ERII - Earnings call transcript Q1 2018

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Operator

Greetings and welcome to Energy Recovery First Quarter 2018 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Emily Smith, Vice President of Marketing. Thank you. Please begin.

Emily Smith

welcome quarter Recovery's of and for conference everyone, first the XXXX. afternoon, to earnings Energy call Good My name Executive is the and as I’m Emily as Board Smith, Vice with well President President HP our Michelet. and Chairman Chief our Officer, Gannon; here Chris of of Marketing,

the may During we future financial Reform Litigation Act projections business, XXXX ability regarding may and the outlook, to and expectations, performance, These market achieve and under agreement, structure strategy. future forward-looking under statements cost their new Company. Securities business licensing today's discuss commercialization including Safe the economic our system, Harbor of the Private or the products and the call, Company's events milestones performance VorTeq the MTeq growth the provisions make and other contained statements in of

Forward-looking on statements on to management's projections. us assumptions, available and currently estimates, or are beliefs, information based

during intent statements any in or or contained Company X, obligation call May by our unless law. future only update risks, documents factors. are not results reflect SEC, from this those Forward-looking otherwise as today, and to or These disclaims actual subject Form performance specifically are files circumstances, this the Company's materially factors forward-looking the refer to made forward-looking statements. differ certain to time We Form important could time projections call Company's that from All guarantees during of made subsequent with statements documents the XX-Q. made and required to to cause the other statements and you are XXXX, expressly events of XX-K uncertainties any identify and to

measures non-GAAP some references call. In addition we to during financial this make will

of today over to results. release will company's the includes turn call find GAAP data to to comparable the Chairman which the newswires earlier reconciliations Board, At supplemental SEC was HP released I the this Michelet. You the earnings the of measures our and furnished to non-GAAP yesterday will press in which point,

Hans Peter Michelet

you, Michelet, President us pleasure you and Good Energy Officer. Gannon of for Chief is name appointment of HP I and Emily. distinct and the have of the afternoon the announcing Chairman joining Chris Thank of a I Board as thank Executive am Recovery. today. My the

Chris Chris Recovery's The In and Officer. extensive Executive to our customers has a goals concluded I our will the an and become his we conducted energize instrumental is the inspire our would attributes his yours. time has business will of and Chief continued set introduce growth for Company's the his Board the new believe is Board this central Chris the company's Chris, the employees, throughout and shareholders. Chris to that Directors and Chris that transition, executive multiple broad I oil our of leadership during are Throughout and company and to demonstrated Gannon. search industries At lead success. floor including his acumen forward. especially as tenure the long-term lead, addition are best We ourselves. gas very been confidence and like the join perfect and in and this best of Energy he Board able the is we've Chris that development strategy for of under in Directors. Energy believe represents company Board's the has time ability be execution to the realize confident our culture to the Chris many leadership to Recovery

Chris Gannon

Recovery's XXXX you Energy thank Thank me and everyone earnings joining for first HP, call. for you, quarter

Energy excited me Board. well honored humbled to to Board as of to a commercial begin we thank this Recovery, opportunity and truly as financial and as a Recovery shareholders, ahead. Energy the I Before the of our of look opportunities women to Officer hold of company's member Board's I and strategic executing company me our this moment appointing like Once the of and with take the and and that for time our President an many the for the I’d to the reiterate by Chief I key again, update, forward and as with strategic, welcoming to the talents against the lead collaborate like I’d is responsibility. It exciting stewardship am Executive initiatives. with men upmost lie

of a will I our began Now with brief results. discussion financial

gross which XX, first total gross margin the with of March highest million represents history. this generated product $XX.X and in XX% of gross of quarter margin we product the margin ended revenue XX% total For and XXXX total company's

income related net was to our XXX,XXX CEO when per transition, income for share. expenses an $X.XX Additionally, or adjusted of nonrecurring adjusted

the Our the through an generated for With efforts we’re margin of XX%, position of activity Water as desalination, OEM aftermarket team, the growth well XXX manufacturing of points quarter, our for product $XX our business the the segment of X% XXXX. income segment to of Through thereby performance margin of Water quarter increase continued efficiencies, representing our able remains strategic underscores within value business. compared robust quarter offsetting further of Furthermore, of favorable revenue Water higher XX% operating first and strength drive first gross this mega-project the as year-over-year. Water as of reinforces key an basis to the quarter. during as with million global well mix, shipments total lower as the a product pricing

