02/08/2023 - ERI - Energy Recovery Inc.: Prepared Remarks Q2 2023

ENERGY RECOVERY

Second Quarter 2023

Earnings Call

August 2, 2023

Opening Remarks - James Siccardi

Hello everyone, and welcome to Energy Recovery's 2023 second-quarter earnings conference call. My name is Jim Siccardi, Vice President of Investor Relations at Energy Recovery. I am here today with our Chairman, President and Chief Executive Officer, Bob Mao and our Chief Financial Officer, Joshua Ballard.

During today's call, we may make projections and other forward-looking statements under the Safe Harbor provisions contained in the Private Securities Litigation Reform Act of 1995 regarding future events or the future financial performance of the Company.  These statements may discuss our business, economic and market outlook, growth expectations, new products and their performance, cost structure, and business strategy. 

Forward-looking statements are based on information currently available to us and on management's beliefs, assumptions, estimates, or projections.  Forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties, and other factors. 

We refer you to documents the Company files from time to time with the SEC, specifically the Company's Form 10-K and Form 10-Q.  These documents identify important factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements.  

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All statements made during this call are made only as of today, August 2nd, 2023, and the company expressly disclaims any intent or obligation to update any forward-looking statements made during this call to reflect subsequent events or circumstances, unless otherwise required by law.

At this point, I will turn the call over to our Chairman, President and Chief Executive Officer, Bob Mao.

Strategic and Commercial Update - Bob Mao

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

Water

First, as usual, let me start with our core Water business. Within desalination, we have now signed all mega projects that we targeted to ship this year and are now filling out our OEM and aftermarket channels, which happen closer to their shipment date. We are well positioned for the remainder of the year, and Josh will give you more specifics on these numbers.

In wastewater, our overall signed contracts and pipeline remain robust, and we now believe we should land at the mid to high end of our $6 to $8 million guidance by the end of the year. The team is most importantly focused on where we need to invest to deliver another doubling of revenue in 2024. We have discussed our intent to build out this team in the regions in which we operate, and this effort continues at a quickening pace as we enter the second half of 2023.

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In June, we announced our expanded Ultra PX product series in a broad range from smaller flows as low as 10 gallons per minute, up to 250 gallons per minute under operating pressures as high as 120 bar, or 1740 PSI. Additionally, our Low Pressure PX enables us to provide pressure exchanger technologies in all trains of a plant - from low pressures to ultra-high pressures.

We will update you more on our plans for wastewater at our next earnings call in November, but our progress continues to yield confidence in not only achieving our 2023 wastewater guidance, but also our 2026 revenue targets in this segment.

As we look further out, we continue to pay attention to specific regions globally that may have potential for Energy Recovery in the coming years. Last quarter, we spoke about the potential for our business in North Africa, in particular the strength we see in Morocco, Algeria and Egypt. We have also identified potential growth markets in South America, which is also experiencing severe water stress and turning to desalination, water reuse, and wastewater treatment for relief.

Chile, which has been dealing with record drought conditions, continues to be a leader in the Latin American desalination market. In the second quarter, we announced contracts totaling over $8 million for projects in the country, all of which are scheduled for delivery later this year.

Chile is projected to see growing water stress in the coming decades, which is already affecting their water supplies. According to the World Resources Institute, during the 2010s, Chile experienced only "low to medium" water stress,

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based on the ratio of local water withdrawals to their renewable supply. This decade, they are already in the "high stress" category and are expected to be classified as "most extreme" by the 2030s and 2040s. The rise in temperatures will likely further accelerate; particularly in the Andes Mountains, which is the source of most of the country's water supply. In addition, Central Chile, where 70% of the population lives, is expected to see significant reductions in rainfall.

This water stress is playing out today in the mining industry - a critical industry for Chile's economy, which supplies nearly a quarter of the world's copper supply. As of a year ago, Chile was expected to nearly triple its use of desalination in mining from eight desalination plants to 23 by 2028. Annually, the mining industry uses enough water to supply 75% of Chile's population and by 2028, it is expected that over 50% of the water used in mining will be desalinated.

This need for water in Chile is appearing in our pipeline today, with sales expected to nearly double by 2026. Water reuse and recycling is another option for Chile, which could potentially generate material increases in our wastewater business as the decade plays out.

Mexico, ranked 24th in the world for water stress, is another country experiencing significant drought and recurring heat waves in recent years. The current water crisis began in 2022 and up to 60% of the country could be under severe water stress in the coming decades. In fact, earlier this year, Mexico City itself announced it would reduce water pressure as reserves in its main reservoir fell below 50%.

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We believe desalination and wastewater reuse will be critical components of Mexico's water strategy in the coming years. Although we have not seen significant revenues from Mexico in recent years, our pipeline is growing, and we are nearly doubling our business there in 2023. However, the future of desalination or water reuse in Mexico will depend on their ability to build sufficient water distribution networks.

Argentina, despite it not being a material revenue generator for Energy Recovery, is another South American country experiencing significant water stress. The country's worst drought in 60 years led to Argentina reporting significantly lower crop yields for 2023, which is a strain for an economy heavily dependent on agricultural exports.

These three countries have a combined population of roughly 200 million, which is more than twice that of the Middle Eastern countries that have been driving large scale desalination growth in recent years. In 2023, revenues in Central and South America are potentially nearly doubling from single digit millions to the mid-teens.

As with North Africa, how and when water stress finally pushes these countries into a considerable ramp up in alternative sources or recycling of water is not known, but that there is a growing need is clear. We have already recently deployed additional resources to continue to serve this market and will continue to invest in its future in the coming years as needed.

CO2 Refrigeration

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