Vitality Restoration, Inc. (NASDAQ:ERII) Q2 2022 Earnings Convention Name August 3, 2022 5:00 PM ET
Firm Members
James Siccardi – Vice President, Investor Relations
Bob Mao – Chairman, President and CEO
Joshua Ballard – Chief Monetary Officer
Convention Name Members
Neil Thompsons – Household Securities
Wally Walker – Hana Street Capital
Operator
Greetings. And welcome to Vitality Restoration Second Quarter 2022 Convention Name. At the moment, all individuals are in a listen-only mode. An issue-and-answer session will observe the formal presentation. [Operator Instructions]
As a reminder, this convention is being recorded. I might now like to show the convention over to your host, James Siccardi, Vice President, Investor Relations. Please go forward, sir.
James Siccardi
Good day, everybody. And welcome to Vitality Restoration’s 2022 second quarter earnings convention name. My title is Jim Siccardi, Vice President of Investor Relations at Vitality Restoration. I’m right here immediately with our Chairman, President and Chief Govt Officer, Bob Mao; and our Chief Monetary Officer, Joshua Ballard.
Throughout immediately’s name, we could make projections and different forward-looking statements below the Protected Harbor provisions, contained within the Personal Securities Litigation Reform Act of 1995 relating to future occasions or the longer term monetary efficiency of the corporate. These statements could focus on our enterprise, financial and market outlook, development expectations, new merchandise and the efficiency price construction and enterprise technique.
Ahead-looking statements are primarily based on info at the moment out there to us and on administration’s beliefs, assumptions, estimates or projections. Ahead-looking statements will not be ensures of future efficiency and are topic to sure dangers, uncertainties and different components.
We refer you to paperwork the corporate information from time-to-time with the SEC, particularly the corporate’s Type 10-Okay and Type 10-Q. These paperwork establish essential components that would trigger precise outcomes to vary materially from these contained in our projections or forward-looking statements.
All statements made throughout this name are made solely as of immediately, August 3, 2022, and the corporate expressly disclaims any intent or obligation to replace any forward-looking statements made throughout this name, to mirror subsequent occasions or circumstances, except in any other case required by regulation.
At this level, I’ll flip the decision over to our Chairman, President and Chief Govt Officer, Bob Mao.
Bob Mao
Thanks, Jim, and thanks everybody for becoming a member of us. We’re all listening to quite a lot of unfavorable international and home financial use. Inflation is excessive. There may be battle in Europe and we could already be in recession.
I might even present a bit of higher just lately have adopted [inaudible] then any time in a long time. But right here at Vitality Restoration, we proceed to make substantial progress in all streams of our enterprise markets regardless of this noise round us.
Our development targets stay intact and our operations are [ph] resilient. I’ll remind you that whatever the home financial headwinds, greater than 98% of our enterprise is abroad. Regardless of excessive inflation, our profitability stays sturdy, owing to the strengths of our margins mirrored by the status and worth creation of our PX know-how.
Regardless of provide chain disruptions, we proceed manufacturing [inaudible], as a result of our group’s foresight to construct inventories effectively earlier than provide chains had been a difficulty. Regardless of the turmoil within the monetary markets, we preserve ample money reserve and regardless of the rise in rates of interest, our enterprise, we actually have — which at the moment has no reliance on debt, has not been instantly impacted.
Our core market of desalination, we’ve offered water to thousands and thousands of individuals worldwide. We imagine this primary human want will largely climate present international financial uncertainties because it has in previous years.
The necessity for water within the more and more water scarce world stay a robust motivator for investments on this sector. As of immediately, we imagine we stay on observe in our desalination and industrial wastewater market to satisfy our steerage of 25% income development for 2022.
Our mega mission channel remained sturdy and we’re seeing a resurgence in our smaller OEM desalination initiatives from the COVID-related pent-up demand. As well as, elevated international water shortage is resulting in a regulatory setting that’s pushing filtration necessities of commercial wastewater. Briefly, we really feel we’re effectively positioned immediately and poised to execute on the technique we’ve laid out forward of us.