Now segment. turning and oil to gas our

ASC revenue which This the impact revenue of in standard million generated in of total the financials, and year-over-year. Form SEC The filed The revenue quarter partly today. of XXX oil resulted in a of with associated VorTeq revenue of was our decline $X with of business decline accounting XXXX, of gas completion is our was $X.X to which million standard. of adoption resulted detailed for of or first new IsoBoost earlier XX% in XX-Q project higher this historical new are percentage offset shift the reduction from Our QX. the accounting the recognition recognition restatement scheduled our which adoption by the license

update. our Water strategic are; business, We now our which near growth term VorTeq Moving the system. the on in reinvestment system, our continued goals of strategic the the focused and commercial remain MTeq three, two, and further one, development the of commercialization to and

the worldwide. capital to which discussing which years Growth to due a Let's the to of our our representing Revenue cycles years. our grown had Water in $XX three six is over $XX in area focus XX% begin discussed CAGR XXXX forward. dramatic In million key growth cyclicality four we of XXXX from Water period. and in company year of predominantly moving business the past business the healthy business run for has is past, several remains Water and historically projects in the funding by extremely over of been a has million

this greater technology We brand limit with as industry professionals respect with of within announced are built we yet which commands to of Pumpen. We takeaway starting in and mega-projects point based had level relationship no We $XX witnessed Duchting's XXXX. tireless been existing projects efforts all are a currently strategic are recent pump will of meetings a offerings upcycle additional slowing. facts confidence history. than was in of fruit of peers award flagship with these have I another cubic we many on and per These package. the upon of ship common our of Water and together Pressure globe. that customers awards respect through see high awards the well. intend our Water Saudi the share strong helm and PX our has taking which an key we year Recovery, production. over projects led the like Energy Duchting and those to for in meters our believe has an Water line the That circumstances, day year build pairs bear from throughout through the market to at our a evidence and our alliance investments million that potable Water for the through and standing provide This The expected year in is and pleasure Since the $XX other the into of meeting as comprehensive with successful to of million announced XXXX sight amidst fourth our dominant Arabia be this partnerships with XX,XXX in XXXX recently Exchanger

but product further other internal more these as grow Our to and end, are from content included business well opportunities shareholders abound our solutions further avenues brand. rather we we team core look scope integrated Customers by will fully explore well calls offering. here as business, call to investments. remained but have our strong across To answer both as for desalination I we continually which business move current as to Opportunities the and partnerships, well foundation SWR strategic I supply, Water in Water that acquisitions applications. product growth as expanding to refinement, our product our for updating is limited challenged forward opportunistic view will our we this not within to Water forward. our explore as of development, as

commercialization. by our technology of to business. an oil now objective I Turning our to the solution update VorTeq the and gas driving providing begin will on and near-term

last this engineering tungsten steadfast success. long-term focus has and I is remain also milestone more the provided product on having Nothing our focus. steps facility. towards upcoming possible product call, on the around harder-grade an in and update track We carbide stated the components and here for our our licensee received commercialization I California our commercialization During remains changed with specifically testing. best around

to as to to These recent further the once proceed As are currently performing include processes they steps series MX. tungsten expected those of harder-grade test received are our a are prior on transformed Based and underway. through being providing components as side. components approach confidence machining, carbide tests, testing reminder, we additional packaging a

completed our and in of changes system the as VorTeq design previously discussed now. and of are specific we addition, announced the to field design implementing test overall process In optimization

design the logistical believe currently feel licensee of us conduct required remain clear, control equipment to be once the on track well again we Let to and that I it of items testing. to certain completion we that MX, is namely are to technical me as as prudent facility shareholders there related the outside our our review for securing remind attempt matters while the is product with test underway, milestone

enhancements timing. to design product could or VorTeq design completion Following that the which may of extend review, it request is the our changes possible licensee

