Energy Recovery(US:ERII)2019-03-08 02:17Financial Data and Key Metrics Changes - Energy Recovery closed a record year in 2018 with total revenue of $74.5 million, an 8% increase over 2017 [10] - The Water business generated $60.5 million in revenue, an 11% increase over 2017, driven by mega projects [10][22] - The Oil & Gas business generated $14 million in revenue, with $13.5 million related to VorTeq license revenue [11] - Product gross margin reached 71%, the highest in the company's history [12] - Operating income was $10 million, an 8% increase over 2017, and net income was $22.1 million or $0.40 per diluted share [14] - Operating cash flow was $7.6 million, 160% higher than in 2017, with a year-end cash and securities balance of $96.7 million and no debt [16] Business Line Data and Key Metrics Changes - The Water business achieved a record gross margin of 71% and continued to grow, winning every major mega project bid [22][23] - The Oil & Gas business made significant progress in advancing the VorTeq technology and building necessary infrastructure for commercialization [29][30] Market Data and Key Metrics Changes - The desalination industry remains robust, particularly in the Middle East, Africa, and Asia, with a significant backlog and pipeline for projects extending into 2019 and 2020 [23][24] - Desalination currently provides approximately 1% of global potable water needs, with higher percentages in countries like Israel and Saudi Arabia [26] Company Strategy and Development Direction - The company is focused on growth and reinvestment in its core Water business while concentrating on commercializing the VorTeq system in Oil & Gas [18][20] - Investments are being made to enhance existing product lines, expand offerings, and increase manufacturing capacity [20][27] - The company is pursuing both organic and inorganic growth opportunities in the Water business [28] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the future, citing strong existing backlog and positive market trends that support growth in 2019 and 2020 [35][36] - The company plans to continue investing in infrastructure to support growth and commercialization efforts [35] Other Important Information - Capital expenditures were $5.2 million in 2018, expected to increase to about $10 million in 2019 for infrastructure development [15][53] - The company has maintained a strong balance sheet, allowing for flexibility in investments [16] Q&A Session Summary Question: Visibility and coverage for 2019 revenue - Management indicated good visibility for mega projects extending 12 to 18 months out, while OEM and aftermarket have shorter cycles [38] Question: Gross margin expectations for 2019 - Management expects gross margin to be similar to 2018, but quarterly progression may vary due to project timing [39] Question: Clarification on VorTeq partnerships - Management confirmed collaboration with both licensees, Schlumberger and Liberty, and emphasized focus on field testing for commercialization [40][41] Question: Reliability and run time issues with VorTeq - The focus is on system reliability in real-world conditions, with past fundamental viability issues resolved [44] Question: Potential for additional partnerships in Water business - Management is exploring partnerships to expand product offerings but is not currently focused on M&A [48] Question: Operating expenditures run rate for 2019 - Operating expenditures are expected to grow at a similar pace as in 2018, around $11.5 million to $12 million quarterly [49][50] Question: Commercialization timeline for new products - New products are anticipated to roll out in 2020, with ongoing growth from existing partnerships [52]