Immediately, I’ll focus our dialogue on industrial wastewater and CO2, and Josh, will offer you some extra particular updates about how the desalination enterprise is evolving this 12 months.
With that, let me transfer on to industrial wastewater. On the finish of the second quarter, we had already exceeded 2021 income by 60% and are effectively on our method to meet our forecast of $3 million in industrial wastewater income for fiscal 12 months 2022.
I discussed in our final name that we had been accumulating efficiency knowledge from our first fee industrial wastewater crops, outcomes from the sector present that our new Extremely PX is attaining efficiencies of no less than 93% and we’re producing the financial savings for our prospects that we promised.
For instance, at one lithium battery plant, our know-how is saving the ability roughly $150,000 in electrical energy prices per 12 months, primarily based on 2021 electrical energy prices ranges, with an estimated one 12 months payback.
On the textile plant in India, a $500,000 funding in our know-how is netting an estimated $500,000 per 12 months of financial savings, once more primarily based on 2021 electrical energy prices. This interprets into worth creation of 10 occasions to fifteen occasions the preliminary funding over the lifetime of this wastewater plant. We anticipate to see comparable financial savings ends in hydro wastewater verticals as effectively.
With rising power prices, we anticipate these financial savings will improve and speed up within the coming years. We imagine these real-world financial savings will assist additional enhance the worth proposition of reverse osmosis processes in industrial wastewater, which after all are pushed by the power financial savings offered by our merchandise. We at the moment are in a position to make use of this knowledge to coach and additional penetrate the markets the place we’ve a presence.
For instance, we obtained our first long-listed lithium battery recycling market in China throughout the second quarter. This set up will give us our first reference website on this lithium sub-vertical. We’ve got now penetrated three sub-verticals of the lithium-ion battery worth channel, specifically lithium mining, battery manufacturing and now recycle. This can be a important milestone for us as we proceed to construct quantity on this area, particularly given the numerous place China performs on this international market.
We’ve got beforehand spoken in regards to the potential of the general lithium market and our estimated complete addressable market is probably going greater than $200 million this decade. Due to the worldwide urgency to increase this lithium capability, our groups will proceed to prioritize this market and have already recognized quite a few initiatives in numerous levels of planning between now and 2030.
One other trade the place we’ve early success is textiles. Water is utilized in a number of levels of the textile manufacturing course of and the trade total generates almost 5 billion tons of wastewater per 12 months.
Textile is without doubt one of the high three waterwasting industries in each China and India. Mixed these two international locations discharge over 2.5 billion tons of wastewater yearly. Immediately, the textile trade is in search of methods to cut back water effluence and to reuse as a lot water — wastewater as doable for quite a lot of causes, together with regulatory pressures, rising prices and restricted availability of recent water within the more and more extra water scares world. And the truth that there are lots of chemical substances within the textile course of will be recycled and reused additionally.
We’ve got had preliminary success in textiles with roughly 15% of our gross sales occurring inside this trade. We at the moment estimate a possible TAM in China and India alone of about $75 million to-date, rising to over $100 million by 2026 and $140 million by the tip of decade. Importantly, India has introduced intentions to double the dimensions of their textile output by 2026, as investing in textile hubs with centralized wastewater remedy facilities.
The centralized remedy mannequin which is able to maintain course of quantity stream for wastewater ought to present an thrilling alternative for Vitality Restoration. All informed, the lithium battery in textile markets might attain a complete TAM for this decade of greater than $340 million.
In abstract, we imagine these two verticals characterize a crucial market alternative to function the core income producing focus for our industrial wastewater unit. We’ll maintain you up to date on our progress in these two verticals within the coming quarters as we proceed to drill down inside them and we’ll spotlight extra wastewater verticals in future calls, as we proceed to push for elevated quantity gross sales on this enterprise.
