Energy Recovery's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Energy Recovery, Inc (ERII)

Q2 2012 Earnings Conference Call

August 03, 2012 11:00 AM ET

Executives

Alex Buehler – CFO

Thomas Rooney – President and CEO

Analysts

Laurence Alexander – Jefferies & Company, Inc.

Dale Pfau – Cantor Fitzgerald

Patrick Jobin – Credit Suisse

Michael Legg – ROTH Capital Partners

JinMing Liu – Ardour Capital Investments

Robert Smith – Center for Performance Investing

Steve Shaw – Sidoti & Company

John Rosenberg – Geneve Capital Group

Presentation

Operator

Welcome to the ERII Second Quarter 2012 earnings call, on the second of August 2012. For today’s recorded presentation, all participants will be in a listen-only mode. After the presentation they will be an opportunity to ask questions. (Operator instructions).

I will now hand the conference over to Tom Rooney, Energy Recovery’s CEO. Please go ahead Sir.

Thomas Rooney

Good morning everyone and welcome to Energy Recovery’s Second Quarter 2012 conference call. My name is Tom Rooney and I’m here today with our Chief Financial Officer, Alex Buehler. The primary purpose of today’s call is to provide you with information about our financial performance in the Second Quarter of 2012. However, some of our comments and responses to questions may contain forward looking statements about market trends, future revenue, growth expectations, cost structure, gross profit margins, new products and business strategy. Such statements are predictions based on current expectations about future events and are subject to the safe harbor of provisions of the US Private Securities Litigation Reform Act. Forward looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and other factors could cause actual results to differ materially. A detailed discussion of these factors and uncertainties is contained in the reports of the company files with the US Securities and Exchange Commission.

The company assumes no obligation to update any forward looking statements made during this call, except as required by law. So we’re pleased to report a profit for the Second Quarter of 2012, our first quarterly profit since 2010. Being able to report a quarterly profit is an important first step in returning Energy Recovery to greatness. We have a long way to go rebuilding the company, but there is a great deal of good news to record in this quarter, including a net profit, substantial revenue growth, significant gains in market share, increased gross margins, reduced operating expenses, strong cash management and tangible progress in new product development in the oil and gas industry.

Much of the current good news does not come as a surprise to the management team. As we defined our strategy more than a year ago, we diligently executed against that strategy and over the past six months we have watched a number of positive indicators turning in our favor. Most notably are rapidly improving market share and growing backlog.

After more than three years of declining revenues, it’s great to finally be able to record strong revenue gains in the Second Quarter. The substantial revenue jump in the Second Quarter is attributable to a rebound in the global desalination market, combined with significant improvement in Energy Recovery’s market share. The desalination industry and mega desalination projects in particular had been in a serious contraction mode since late 2008 when global capital markets and global economies faltered. Energy Recovery’s revenues fell significantly from 2009 through 2011.

We began to detect the early signs of a global industry rebound in the mega desalination market about one year ago, a rebound which manifested itself in the form of increased bidding opportunities toward the end of 2011. Energy Recovery was extremely well prepared for that market rebound and as a result notched impressive market share gains.

Roughly 15 months ago, the company set out to improve its market position within the desalination industry. Energy Recovery built an impressive market share throughout a period from 2000 to 2008, reaching a high point in 2008 with approximately 70 to 80% market share. Then, with a rapidly shrinking global market and competitive forces, Energy Recovery saw its market share fall back year-over-year to a low point of roughly 50% by the middle of 2011. In the spring and summer of 2011, the company performed an extensive market assessment and a reevaluation of its overall product value proposition as seen within the global desalination marketplace.

In the late Summer of 2011, almost exactly one year ago today, Energy Recovery launched a new and much more highly focused value proposition for the desalination market. The net result was that Energy Recovery competed for and was awarded every single mega project in the world over the past 12 months. That overwhelming MPD success, combined with roughly 80% market share in the OEM scale projects has given Energy Recovery roughly 90% total market share in the desalination industry over the past 12 months.

The combination of an unusually high market share and a rebounding global market has enabled Energy Recovery to generate unprecedented revenue growth in the Second Quarter this year and underpins the company’s previous guidance of 40% year-over-year revenue growth for 2012. For many companies, such large gains in market share come at the expense of prices and profit margins. But that was clearly not the case for Energy Recovery over this past year. I’m happy to report that prices have been stable over the past year. And that combined with lower manufacturing costs has enabled us to generate reasonable gross margins.

Considering our recent transition to a more vertically integrated manufacturing platform, which gives us a high fixed cost structure, we experienced significant operating leverage with revenue swings. Our strong gross margins in the Second Quarter are the direct result of stable prices combined with substantial revenue increases in a highly leveraged manufacturing cost structure. One might describe this scenario as the perfect combination of factors required to produce strong gross margins. Having said that, we do see these gross margin levels as sustainable and even improvable.

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