Energy Recovery, Inc.
Q4 2020 Earnings Call Transcript

Published: 11 Mar 2021

[Operator:]

Greetings and welcome to Energy Recovery’s Q4 Earnings Conference Call. Please note this conference is being recorded. I would now like to turn the conference over to your host, Jim Siccardi, Vice President of Investor Relations. Thank you. You may begin.

[Jim Siccardi:]

Good afternoon, everyone and welcome to Energy Recovery’s 2020 fourth quarter and full year earnings conference call. My name is Jim Siccardi, Vice President of Investor Relations at Energy Recovery. And 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. I want to start today’s call as I did last quarter, pandemic started with the sincere hope that everyone listening and your families are safe and healthy. Although the past year has been challenging for everyone, I am happy to report that the Energy Recovery team and our business remains healthy and strong. Our goals has always been to protect the lives and livelihood of our team. We have robust testing and monitoring protocol in place for all our manufacturing sites. To our knowledge, there has been no spread of COVID-19 at our facilities. It is a testament to our team that we were able to keep everyone safe, even while producing and selling a record number of PXs. Beyond these achievements, our continued evolution as a company is exciting. We have settled into our long-term strategy, which is expanding the operating range of our pressure exchange strategy and introduced it to new industries outside of desalination. As an example, we diversified our water product offering with the introduction of our Ultra PX Energy Recovery device for use in industrial wastewater treatment. We are now partnering with a leading global membrane manufacturer, DuPont Water Solutions, to market our product in this space. We also issued our first ESG report, formalizing the focus we have always had on environmental sustainability. Our efforts around this path led to an A rating by Morgan Stanley MSCI. We know there is more we can do to be a good global corporate citizen and we will continue to update you on our ESG efforts in 2021. Finally, in recognition of our achievements, Forbes named Energy Recovery as number 16 in its list of top 100 small-cap companies and IR Magazine short-listed us for top Investor Relations department for small-cap companies. I am proud of how the team responded in 2020’s challenges. But I am not surprised. The evolution underway at Energy Recovery is what I envisioned when I have accepted the permanent role of President and CEO. We are now building off our momentum of 2020 and are positioned to deliver another great year in 2021 and beyond. In today’s call, I will update you on our base desalination business, industrial wastewater, VorTeq and our emerging incubation projects.

[Joshua Ballard:]

Thank you, Bob. The dynamics in our revenue that I described last quarter, with mega projects leading growth in OEM and aftermarket showing weakness, played out through the end of the year as expected. Mega project sales grew 75% in 2020, while OEM and aftermarket ended the year having decreased 31% and 18% respectively. As I mentioned last quarter, the weakness in the OEM and aftermarket channels was entirely due to the impacts of COVID-19, which especially affected our travel and hospitality markets.

[Operator:]

Our first question comes from the line of Jason Bandel with Evercore ISI. Please proceed with your question.

[Jason Bandel:]

Thanks. Hello, Bob, Joshua and Jim. My first question, can you talk more about your partnership with DuPont? How has the partnership formed? How do you see yourself going about marketing your combined expertise to customers? And are there other opportunities to partner in your wastewater initiatives to drive faster adoption?

[Bob Mao:]

Okay, thank you. The partnership is this it takes two to do a dance. You need a PX that can place higher pressures, but you also need a membrane that can withstand this higher pressure. So we come up with the ultra-high pressure PX and DuPont comes up with the next-generation membranes. So it’s a natural team. So, we do – we did join a webinar yesterday, and we will do more co-marketing everywhere that we can do. And we would also share our pipeline.

[Jason Bandel:]

Got it. Okay. And then on the water side of the business, it sounds like you reiterated your growth targets for ‘21 and ‘22. Where do you see potential upside in ‘21 for water growth? I know Josh had talked about in his comments that OEM and aftermarket just at least stopped its decline. As the world starts to open up, do you see opportunities in OEM channel for growth? And I guess further to that point, we’ve seen many stimulus plans announced of course over the globe. Have you seen any that actually addressed water infrastructure that could possibly add to your underlying positive growth trends?