Now allow us to focus on our CO2 enterprise. The place, once more, international rules are forcing a transition from HFC refrigerants to extra climate-friendly pure refrigerants, as a consequence of extra international warming, offering the tailwinds that drive future potential development in CO2.
Whereas this transition will happen with or with out us, the response we’ve obtained so far appears to point the trade’s need to ease the OpEx problem of pure refrigerants prices. First, we’re happy to announce that our first PXG was commissioned within the new grocery retailer in Southern Europe and the preliminary outcomes are exceeding expectations.
Set up and commissioning went easily and we’ve been constantly decreasing the power load of direct by over 20%. Throughout days the place the temperature ranges from 30 levels to 35 levels Celsius or 86 levels to 95 levels Fahrenheit.
You will need to notice that this primary unit was not a PXG-centric system. The unit was absolutely built-in into racks management programs and mechanically separated, virtually just like the bow down we will likely be deploying at Vallarta in California.
Our European accomplice’s preliminary precedence was reliability of our know-how within the discipline and this structure supplies our companions with the flexibility to isolate the PX ought to any points come up. Subsequently on this first set up power effectivity was truly a secondary consideration. Nevertheless, regardless of these lower than optimum architectural circumstances, the PXG effectivity has offered a pleasantly shocking upside to our accomplice.
We imagine that with the absolutely built-in PXG-centric construct we are able to obtain even better effectivity for our prospects. Our preliminary success with this buyer has already led to preliminary discussions for added PXG-centric deployment at new websites presumably later this 12 months.
Along with our profitable fee, I’m happy to announce that we enter right into a second joint improvement settlement with a big U.S.-based refrigeration producer. Our new accomplice has indicated that they intend to deploy our PXG later this 12 months or early subsequent 12 months.
We’re additionally engaged in superior dialogue with conventional refrigeration producers and hope to signal and deploy our know-how with them within the coming months.
We’ve got additionally obtained a robust response from the G — PXG reference designs. We revealed on our web site this summer time. These reference designs present producers a variety of PXG architectures to think about as they design their very own next-generation PXG-centric CO2 refrigeration rack. This transfer has additional penetrated market acceptance and expedited relations with extra OEMs. We hope to see additional deployment with these OEMs as effectively.
Lastly an replace on our set up at Vallarta Supermarkets, the place we hoped to have commissioned our unit throughout the second quarter, we at the moment are on observe to fee in September.
A lot of the development work has been accomplished and our testing of the size has been ongoing. Vallarta stays excited in regards to the know-how and has begun preliminary discussions about extra future PXG-centric deployments.
In abstract, we made materials progress this quarter. We imagine our know-how is being seen by the refrigeration trade as they wanted options to the OpEx problem of transitioning away from local weather dangerous HFCs and towards extra climate-friendly pure refrigerants.
Our technique to leverage distribution networks established by present producer is starting to point out promise. Now, we’re gathering knowledge from the sector set up and is proving to the trade the worth of our know-how in actual world scenario the place increasingly more trade individuals are taking discover.
We anticipate to start in earnest discussions with our companions relating to volumetric quarters, in order that we are able to start the mandatory planning wanted to steer their supply necessities for 2023 and past. We’ll present additional updates on our progress in CO2 at our subsequent earnings name in November, together with how we see quantity ought to be ramping up in 2023.
With that, I’ll hand it over to Josh.
Joshua Ballard
Good afternoon, everybody. We generated $20 million in income this quarter, as guided throughout the Q1 name comparatively flat towards Q2 2021. We launched for this quarter’s income was pushed by the timing of mega mission shipments, which this 12 months are weighted into the third and fourth quarters as communicated in Might.
For instance, whereas year-to-date mega mission revenues are down 9%, primarily based on our contracted backlog, we’re anticipating a robust second half highlighted by a really sturdy fourth quarter. By year-end, we anticipate full 12 months mega-project development within the 10% to fifteen% vary.