Regarding the and availability the are facility. the product process matter, equipment of logistical with licensee in for our required both test we converting the

required anticipate we are schedule we ready from around resources will review. refrain to stay design will upcoming we milestone any these let Due providing are addition, the if timing I to uncertainties that uncertainties, conduct and In discrete finalized these once rather milestone me following the be secure test believe of to we completion testing resolved.

that more is ever and our pace confident or rapidly other rapid to companies Services, our We American partner Liberty next tremendous to ever transformative our and VorTeq partner. a over am confident produce report of many North disruptive drive are exists the changing test than our to or that as commercialization. stage VorTeq VorTeq partner, I'm is and flow now the next pumps to passing improvements, the to possibly hydraulic pressures with we the focus of year. further move increasing completion to on pleased value I the quarters. even Recovery mitigate quicker the technology recent continued in sand the will and a Due technology market continual months. had Liberty again, technology. can viable, constructive help at team quickly discussions degradation than Turning more provide Energy high fracturing I that through will equipment. through several potential volume rates. Oilfield state progress early product will within unit successful two that And frac The remain field updates the having at in I the have Once

more finalizing Moving now in solution, test changes the the mud for we your system our MTeq process design are previously pumping completion of exhaust site the the and near of to the testing. announced in of to are

Most ways. what last this discussed while can test varies to that the and in something locations rates, that perspective loop many VorTeq system is drilling flows we impossible MTeq from means compositions considerably system. testing As from the closed our VorTeq it as a with indicative importantly a the seen is material do MTeq yard at being a the in quarter, field in

with overall Board to partners and you more of technology I company to turn will with I’ll validation. with with questions. parallel, this I drilling anticipate of We During will to be update oil operational anticipate OEM timeline care We testing yard the space field to a an industrial thanks forward oil following shareholders. dispatched expedite fulsome occur North support year. the a to Directors I testing optionality. test the to internal basin engage our you this hands. operation to the a yard. look dialogue and Recovery In the as field opportunity will entrusting the the testing, potential unit MTeq later that, my represent licensing discussions in across to for This long-term validity me these both which stewardship system the like reiterate year the demonstrate and manage or progresses. to over best will in Energy the providing with resume would for partners season, from to the increase American company or With in testing we of In in continue will with closing, the potential engineers call for

Operator

comes Joe One. Gibney proceed. Our Please line Capital the with Instructions] [Operator of first question from

Joe Gibney

the Chris the congratulations removal Interim of on designation.

water curious you rising sort a referenced page, flows presence pretty to R&D has business? so on your laid or open talked on been we as terms really here the a there business, on Water, layout talked am Just just it’s packing an I open or top just initiatives the China mega lot guys the process you of to of stout. relative been on internal initiatives out reinvestment dominant acquisitions order to team book some inbound wanted is about those partnerships is there you just R&D maybe out you can there about book, do curious open you of start your expand this curious in in your just putting order on what you in certainly that have landscape pollution grow here your works, side this so of the

Chris Gannon

osmosis growth expanding we Look we’re where more there seawater really products across can offer existing our I at Water. desalination the opportunity see the distribution strategy front tremendous reverse of end a of in amount our through market channel.

then currently technology improve additional better products even So offer, adding for technology. mean there what that our as to opportunities existing well would and we is offer us as

we've success there in nice and organic or partnerships And I our an some partnerships look enhancements really And an about like Duchting it when then I or Water, think product believe so then even new growth inorganic on continue. and that or product strategic at standpoint, both we development from namely which them seen will other standpoint early with investments acquisition.

