like how does that transition typically happen?

Speaker 2

It really depends. So in this space, there are what we call 1st movers or 1st adopters and then there are followers. And so there are sort of supermarkets following those 2 camps, sort of nobody in between really. And I see Kroger as someone that you would call an early adopter, right. And so how this will play out with Kroger is we're doing the one store now in Cincinnati.

Speaker 2

It's getting a lot of exposure by the way because it's their headquarters. As that continues to go well and as Kroger begins to work on their capital plans for rolling out CO2 over the next 5 years, then I believe we have a real chance to be a part of those capital plans. And they'll go faster and they'll start with stores that are older, most likely that are older, where there may be some leaks, maybe a problem, system may not be running well or it's just the equipment is sort of at its expiration date. And so they'll start with the older stores first. And then as the new stores are obviously built, those would be certainly CO2.

Speaker 2

But I think they'll start from the bottom of their list and their most problematic stores will be where they start.

Speaker 5

Got it. Okay. That makes sense. And then with the white paper, the OEMs, would they feel comfortable with the amount of runtime data in the white paper or will some want to see even more runtime data in order to get comfortable with the real world performance of the PXG?

Speaker 2

Yes. So it's a very good question. So the run time that we've laid out as part of this work with DC Engineering has been largely given to us by the OEMs. And so this is what they're mandating. This is what they're comfortable with order to be able to sit with end users and have this next discussion.

Speaker 2

And so, we are following their direction when it comes to run time. And what's critical is this is the summer period and nothing more and nothing less. And so, we come out as we come out of the summer period with good results, that will be enough then to take our discussion to the next level.

Speaker 5

Got it. Now switching gears a little bit to wastewater. I know you reiterated the full year revenue guidance despite the slower start to the year. Just curious if you can provide a little more color on what gives you the confidence that the second half revenue come in to meet your full year guidance?

Speaker 2

Yes. So we did about $600,000 in wastewater this quarter, which was equal to what we did this time last year. Our backlog our backlog as I talked about earlier is growing. We're seeing an uptick over the last 4 weeks. We've seen a real uptick in quoting that we hadn't seen for a while, largely driven by China.

Speaker 2

And so we're seeing that China is starting we're starting to see just an increased level of activity that we haven't seen for the year in China. And so I think that bodes well for the rest of the year. And if we look at the uptick in quoting plus what we've already got on the books in of backlog, we're still comfortable with the $12,000,000 to $15,000,000 of guidance even though we started slow.

Speaker 5

Understood. And one last one for me. Just on the CFO search process, I know you went kind of went through Michael's background in the prepared remarks. Just curious if you can share a little more details on, I guess, how you decided then to pick him? And if you regret not having an overlap with Josh when he starts?

Speaker 2

Look, I think in a perfect world, it would have been great if we would have had some overlap. Michael is an experienced CFO. He brings a skill set with his start up work. He knows how to work under pressure given his previous background. He knows how to work with investors.

Speaker 2

He'll hit the ground running, I have no doubt. And so yes, would have been good, yes, but where he'll hit the ground. He starts next Monday and so and Josh has been kind enough to say that he will make himself available if needed. So I'm pretty happy that we hit the ground running. I'm not worried about that.

Speaker 5

Sounds good. Looking forward to meeting him and thanks for taking my questions. Thank you.

Operator

Thanks, Jason. There are no further questions at this time. I would like to turn the call back to James Siccardi for closing remarks.

Speaker 1

Thank you everyone for joining us this evening. We look forward to speaking to you again in the Q3 call and

Speaker 2

at our webinar. Please take care.

Operator

This concludes today's conference. You may disconnect your lines at this time. Enjoy the rest of your day.

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Earnings Conference Call
Energy Recovery Q2 2024
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