[Bob Mao:]

Josh?

[Joshua Ballard:]

Sure. So we are seeing – I mean, we’re unsure what will happen this year, obviously, due to COVID, how the OEM and aftermarkets will play out. We are seeing a stronger resurgence of aftermarket currently. So we think we’ve got some good potential to claw that back to more 2019 levels or so. OEM is a little less certain. We don’t think it’s going to fall anymore by any means, whether to grow or not is up to question for sure. And what was the second half of your question?

[Jason Bandel:]

Yes. The second part was the – we’ve seen many stimulus plans actually be announced globally over the past year. Have you seen any specifically address water infrastructure?

[Joshua Ballard:]

Yes. I don’t think we’ve seen anything that specifically touches our business globally that I’m aware of at any right. I mean, with the exception of the fact that when you look at the large mega projects, obviously, those are being supported regardless of any of the economic downturns that may be occurring. Water is needed, and those projects are moving ahead as they were planned for the most part.

[Jason Bandel:]

Yes. Makes sense. And then my last question I guess, for Josh, why do you feel like the timing is right here to start the share repurchase program? And I know you touched on it a little bit, but do you see yourself likely to use the authorization opportunistically all at once or maybe more likely over time? And maybe I missed this but is there an expiration for the authorization?

[Joshua Ballard:]

There is no expiration. We’ll do this over time. And the reason why we’re doing it today is because we see more certainty in our cash flows than we have in prior years, right. We have got a better sense of where we are headed. We are coming out of COVID. And so we’re more comfortable making this kind of commitment. And with a share buyback, we can manage through our day-to-day cash flow, right. So we are not – we can kind of handle that over the coming period if that makes sense.

[Jason Bandel:]

Great, thanks for the help. I will turn it back.

[Operator:]

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

[Pavel Molchanov:]

Thanks for taking the question and congrats on the live well deployment. You talked throughout last year about making a final decision on VorTeq by the middle of 2021, so 3 months from now. Is that still the timetable that you are working towards in terms of yes or no on commercialization?

[Bob Mao:]

Yes. And we’ll give you much more clarity in 8 weeks at the next earnings call. Yes, we absolutely stick to that time line.

[Pavel Molchanov:]

Okay. That’s clear. The timing of this first well deployment in early March, was that related at all to the recovery in the oil market that we have seen in the last 60 days or so?

[Bob Mao:]

Not really, no.

[Pavel Molchanov:]

So what drove the timing?

[Bob Mao:]

The timing, you remember, a year ago, March, we were literally on a pad and hours from oil flow. And yes, market change stopped that. And in April, we did that again. But what we have learned, maybe the most difficult part of introducing a technology is to get somebody willing to try in the live well where they are pumping real commercial oil. And that has proven to be more difficult than we thought. But as we continue to work at it, continue to connect with customers, it finally clicked. So that’s the story.

[Pavel Molchanov:]

Understood. And finally, when you talked about renaming the oil and gas segment to emerging technologies, should we assume that there will be other products, other adjacent industries included within that, not just oil and gas, in other words?

[Bob Mao:]

Well, actually, even in today’s call, we said in the emerging technology include the ultra-high pressure PX for water – wastewater treatment although financially we would report that as part of the water revenue. And we also talked about the new ability, we have proven that PX can push gas, and that opens up a lot of new markets and the first of which we are addressing is refrigeration market. They all come under the emerging technology. Of course, over time, when any one of the emerging technologies grow and into substantial revenue, we would separate out as another business unit to report. And hopefully, we have more emerging technology applications to take the place of the graduations, if you will.

[Pavel Molchanov:]

Understood. Thank you very much.

[Operator:]

Our next question comes from the line of Nils Thommesen with Fearnley Securities. Please proceed with your question.

[Nils Thommesen:]

Good afternoon, gentlemen. I have a question on the DuPont partnership. You previously highlighted the total addressable market of $100 million in China and India. I was just wondering if this partnership has since highlighted some other markets outside of this or are these the markets you plan to approach together with DuPont now?

