Energy Recovery, Inc. (ERII) on Q1 2021 Results - Earnings Call Transcript
Operator: Greetings and welcome to Energy Recovery's First Quarter 2021 Earnings Conference 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, Jim Siccardi, Vice President of Investor Relations.
Jim Siccardi: Good afternoon, everyone. And welcome to Energy Recovery's 2021 first quarter conference call. My name is Jim Siccardi, Vice President of Investor Relations at Energy Recovery. I am here today with our Chairman, President and Chief Executive Officer, Bob Mao and our Chief Financial Officer, Joshua Ballard.
Bob Mao: Thank you, Jim and thank you everyone for joining us today. Once again, I want to start today's call with the sincere hope that everyone listening, and your families are safe and healthy. Although it has been only eight weeks since our last earnings call, the momentum we spoke about has continued to build. We completed the two live well field trials in Texas and New Mexico announced in our last call. We are currently at another and have two more planned. We held another successful joint marketing webinar with DuPont, this time hosted in Mandarin and focused on the Chinese market. Our R&D testing has delivered compelling data on our CO2 refrigeration PX, and we are finalizing design and testing in preparation for beta testing. And, of course, our core desalination business continues to surge forward delivering a new record high first quarter product revenue. In addition, we are proud to say that we have been shortlisted for the Best 1st Time Sustainability Report with the Corporate Register Reporting Awards. Corporate Register is the world's largest corporate responsibility and ESG report directory. In today's call, I will update you on our desalination business, industrial wastewater, VorTeq, and our refrigeration efforts. With that, let us start with our record-setting desalination business.
Joshua Ballard: Thank you, Bob. We achieved extraordinary 52% growth in water product revenue in the first quarter as compared to last year. However, let's remember that this year, unlike in 2020, our quarterly results should be more of a dumbbell shape. Meaning, we expect to report higher Q1 and Q4 revenues, and lower Q2 and Q3 revenues, whereas in2020, Q1 was our lowest quarter for water. We achieved these sales with a gross margin of 69% in Q1, right in the middle of our guidance of 68% to 70% for the year. We realized a decrease of 12% in operating expenditures against Q1 last year. However, if you compare OpEx to the latter half of 2020, you will see that we are right in line with expenditures in Q3 and Q4. The latter half of 2020 is a better comparison to our trend this year for three reasons: first, many expenditures fell after Q1 due to the pandemic, especially those related to travel, employee-related office expenses and trade show marketing, for example. Second, we had a somewhat elevated G&A expense in Q1 2020 related to the CEO search, which ended in the second quarter. And third, and most importantly, VorTeq spend remained elevated in the first half of last year during a heavy testing period which has since tempered. Total VorTeq spend was $3.5 million in comparison with $6.6 million in Q1 last year, which is also comparable to the past two quarters. We expect roughly this spend on VorTeq in Q2, and spend in the second half of the year will depend on our decision in June. Overall, we expect our OpEx to grow in mid-single digits, 5% to 7%, for the year, once you exclude the one-time impairment charge related to the termination of the Schlumberger agreement in Q2 last year. 2021 R&D spend should remain lower than 2020 despite our investments in refrigeration. As a reminder, we guided 15% to 20% R&D spend as a percentage of revenue for 2021. We closed the quarter with an increase in our cash and securities balance from $115 million in December to $120 million at the end of Q1. Notably, unlike the past few years, we posted positive operating cash flow in the first quarter. Historically, we have generally reported negative cash as high as $5 million to $6 million in the first quarter driven by annual bonus and insurance payments etcetera. The increased cash flow this quarter reflects our growing sales and importantly, our strong cash collections, which our team has remained focused on throughout the pandemic.
Operator: Our first question is with Jason Bandel with Evercore ISI. Please proceed with your question.
Jason Bandel: Hi, good afternoon Bob, Josh and Jim. First question, in your earnings release, you talk about sustainable disciplines and diversified growth and how the company is at a key inflection point here but it's more of a high level. As you look out a few years, can you discuss your vision what the company that looks like? And how you achieve diversification while also protecting your strong position in desal and create value?
Bob Mao: Josh, you want to take that?
Joshua Ballard: Sure. We have a strong DSL base, base, which we plan on protecting and we have dedicated teams to that desalination business that we invest into. And we're also investing into the technology in order to stay ahead of any potential competitive threats and so forth in the future. So we're actively investing and protecting that base business but our margin financials do allow us to invest in other areas. And so as we look forward, we would like to diversify and de risk our revenue. We're very concentrated, obviously, in one industry today and by expanding and diversifying outside of these industries, we can be derisk that revenue, create much more growth, as well as create a more stable growth, if you will, right. In addition, we're looking at really building -- we're focused on our PX platform technology, which is focused almost entirely on sustainability, right. I mean we started out our business reducing energy costs in desal. We're looking at how we can reduce waste in oil and gas with the VorTeq. But the other things that we're working on currently today are very much sustainably focused, very much focused on reducing energy costs in other industries, so we're expanding on that story with our technology as we look forward, and then hope to really do that . Does that answer your question Jason?
Jason Bandel: It does. Thanks for that. Now turning to your water business, obviously you reiterated your 2021 and 2022 growth rates, given the opportunities they are seeing to further grow your mega projects backlog. And also. just noticing that aftermarket revenue was also up strong in the first quarter. Are you seeing opportunities in the aftermarkets and is that strength already included in your current guidance?
Bob Mao: Josh?