would end initiative. So front everything you is we’re tell the on but at the that pursuing table, of I really

Joe Gibney

new and repurchases your gas Q. questions. tuned And here some respect lack of timing. just one the have continued update modeling we’ll to stay a related oil just one of rate and couple licensing VorTeq actually on in in and G&A of XQ, had I discrete another appreciate adoption the the here was you curious referenced Curious standard quick month on and certain

be there licensing flow Thanks. the understand on items through the to flow modeling and line through? trying Just G&A those and we should

Chris Gannon

that’s talk revenue, let’s the so about easiest. probably Sure, licensing

it’s a essentially there's use to a just So what frankly. would and But basis what what as you related this do kind that until see if quarter all reported and modeling run clarity I million future lot out for you for in up more the I the we perspective of for XX used the would you’ll in will. quarters Q

we on continue to grow advance continue VorTeq R&D both our activities, MTeq. to of of terms and/or and In to are to R&D spend going

uptick to that also and going you’re a activities our So to as slight in Water our to well. see related see going business you’re

year XX% for call range mentioned somewhere and still activities it XX% be would that I related end increasing R&D last the number. that in by we in call, to spending believe I reasonable believe that’s our I So a

Joe Gibney

helpful. Chris. Thank you. appreciate Okay, I

Chris Gannon

apologize. didn’t I question Yes, I answer the buyback

In quarter. terms that we’ll continuing to over in to fully buy shares complete share I this do of the that yes and buyback, buyback back. intend entirety its we’re

Operator

of proceed. Please Our next Tom question Riley. the with comes from line Curran B.

Tom Curran

shortly of and it a upon CEO after from a echo they they color as wanted to nature expound the let you ones with what understand, you of wish congratulate Joe's your Chris comment changes appointment on decision team back Interim the I VorTeq, please modifications the could the presume engineering bit you to the referred that them? Board I had, turning me that sort to you Chris, and then list Are come official to these are on you design enhancements like changes make. and some to and design the congratulations. share had of could make

Chris Gannon

system. minor are call Sure, modification the would so these to really I what

others. that’s to within think the and a key system. related I flow you all the it’s takeaway for And

So that of you flow would and look a at were would site, going lot through see you a balance those to if you a see systems. on typical frac missile

and not exchangers meaning we And balance so were seeing flow rate. system the were same the some VorTeq flow seeing all in of pressure our

so anomaly And will. on if you focused fixing that were we

were looking terms we so parts call. at primarily in all very, these off And testing last simple what implement. are that is the to in And the what the and they mentioned of when - various that conducting I are in shelf we very did implementing

Tom Curran

And design you X-K? plan with its update provide us to review review, outcome disclose the Schlumberger the complete an via design then technical press once technical to either an release do does of or

Chris Gannon

along that the go with we’ll next not our Obviously meeting we’re then hope we No, I steering to at my continue steps. through don’t. that future point committee licensee distant really path and product too determine some the over review complete the will process is will going The which design quickly. a have

Tom Curran

are the expecting somewhere so return then Are of and to matters will test the same required secure facility moving potentially had one. question to facility. if you comes When implying another to and equipment MX? you’re test and crew location else frac conditions you that how simply test line setup to the the the on need going in you to milestone to up or logistical for be it Schlumberger referring Last remainder the change that the and

Chris Gannon

for Great question and confusion. that sorry

look very, are up right now very So they’re hard. if oil working you crews and at prices

the it’s of we terms So to going scheduling, in back really issue be would same testing facility. timing

Operator

of question next line proceed. the comes Securities. from Osha JMP Our with Please Joseph

Joseph Osha

your that - I you about and correct? licensing at is I the is there which at get At least $X.X four I by basically that licensing any conclusion all. look divide X.X restated the which revenue On revenue the IsoBoost Q revenues if million that if suggested am reported its I meaningful, what not wasn't

