ERII - Earnings call transcript Q2 2019

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Operator

Greetings and welcome to the Energy Recovery Second Quarter Earnings Call. [Operator Instructions].

As a reminder, this conference being recorded.

I would now like to turn the conference over to our host, James Siccardi, Vice President of Investor Relations.

You may begin.

James Siccardi

welcome quarter Recovery's of and for conference everyone, second the XXXX. afternoon, to earnings Energy call Good My name with is Relations Chief at Jim Officer, Siccardi, Vice Recovery, Executive I'm President and here today Mr. our and Energy President of Investor Mr. our Officer, Chris Gannon; Financial and Chief Joshua Ballard.

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

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

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

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

the today. release SEC GAAP the released results. in data and news press of measures includes was supplemental which reconciliations earlier release furnished to non-GAAP to to the find company's earnings comparable wires will press the The You

Officer, Chief this Josh, to like Joshua yours. the I'd Financial to call is At our point floor Ballard. turn over the

Joshua Ballard

afternoon, Jim, everyone. good and Thanks,

Energy $XX.X revenues for half year-over-year. total of strong over ending achieved was first growth revenue XX% quarter XX% XX June Recovery. The $XX.X of We million, million, another XXXX. one have second growth we of the representing generated Year-to-date,

growth quarter. gross margin overall the a line of for gross top XX% an of margin translated XX% Our and product into

continued strength gross from tariffs cost Our show downward other despite to and pressures margin increases.

reported income share. the million we net addition, for diluted of or $X.X In GAAP quarter per $X.XX

Our Water year. increase representing And XX% revenue quarter, year-to-date, the of growth have revenues business $XX.X period generated same achieved million in the of XX%. second million, we last $XX.X during a over

XX% we last was As X increase I slowdown months first this mentioned of the saw growth the in quarter, substantial the year from in expected.

Our to compared quarter, full remain low-teens grow same high to fiscal last by year year-end the basis year on expectations a revenue XXXX. as percentage as to the forecasted as

quarter, for second a of & license $X.X total increase Gas year, period revenue the to revenue. of generated Oil million the same Our X% XXX last VorTeq recognition related over all business ASC

Gas businesses. $XX.X in Overall, related for year-to-date. and both Oil in R&D operating XX% year-on-year increased largely quarter in the have & and grew was spend XX% expenditures growth to the to This Water investments million

operating to XX% throughout last will XX% spend higher you expenditures we our in XXXX discussed As to of for quarter, overall push expect year. R&D the continue roughly should and operating increases expenditures

June our $X flow from operating million the first million cumulative through expected, positive to cash quarter cash the XX As a the improved operating breakeven. in to our flow negative $X bringing in second,

timing of receipts. the related of and cash typical past line Ultimately, volatility up shipments operating flow on to our due to years flow upcoming the roughly few will our and our expect depend cash year-end customer quarterly by We final year-end. in results end with the

operations as to $X.X a increase related our our and large Gas the reflects as build-out it's We spend over CapEx million XXXX well expended testing CapEx. capacity largely a of on Water total Oil for This business. &

Our $XX.X We debt-free. on the to first cash at quarter cash million end $XX.X position of XX. increased and balance remain June from on million the securities and a strong

to hand CEO, With President Chris it that, Gannon. our over and I will

Chris Gannon

and everyone, Thank you, for joining thank us Josh, you, today.

overview I past, the will in begin with As a objectives. near-term our of brief strategic

in business, and we on First, our are reinvestment. growth focused Water

both Gas Second, progress very are in with our commercialization. Oil pleased & focused business, on our VorTeq we I am in areas.

with I business. will begin Water our now

next experienced against this saw strong you results, our The robust just extended anticipated execute As further Today, pipeline. once now than mega-project population that continue may increased growth namely growth, growing to the we and driven see Macro industrialization, and we and years. X ago, change by believe space. X growth capital demand that to climate again few needs a our urbanization, water has the we quarter are financial we from rapid was a cycle backlog growth investment increased contributing scarcity, the years to driving continue in all over agricultural desalination. trends

tangible projects awarded being at as a is rate. rapid The excitement industry are in the

side, to seeing supply proactively reaching secure we the are project quickly supply are accelerating. occurring time out is financing Project lines On sources. and customers more

last addition, investment maintain supply. water to layer provide conversions existing highlighted additional simply thermal quarter an occurring In plant capital of incremental

supply next desal fact, data is over water meters cubic more will three and the commissioned than years. commissioned capacity cubic In meters million be XXXX. between more daily over projects of million twice This XX than XXXX daily water of XX the volume

supply our these demand surrounding Water trends together, base continue to drive and optimism business. Taken our