Joshua Ballard: Sure. When we start with aftermarket, we are seeing a return to our aftermarket business. We did assume that in our guidance so that that has been included; this first quarter is definitely evidence of that. And if I understood your mega project question correctly, you know, we are very focused on building up that backlog in the mega project space as early as we can; as you know, we typically sign contracts about 12 to 18 months out, and sometimes a little bit shorter, but on average 12 to 18 months. We're off to a very strong start with that this year, for not only 2021 but also 2022. And in terms of growing that, I mean, we have -- haven't lost a project in about 7 years and so we're certainly capturing that market and growing with it as it expands globally, whether it's the Middle East or in Asia where we're seeing lots of growth as well.
Jason Bandel: Perfect. But then…
Bob Mao: Jason, we confirm that the aftermarket has fully bounced back from the COVID.
Jason Bandel: Understood, thanks for that clarification. And then the last one for me just touching on ultra PX capabilities. How do you guys, we can talk more about your education process to the marketplace? Does require some results when the products you have in the first two contracts in the field itself or can marketing education and partnerships kind of be enough to get potential customers to understand what you're trying to do with it?
Bob Mao: One part is indeed these webinars and other marketing communications we do. But secondly, Jason, is that we're -- as we said this a few minutes ago, we will attend to secure initial projects, commercial projects, in different industry verticals, and thereby whilst deployment and actual view results that will educate the market, what are the real efficiencies and value that our Ultra PX brings. So you will see that in the coming months that we expect to penetrate into additional verticals. And that is -- I think that's the most effective or potent way of educating the market.
Jason Bandel: Makes sense. Great. Thanks for the time. I'll turn it back.
Operator: Our next question is with Pavel Molchanov with Raymond James. Please proceed with your question.
Pavel Molchanov: Questions; all of your testing has been in one basin, the Permian, and obviously an important oil producing area, but by no means the only one. Has your EMP company partner or Liberty suggested that it might make sense to do some field tests outside the Permian maybe in another shale play or even in a different geography altogether.
Bob Mao: Eventually, we would do that. However, the Permian is a pretty large place and it just so happened, this particular end customer has a lot of wells in that region. And we are getting -- including the two addition of the one we're doing now, and the two additional ones we plan in May we should have sufficient data for not only the customer value proposition verification but as well as our own VorTeq cartridge live test. So, for the coming couple of months or you will for the coming 45-60 days until we make the report to you on June 10; the premium search the total purpose that we need. And just to clarify on June the 10, you will announce whether VorTeq will be commercialized, and if you commercialize it, in which manner or what -- using what strategy, like the JV both parts of that decision at the same time, right?
Pavel Molchanov: Correct. Yes. Okay. My follow up question is on your water kind of capabilities broadly, obviously, in the last several months, a lot of discussion in Washington about infrastructure, including $100 billion proposed water infrastructure spending in Biden's proposal. Do you anticipate any desalination projects being incremental in the United States, in the context of that infrastructure program?
Bob Mao: We hope so. But as you know, Washington push is one thing, respective state level requirements to verify the lack of the current attractiveness of desal to the environment, for example, California, that will continue to play a very important role. So, we're hopeful that this push will result in more initiatives of desal in the United States.
Pavel Molchanov: Okay. Well, the point about slowness in Washington is well taken. So, thank you very much, guys.
Bob Mao: Thank you.
Joshua Ballard: Thank you, Pavel.
Operator: Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back over to Bob Mao for closing remarks. Oh, excuse me, actually, we do have.
Bob Mao: We thank you for -- okay, go ahead. One more.
Operator: We do have one more question. It's from Wally Walker with Hannah Road. Please proceed with your question.
Unidentified Analyst: Yes, good afternoon. So the gross margin percent continues to be extremely high, extraordinary, really for manufacturing business. Assuming that your customers can also read the financial statements. Can you elaborate a little bit on what the value proposition they see and it makes them willing to accept that kind of pricing to drive 70% gross margin?
Bob Mao: Josh?
Joshua Ballard: Hey, Wally . Our product delivers incredible savings to our customers, right. So if you look at desal, and this will apply also in industrial wastewater, and we believe in refrigeration. But if you take desal as our concrete example, we deliver 60% energy savings within the RO process for our customers, which is pretty tremendous. And electricity, energy costs are the one of the highest cost, not the highest cost of an operating desal plant. In addition, our product, we like to say is near perfect or I personally like to because we sell them our product, they put it in their plant, it basically lasts for 25 years or so, basically the life of the plant. They don't have to touch it, they don't have to maintain it, they don't have to clean it, right? It just runs and runs and runs. So the lifecycle value or lifecycle cost is the lowest in the industry, over the life of our product; and that's why it's so valuable to our customers and why we can get the margins that we can. It's just tremendous value for customers. And there is no competitor out there right now who can deliver that kind of low lifecycle cost, that kind of life value that we do to our customers.
Unidentified Analyst: As a follow-up; as you grow your volume and move into adjacent markets, do you think you can sustain anything close to recurrent margins?
Joshua Ballard: Absolutely. If we can continue to create this kind of value for our customers, I see no reason why we can't have great margins in the other industries we're looking at. We believe we'll achieve similar margins in industrial wastewater, refrigeration we'll see but certainly we're going to have great margins in refrigeration as well for successful that product .
Unidentified Analyst: Yeah. Okay, good. Thanks, Josh. Congratulations guys. Great quarter.
Joshua Ballard: Thank you.
Operator: And now we've reached the end of our question-and-answer session. I would like to turn it over to -- the call back over to Bob Mao for closing remarks.
Bob Mao: Well, again, thank you for joining us today. And we're happy that we're able to report not only great desal performance but all the exciting new things we are doing which will come back to boost further the value of our company to you as investors. And we look forward to talking with you again in late July or early August at our next earnings call. Thank you. Good bye.