[Bob Mao:]

We – together, in fact, we are learning this market, as we just reported that the industrial wastewater market is emerging, evolving, partly driven by regulations, which basically forbid people to dump dirty water and damage the environment. So what we have said previously is we identified $100 million onetime market. It was just one of the initial subverticals within that vertical, if you will. But as I mentioned in my any projects now that waste industrial water actually covers from metals mining, to textile to tanning that’s measure from and etcetera. And we continue to identify, to measure this market. For example, our first order from India was in the chemical industry and our first order from China was in the natural gas industry. So we don’t have a lot of data on how large this market is. And why we pushed to pick China and India is at the moment, the regulations are tightest in China and India, but we expect the rest of the world to follow.

[Nils Thommesen:]

Okay, great. And then just another question, on the last quarterly call, you mentioned some progress on your zero mix PX. Is this any way related to the PX you can apply for gas purposes or is this a different vertical?

[Bob Mao:]

Zero mix is not a vertical. Zero mix is enlarging the sandbox we can play in, where you must not have liquid seeping back and forth. And we will have new vertical applications as your mixing technology is complete. But for the moment, you know.

[Nils Thommesen:]

Okay, great. Thank you.

[Bob Mao:]

Although I’ve said it, pushing gas is also enlarging the sandbox, which we said it covers many sectors, but refrigeration and air conditioning are the initial new verticals that we can now address.

[Operator:]

And our next question comes from the line of Tom Curran with B. Riley Securities. Please proceed with your question.

[Tom Curran:]

Hi, Bob. A few follow-ups on the VorTeq. First, is this multi-well pad where you are currently utilizing the VorTeq with one of the biggest independent oil producers, it sounds like it’s in the New Mexico side of the Delaware. Is it with Liberty?

[Bob Mao:]

Yes.

[Tom Curran:]

And then are you counting this as the first of the 2 to 3 live well fracs or the second? And do you already have the next one lined up? And if you do, is there anything about the outcome of this current job that will be determined if and when the next one moves forward?

[Bob Mao:]

Actually, we can’t just the New Mexico one as second. But as I mentioned, it is a multi-well pad. In fact, we move from pad to pad, and we expect to go by the time we finish maybe 50 to 100 stages. So that in itself is a multi life brand. We’re not staying on one on top of one fold and continue to pump. By the way, as of the end of day yesterday, we have done 25 stages. So in a way, we are fortunate with the tremendous interest shown by this largest independent oil producer that we are actually on motive fact, if you will.

[Tom Curran:]

Great. And then does the key technical challenge when it comes to getting the cartridge durability and lifespan to where you need it to be, does it remain – the total volume of frac sand that the cartridge can process before it needs to be repaired or replaced? And to the extent that does remain the defining technical issue, could you give us a rough estimate of how far along you think you are to solving, are you 50% of the way, 75%?

[Bob Mao:]

Actually, this is a new technology. So in some ways time until you – when you get into something entirely new, it’s not just for new for us, for our suppliers. Until you finish, you don’t know what is 100%. So it’s hard for me to say it’s 30% or 50%. We may be literally at 95%, but when you don’t finish that 5%, you could be just as well at 5% as 95% to go. But in 8 weeks, I can give you much more clarity. The cartridge life is the most important part of our costs. As I mentioned before, what is needed is to have validation on the value proposition, that is what the savings, not only savings, but the improvement in – on frac safeties, etcetera. That is what I call X but then what is the cost for us to provide the equipment as well as the service to allow the VorTeq to be part of the frac, that is why and X minus Y equal to Z that is the net contribution. And that we will give you a much better report in 8 weeks from now.

[Tom Curran:]

Understood. It makes sense. Thanks for doing the best you can as of now with those questions.

[Bob Mao:]

Thank you.

[Operator:]

And with that, we reached the end of our question-and-answer session. And I would like to turn the call back over to Mr. Ballard for any closing comments.

[Joshua Ballard:]

Everyone thank you for joining us today. If helpful, you can find our prepared remarks on our Investor Relations website, and we look forward to speaking with you in 8 weeks’ time. Thank you.

[Operator:]

This concludes today’s teleconference. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.