Middle for and strong many see have the concentrated years. presence in East Take water discussing for much other of While to beginning regions scarcity. where also signs increased I India a activity capital example, had investment in we is been we've are Africa, experiencing of the

be is recent the water than to over water to twice massive to million new, By an more are of available suffering country's water by headlines droughts. found and growing XXXX population India A not XX% that report Although expected of issues supply. people. crisis. recently government from India's tank people high X.X extreme for made are think the That's India's India water shortages due projected billion XXXX, demand Indian in their XXX

needs. countries infrastructure next to water investments why Quite and India to to like the address relevant So are Energy water dire substantial believe will centralize taken of investors? into Prime make leadership to the ministry by decision-making over Under we water Modi, a of consolidating its single has our the India waterpower. ministries Recovery initial simply, steps need various Minister India decade the

proper is Other multipart Desalination water can rainwater their of strategy economies water wastewater a to treatment, of methods others. and infrastructure, scarcity and rationing component one variable address other water-starved water capture, India pricing existing issues. utilize maintenance include among

for of scarcity, and India we Given Recovery. that the other be new countries Energy expected demand current many will believe water potential and areas

already In plan sizable India for investment desalination in XXXX. we seeing are fact, beginning

to Owing in to and have our project backlog infrastructure. our trends and water scarcity water the we we the seeing decision pipeline, made are invest strong

fact, phase first we completing capacity are of expansion our In right the now.

will around The for we'll second we this At year. time fully customer years. enough capacity at next phase have believe online X least is this next that capacity underway anticipate be and demand the we also point, meet to

summary, that at this a want historic I to large. industry business In period is stress Water for and our our

coming, we for on Our to unprecedented we've capitalize proactive well-positioned teams and are demand measures taken this saw to it be growth. ready this trend

concept. billions its water so world I It's abstract of of is company challenges be part it's that's helping to am scarcity head-on. it's proud meet here, people. scarcity a not Water real an and affecting the

VorTeq, out organization where Gas, Houston preparing and commercialization focus to our the building remains of turn let's commercialization Oil our Now and operations for & beyond. the the

We of make progress advancement to technology. material the continue in VorTeq our

the a science basic have moved of past reminder, VorTeq. As we testing the

handle with technology VorTeq today center site. that can We how interacts spread. reliable, on around challenges the a conditions the Our must a sometimes the unpredictable provide complete repeatable system frac frac

have ways We that year control solved significant run-time ago were the system as fluid a symmetrical in controlled is many We access uncovered to moving not system-related possible and representative the such ensuring at scale. in flow now issues a manner.

to procedures operating point baseline a technology parameters critical established we and as build environment. us have production we addition, for this that reference prepare a of allow In

as must the solving prior commercialization. design be I we comments frequently complex last scale, many reiterate more technical to of for addressed year commercialization. addressed less largely in representative as enhancements becoming the restate identified to nature we we at To prior my have quarters, still but that challenges necessary test are are want from system-level

top priority, our know technology we only a that launch first our of the successful remains step. is commercialization While

when preparing are also to time manufacturing internal the comes. technology We own includes infrastructure. the our overall chain robust the human This organization developing infrastructure, our supply appropriate rollout a smooth resources and support and testing of a and

Center. design our of second Commercial Development completed Houston-based During quarter, the the we

As a will operations. and become R&D house our Gas center Oil reminder, TX and certain our testing manufacturing, & the functions of facility will

the under now by year. Our finish our of construction facility the goal and is is to end

carbide tungsten have inspect advanced equipment We testing procured components commercialization. support machine, test necessary and to and to precision the already

working suppliers continue capacity for to to full-scale In and technology our to partners our and level Of issues supply expand we to prevent time lead base multiple key advance system commercialize identify potential VorTeq to once bottlenecks, are issues and tungsten with the constraints components. carbide we manage addition, we include note, production.