Notably, OEM revenues are up 75% year-to-date. Whole OEM income for the 12 months consists of $1.6 million in industrial wastewater gross sales, which as Bob talked about is on tempo to attain our full 12 months steerage. OEM desalination revenues have grown nearer to 50% year-to-date, which we at the moment anticipate to carry by the tip of the fiscal 12 months.
General, we proceed to lastly see our post-COVID return of desalination OEM and aftermarket revenues as a consequence of pent-up demand, which as of immediately is predicted to proceed by the tip of the 12 months. We’ve got no change to our income forecast for the 12 months, though we proceed to control end-of-year shipments in a really massive fourth quarter.
As I discussed final quarter, we anticipate gross margin to reasonable this 12 months, we’ve begun to see this within the second quarter. There are two issues at play right here. First, our product combine modified within the second quarter, reflecting a rise in gross sales of non-PX merchandise, which naturally places stress on our topline blended margin. We’ve got seen this happen a number of occasions through the years.
Second, whereas we aren’t but reflecting inflationary will increase in our stress trade of prices this 12 months, we’re experiencing some inflationary stress on uncooked supplies for pumps and turbochargers, which has weighed on margins. Whereas we’re working to mitigate these will increase, we don’t anticipate to see our margin improved significantly in 2022. Once more, we preserve our steerage of 66% to 68% gross margin for the 12 months.
Now that we do anticipate to see extra will increase in prices in 2022, significantly for labor and different inputs, equivalent to power and delivery, the vast majority of these will increase is not going to be mirrored in 2022 margins and half owing to our total stock construct that has already occurred, however we can’t delay inflation ceaselessly. We don’t anticipate that the general impact of those will increase will likely be massive, nonetheless, we will likely be ready to debate them in additional element throughout our Q3 name.
Our OpEx grew about 24% year-over-year within the quarter. Nevertheless, remember the fact that this features a $1.3 million one-time expense to the cessation of our VorTeq actions. About $1 million of that is mirrored in R&D spend and the remaining $300,000 in G&A.
Subsequently on adjusted and recurring foundation, OpEx grew 15% year-on-year, largely pushed by gross sales and advertising and marketing as we naturally develop spend from our COVID lows and give attention to constructing our industrial wastewater and CO2 enterprise.
For instance, we’ve vastly elevated the variety of frequency in tradeshows and conferences as we work to re-engage with prospects in desalination after COVID, in addition to to increase our messaging in industrial wastewater filtration. R&D remained comparatively flat year-over-year and G&A grew about 8%.
Importantly, our total adjusted working bills confirmed a nominal improve just one% over first quarter of this 12 months. We’re nonetheless concentrating on round 50% OpEx as a % of income by year-end, excluding these one-time VorTeq associated bills as elevated income within the second half of the 12 months ought to start the steadiness out our spend.
We closed the quarter with a money and securities steadiness of $87 million. There may be $10 million discount from final quarter is fully because of the share repurchase program. Our free money stream is definitely elevated by $12 million per quarter, largely to elevated collections, however had been offset by almost $19 million of buybacks.
We accomplished the repurchase program on July 1st. All informed, we repurchased $50 million of inventory at a median worth of $18.67 for a complete of two.7 million shares. As of immediately, we’ve not put a brand new buyback program in place, however after all, we’ll let you understand if that change.
On the subject of our working money stream, as I mentioned final quarter, we proceed to see elevated stock ranges because of the decrease shipments this quarter. Regardless of these decrease shipments, we proceed to supply at a stage loaded tempo to fulfill demand for the a lot bigger plan third and fourth quarters, which elevated stock ranges as much as $20 million.
Lastly, I will provide you with a short replace on VorTeq, we’ve not been profitable find a accomplice immediately. Though, we continued discussions with a few potential events, actions have been decreased to the purpose the place we made the choice to close down operations. This resulted in a $1.3 million one-time expense pushed by severance and accelerated depreciation. All informed, the money part of this one-time expense is just about $200,000.
With that, we are able to now transfer to Q&A.
Query-and-Reply Session
Operator
Thanks very a lot. [Operator Instructions] Our first query comes from Neil Thompsons with Household Securities. Please go forward.
