Energy Recovery(ERII) - 2021 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The second quarter revenue was $21 million, lower than the first quarter, but the company expects strong annual product revenue results with a growth outlook of 10% for this year and 25% for 2022 [8][30] - Product revenue growth slowed to 7% in the second quarter, with expectations for Q3 revenue to be between $19 million and $21 million, and Q4 projected to be the largest quarter of the year [30][31] - Gross margin came in lower than annual guidance due to increased sales of lower-margin products, but the company still expects to achieve roughly 68% gross margin for the year [33] Business Line Data and Key Metrics Changes - The desalination business is performing in line with expectations, with a strong backlog and growth outlook [8] - The industrial wastewater business has secured five awards in four industries, including landfill, chemical, and lithium battery sectors [10] - The VorTeq product has completed multiple field trials, demonstrating its performance without interrupting normal operations [15] Market Data and Key Metrics Changes - The Middle East remains the most active region for desalination, with potential growth in Asia due to China's increased desalination capacity [9] - The lithium battery market is expected to grow significantly, with a total addressable market estimated at up to $120 million for the company's pressure exchangers [12][13] - The refrigeration market is transitioning away from HFCs to more natural refrigerants, potentially translating into a $1 billion annual total addressable market by the end of the decade [20] Company Strategy and Development Direction - The company is focusing on expanding brand recognition in new markets and educating partners on the benefits of its technologies [11] - A two-pronged approach for the PXG product involves retrofitting existing CO2 systems and providing a reference design to accelerate adoption [23][25] - The company aims to disrupt the global refrigeration industry with the PXG, similar to its impact on desalination [26] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about growth in OEM sales and a rebound in activity across most territories and industry sectors [31] - The company is prepared for growth and is excited about the potential in existing and new businesses [39] - Management indicated that they will provide deeper insights into the economics of their initiatives in the upcoming quarters [28] Other Important Information - Operating cash flow grew substantially due to strong customer receipts, but moderately negative cash flow is expected in the third and fourth quarters [36] - The company repurchased 657,000 shares at an average price of $17.60 per share, with plans to continue the buyback program [38] Q&A Session Summary Question: Will technical updates on VorTeq be provided regularly? - Management confirmed that technical updates will be provided every three months to varying degrees of depth [41] Question: Will there be a cost associated with the reference design provided to customers? - Management stated that the reference design will be provided free of charge, similar to how Intel provides reference designs for CPUs [42][43] Question: Is there a need to test VorTeq outside the Permian basin? - Management indicated that there is no need to test VorTeq in other shale production areas as fracking sites are fundamentally similar [44] Question: Are revenue growth expectations for 2022 at the higher end of the range? - Management confirmed that they expect revenue growth in 2022 to be at the higher end of the range at 25% [46] Question: Is there a need for commercial beta testing in refrigeration compared to industrial wastewater? - Management noted that refrigeration systems are more standardized, allowing for quicker market entry with more finished products [47][49]