key up Oil area. our relocated team of we ramp As operations, our members have Gas to Texas-based Houston & the

and further continue allow a field us week. X to multiple expand personnel, hire including engineers We to maintenance testing technicians, shifts to operations operations to our experienced days and

as can We as our and so begin is and California training we hiring personnel also machinists at operations our manufacturing them other are headquarters ready. facility soon manufacturing

advance the to technology commercialization, work that doesn't VorTeq we short, our we towards In continue stop while know there.

itself. complexity to proactive in the our diminish face progress in interaction the related technology. with our site. our challenges not sometimes with reliable, the and We around pace. continue the during commercialization unpredictable of prepare it, past the XX the confidence to Our now VorTeq progress a equipment team has are on more made we with system efforts again, current frac repeatable underscore for conditions handle months to Once a extremely by and am encouraged our that technology core frac the provide the of can I proud must

great In commercialization. in closing, performance second saw quarter our as material as Water well towards VorTeq the progress business

business position and our is time to segments a at in infrastructure Recovery. our This Our throughout fantastic us long-term for Energy will I strong, believe remains be success. investment outlook across both company

And your questions. look I to forward taking

Operator

[Operator Instructions].

Urban question Our comes from with Mike first Global. Seaport

Michael Urban

or How working that VorTeq that incentives or it's on but for it? those commercialization, do you give much folks focused it whether approach however there. in you internally, are to want and or on milestones think out around So internally the guidance I terms still frame are the have realize you about targets of that don't you to want do really

Chris Gannon

for Sure. Thanks the question, Mike.

If made material year-end, before MX at can whether I progress year advancing quarters, really over demonstrate somewhere else. in confidence said me facility requirements VorTeq. This that's the what the of in we look gives last technical we past you the or

the around site, test look at and really at you simulate clock facility, it when enables to key a So Houston which really us. frac and representative our is scope us scale for

supply our We out I manufacturing, which personnel, further our that are overall in on building right, the confidence infrastructure, our technology. chain also and hope our underscores including

But tremendous positive created made bottom to our the our analyzed VorTeq for against progress are in and last year, we a we include executing development plan efforts that, plan. We've and them. line, doing

I'm I'm today. are So feel -- And extremely we I listen, today. very where we're pleased at good where

Michael Urban

targeting And that? think commercialization, preparing capacity mentioned you do to I helpful. How what very organization manufacturing, point be you what things scaling you rollout the to smooth sure? That's of scale a how commercialization that Okay. terms to kind -- for how like are least and you're you in that that. at your mean at of about you are

Chris Gannon

Yes. Sure.

capacity it then break really I'll so on our internal suppliers forth. into and and our So down

think you now. we're putting That's when the in about focused demand. on it's several So they capabilities the in there, place developing right that were right first our years capacity manufacturing of anticipated Houston,

In terms we're of thing. our same doing the supply base,

the on So where carbide, that us the about also focused of the what of scenario multiple they ensure that to at same VorTeq, components can when on we're When our manufacture as comes other then you so when all part most to we're a so that's technology, working their forth, capacity suppliers is and is which with doing time there. you complex that to very think the available tungsten look we're so high precision things. well

at constraint we're So a suppliers multiple so, we capacity sourcing again, don't have all.

we're people just the These going work is terms our one with personnel, the comment out imagine personnel. VorTeq customers very that and we we go do with last with them. will hiring on-site field early -- actively of in will And have are eventually both that on. are to I

now. As San manufacturing we're well machinists as right actually hiring here we personnel, other are and which facility at Leandro training our

Operator

comes Securities. with question Joseph next from JMP Our Osha

Joseph Osha

of couple A questions.

wondering be I'm your treatment. market, have a potential wastewater do applications about talk I might PXs? And look follow-up. at it you if any that -- interesting it's First, then for think you that you as there

Chris Gannon

Sure. you pressures within when Thanks for much, lower. treating much the the wastewater, think question. Yes, about they're

specifically PX So It looking we're terms our opportunity. at of in not mean technology, industry. doesn't that see I don't an

Joseph Osha

Would -- that be retooling that about perhaps pressures? guess there operate then, would to is Or not at be that viable? technology there talk I following some on lower to or opportunity repurposing

Chris Gannon

Well, energy the application pressure to use to or, and revolves exchanger a in we it of case within in energy system energy is when technology, you think can density, the as how really about so it of much barrier. transfer it the recycle that that VorTeq, around a that

do SWRO. We sell pumps pumps. into are, of at course, naturally We looking

We have line turbochargers. there and a also

SWRO focus on building now, or offering solution but right is naturally the that offering out we're product overall So side industries at there and looking our water other today first.