Chris Gannon

And on exactly our That's of percentage negotiations a as anticipated. customer, project because quickly recognizing on correct. completion be of just recognizing with that end we we’re to didn't we’re of as we that a it clear completion percentage completion advance

in and intend revenue more also we ship we'll So it recognize QX in QX. to

Joseph Osha

be rate? request And realization at then alluded your in this albeit you VorTeq this new the of as linear higher licensing will

Chris Gannon

I a essentially reasonable estimate. a model that’s It based can million and vary, year correct. XX that’s a it’s mean XX does to you cost driver. Yes, million on basically

to of guidance. but revenue the nature the So very unfortunately completion similar that’s percentage of new

Joseph Osha

VorTeq IsoBoost? that not even applies And to to

Chris Gannon

the XXX we under ASC to license that's - really million actually standpoint XX million why look That’s yes per $XX we’re call from a elevate that at basis. year so accelerating seeing we a a It’s exactly it recognizing P&L year. million anymore it X or million, to to on are you're and not it $XX correct, not when the

Joseph Osha

could want terms you saying have on comfort do put year And business revenue see marker there? this Water, out we to in you then with perhaps grow secondly that that some any

Chris Gannon

where projects very the number. to based what move at X% X% think basically look MPD rate today. business is not. orders susceptible orders on I X% and where from on those right, actually and business a historically Things Joe I have always sit those quarter-to-quarter those today Water or the can X% now, I that those when in a to movement is reasonable move, of large I based so But based information have sit on Yes, I reasonable the projects right we’re very,

Joseph Osha

would at a you’re that So the run to decent point over imply this get QX rate? some year bounce that going off

Chris Gannon

if some its it projects past as see on orders QX in healthy Absolutely. sometimes just MPD quarter accelerate And again you’ve very, around the those unpredictable. and we move heavy the seen and it’s can very somewhat very in depends then

Joseph Osha

question on as last then this TPI from me, ask And well. I

year when You’re as going to restatement we XXXX, so restatements of the or should kind XXX will is QX you see what that over XXX the provide out roll expect? do for the quarter-by-quarter QX you course Q, the of

Chris Gannon

Yes, exactly.

Operator

from comes question B. of Curran line next proceed. Our the with Tom Please Riley.

Tom Curran

aftermarket your Water would with you OEM and MPD, Chris provide traditional breakdown for between us XQ? for

Chris Gannon

this aftermarket. was have - OEM XX%, always ready it the XX% roughly now, MPD was so was I remainder and for you is so

Tom Curran

constraints And would of of and then one forward is for contractually back and engineering would in anything to it there moving option your for an Liberty you prevent the if different is turning one that VorTeq, terms would that capacity one with VorTeq, consider? two be technical from you versions potentially Schlumberger

Chris Gannon

So are is and needed limitation if contractual there. to Once hit Liberty. for be milestone system go may for right we we we’re one. then changes What is milestone system any order a changes back we one, evaluate now will what to there the then waiting there no to would

in that’s we that really the timing put hurdle in place. And so the

Tom Curran

with And sort plan once all us only it of completed related announcement around outcome? of official do next the or been expect just clear next some and you've there's some to to decisive clear it, once public update sort we’re here you to disclosure MX, you've resumed

Chris Gannon

a schedule we’ll that so I out and make really to did, obviously do that at I result that will we see. My time. what yell would just call want likely is determination

Operator

to time. hand Gannon are for remarks. in this further questions Thank the over I'd you. There to back floor no closing at Mr. queue like

Chris Gannon

everyone. well right, thank you All

our we have your and of just you an next me this a Let the that great call. to and rest say appreciate look I day. providing afternoon, on Thank forward update you call joining

Operator

concludes This you. today's teleconference. Thank

at this participation. lines thank your time. disconnect And you your for may You

Energy Recovery (ERII) 3 May 182018 Q1 Earnings call transcript