Neil Thompsons
Good afternoon. I used to be simply hoping to get some extra shade on capital allocation going ahead. In the event you might share something on, for instance, CapEx necessities for extra capability and what’s doubtlessly it is advisable construct in working capital, so we are able to have our personal ideas round future potential shareholder distributions?
Joshua Ballard
Certain. That is Joshua. I’ll take. Hey, Neil. How are you doing? This 12 months our CapEx and is just about in keeping with final 12 months, not any main modifications. As we glance ahead, what’s going to drive will increase in CapEx or working capital will — any massive diploma, any materials diploma can be CO2 refrigeration. And in order, as we begin to discuss that potential ramp ups in future quarters, we can outline that a bit of higher, proper?
So, relying on how far CO2 refrigerant — how shortly and the way far we go, we actually push our CapEx into constructing facility or improve capability of present amenities, that may — that’s what I’ll drive that within the coming future, that is sensible, in addition to working capital. In any other case, our present money flows can simply cowl a few of our working money stream, we’re spending with the intention to desalination and industrial wastewater.
Neil Thompsons
However at this level is there any purpose to imagine {that a} new CO2 refrigeration building website can be dearer than the final one you constructed for desal?
Joshua Ballard
No. I believe the open questions will likely be the place we construct it. So if we don’t increase an present facility. For instance, we’ve determined to construct nearer to the place different refrigeration producers are or if we had prospects in Europe, who wish to go near no matter they — no matter which may be that would entail a bit of extra price or as a result of volumes will likely be growing a lot if we have a look at extra automation and so forth in our manufacturing course of. These issues might outline up or down, however both means. I don’t suppose it’s going to be dramatically larger than what you will have seen previously and what we’ve talked about.
Neil Thompsons
Okay. Thanks.
Operator
Thanks. [Operator Instructions] Our subsequent query comes from Wally Walker with Hana Street Capital. Please go forward.
Wally Walker
Yeah. Good afternoon, guys. Hey. It’s simply been another time in your CO2 enterprise and testing it. Do you will have any updates as you consider it on the TAM for that enterprise? And likewise as you’re spending the time in testing, any adjacencies which have come ahead that you simply haven’t thought of simply as you begin to have a look at that new enterprise?
Bob Mao
Thanks, Wally. When it comes to TAM, fairly a number of incomes calls in the past, we mentioned, the refrigeration TAM in — by the tip of the last decade might be one factor. That’s in all probability nonetheless is an efficient quantity to work with. However after all you’re going to say, yeah, inform me nearer than one in every of — on the finish of [inaudible]. We expect it’s fairly massive, Wally. And in November, we’ve extra specific quantitative numbers for you.
The TAM in parallel will is dependent upon how a lot — how good which we take into account fairly good is our price proposition and the temperature vary that we are able to serve very successfully, each with our testing outcomes and early outcomes on the precise real-world checks are very encouraging. So, Wally, the subsequent time we will provide you with very particular numbers. However I can say that from [inaudible] we anticipate the TAM is massive.
When it comes to adjacencies, once more, we’ll discuss subsequent time. The flip facet of refrigeration is hitting and it’s within the first-degree approximation. It’s mirror facet — mirror picture of refrigeration and we’re evaluating that, in reality we’re discussing with some OEMs on this different facet. Once more extra particular to come back subsequent time, Wally.
Wally Walker
Okay. I’ll wait. Thanks. Good luck.
Bob Mao
Thanks.
Operator
Thanks. [Operator Instructions] As there aren’t any additional questions, I might now like at hand the decision again to Mr. James Siccardi for closing remarks.
James Siccardi
Thanks, Peter. As a reminder, our ready remarks will be discovered on the Traders part of our web site. With that, I’d wish to thank everybody for becoming a member of us this night and we sit up for speaking to you once more in early November. Thanks.
Operator
This concludes immediately’s convention. Chances are you’ll now disconnect your strains right now. Thanks in your participation.