Joseph Osha

Okay.

and I've to another something's testing build still as see all asked undertake met MX, your assume believe not And own you would Schlumberger's I part to we before, missile? Why might unless relates this be capability, when build you site. As on expect VorTeq, it it, you that out of guys to at changed, I has least internal that?

Chris Gannon

as question always. Great

we is the utilizing tweaking now. on focused build finalized, another so, missile, are but we're that, do When We makes don't we'll it to Once today. still but things. we VorTeq design we'll the right it do need have sense

Joseph Osha

Okay.

despite idea you get missile have design may would to the build before then you this thing around off the tow to is So the this fact more idea rather I'll the that is lot, a spend then finalize -- -- the after another money one. you

Chris Gannon

Yes.

and -- capability, kind We've our a to unnecessary footprint our it investment I so our technical an manufacturing testing, right, forth. today. is spending build that's of think been up

until necessary. I'll that's absolutely So wait

Joseph Osha

event that I think And had the in I where of then the Okay. some Lubbock, it's Is believe the on last down prior see one. that type you potentially that investor card? might last, call last, said we is. site in, still

Chris Gannon

Yes.

out But Katy, So in so site at we plan our I'm start the we start the next months, bringing people because definitely -- reach that to coming through. within glad question to hosting here Jim on that. you yes, will people asked on

Operator

[Operator Instructions].

Our next comes question from FBR. Tom with Curran

Thomas Curran

before you Development and expect is to then fully And you once were operational the you it Houston, year-end, begins, when all CDC Commercial staffed does personnel from commercialization up CDC fully operating by for fully quarterly which point San to have staffed, including ready to Chris, be relocated in you at include sort expect say expenses staffed, to go, the the Center, the pre-commercialization? of running Leandro? be what we that reach should the

Chris Gannon

fully we part So yes, do facility. the by staffed first your our in end expect be the to of the of year question, Katy

and personnel also Josh, of the And a question? answer other personnel. mix so to want manufacturing you that's then field

Joshua Ballard

course, change, major case a we'd to mean, variable spend we a on, field to testing a so perspective, QX. much expense means. spend operation an from is we from forth, hiring massive of be than commercialization, few QX seeing is little back the there, That so more at kind the we personnel because in harder and by but how going might et peg, you're say but unless these after to aren't developing. even basic what one -- The larger and fluctuate be numbers change test. operating base probably lot I here. will that's can a have looking commercialization and prior in but cetera. of probably It's would that They not not I I'm course, people, of Yes. commercialize, any Once ton a small

Thomas Curran

That's the Water's to to Okay. the ultimately then, XXXX, And as like organic going at? Josh, And helpful. it will in on does offerings? expand any side, the range that of the initiative look for CapEx of Water include investments what is suite range potential part come budget

Joshua Ballard

a to mean have not low. we we're going CapEx, overall capacity cycle, for I from our are our through that make suspect but perspective, Well, large would investments the Sure. super be I us. increases CapEx budgeting still

to on see change more that those perspective. only way. CapEx the than -- there's be it's massive rather that's are from into that going initiative roll so more And We'll next going And I perspective, a expenses either because mean through then R&D year CapEx.

Thomas Curran

Okay.

for XXXX? So maybe just CapEx in assume a now, Water for flat with XXXX

Joshua Ballard

Yes.

CapEx we last within that $XX roughly And think I -- million year. talked think I range, of roughly this as okay. you'd And CapEx. roughly if kept flat about see we'd you flat be overall that it cap quarter

Thomas Curran

housekeeping one AM? question. XQ between Water final provide me, a MPD, you breakdown the for revenue then Could for and standard for And OEM Great. please

Joshua Ballard

You bet.

were XX%. MPD mega-projects So XX% and were XX%, OEM aftermarket,

Operator

gentlemen, I'll further Ladies closing to back there this remarks. for it management turn time. at and are no questions

Chris Gannon

everybody. all company, all months' right. for forward so we Have us Thanks day. a joining a you Great. few to appreciate Well, of and We time. look in talking much afternoon, we this to great your again, support the --

Operator

disconnect. a This concludes parties today's conference. Have day. All may good

Energy Recovery (ERII) 1 Aug 192019 Q2 Earnings call transcript