Energy Recovery Inc (ERII) 2008 Q2 法說會逐字稿

Good afternoon. My name is Tasha, and I will be your conference operator today. At this time, I would like to welcome everyone to the Energy Recovery Second Quarter 2008 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

(OPERATOR INSTRUCTIONS)

Thank you. I would now like to turn the all over to Mr. Tom Willardson, Chief Financial Officer. Please go ahead, sir.

Thank you. Good afternoon and welcome to Energy Recovery's first earnings conference call. Joining me today on the call is G.G. Pique, President and CEO.

Today, we will be discussing the financial results of our second quarter 2008, the near-term outlook for the overall industry and an overview of our various strategic initiatives. In our press release today, we provided guidance on our upcoming third quarter and our projected results for revenue and earnings for the full year.

Because we will be making forward-looking statements today, I would like to review the Safe Harbor language that qualifies these statements. We wish to emphasize that some of the information discussed during the call, particularly information regarding expectations concerning future revenue and earnings growth, business strategy, customer demand, market observations and future product lines are based on information available as of today.

We believe that some of the statements we will make on today's call, including statements about the expectations I just mentioned, may constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and 27A of the Securities Act of 1933.

Accordingly, we wish to caution you that such statements are just predictions based upon current expectations and assumptions regarding future events and business performance and involve risks and uncertainties that could cause actual results to differ materially. We refer you to the reports that the Company files from time to time with the Securities and Exchange Commission, which are available on our website and contain and identify important factors that could cause the actual results to differ materially from those contained in our projections or other forward-looking statements.

ERI undertakes no duty update any forward-looking statements to conform the statements to actual results or changes in the Company's expectations.

Turning now to our second quarter results, ERI achieved net revenue of $12 million, an increase of 247% compared to revenue of $3.5 million recorded for the same period a year ago. ERI reported net income of $1.8 million, or $0.04 per diluted share, for the three months ended June 30, 2008, compared to a loss of $0.4 million, or $0.01 per diluted share, for the same period last year.

I will discuss these results in more detail after G.G.'s remarks. I would now like to turn the call over to G.G. Pique, our President and CEO.

Thank you, Tom. Good afternoon. Today I would like to cover the overall outlook for the industry and what we are seeing in our sales pipeline. We will provide an update on recent significant awards and give an overview of our strategic initiatives, and we will talk about recent changes to our Board of Directors.

Following my remarks, Tom will review the financial results for the second quarter in more detail, and then I will make some concluding comments. Afterwards, we will open up the line to take questions from the research professionals. Before I comment on the pipeline and industry outlook, I would like to acknowledge the hard work and dedication of the ERI team, our bankers and our legal advisers, in taking ERI public in a very difficult market environment.

As you know, we are all here today because we went effective as a public company on July 2nd of this year. In the IPO, ERI sold approximately 8 million primary shares and existing shareholders sold approximately 6 million shares at $8.50 per share. On July 8th, our bankers exercised their over-allotment option and an additional 2.1 million primary shares were sold. Including this green shoe, we raised $77.1 million of primary capital, net of IPO-related expenses.

As a company, we are very proud of these accomplishments and we will make some further comments on the IPO at the end. The dissemination project growth and ERI operating results remained very strong. We continued to see significant growth worldwide in the [CRO] section of the dissemination market.

The pipeline of projects over 50,000 cubic meters per day that we tracked in 2003 consisted of four projects with a potential PX technology sales of $12 million. Today, our pipeline of large projects that may be built in the next three years to four years consists over 140 projects with a potential PX device sales exceeding $490 million.

Over the next 18 months, we are tracking approximately 30 projects with a total combined production capacity of 5 million cubic meters per day, representing approximately $100 million in potential device sales to ERI.

In the last three months, five or six new large projects have gone out to bid in various countries, including Spain, India, Oman, Namibia and Australia. While the majority of these projects are built on schedule, some may be subject to delays beyond our control. Projects may be delayed due to a temporary shortage of high-pressure pumps and membranes, politics of local municipalities, environmental roadblocks and temporary shortage of qualified plant designers, construction and operating personnel.

We have not seen project delays resulting from the current turmoil in the debt markets. In our press release today, we provided guidance on the range of net revenue and earnings for Q3 and for the full year. For the large projects, we have good visibility of approximately six months from award to shipment of product due to the longer sales cycle.

For the smaller projects, the sales cycle is much shorter, but there is less variability between quarters. The guidance we provided today is based on projects we have been awarded and it's underpinned with either signed contracts which are booked into our ERP system for production scheduling or contracts that are in various stages of negotiation. We are expecting a very large fourth quarter.

This has been our historical pattern over the last several years. Tom will discuss the factors that affect our quarterly variances. Over the last couple of weeks, we announced three significant awards to ERI. The Hadera, Israel plant, being built by EPC contractor IDE, will be the largest seawater RO desalination plant in the world.

This was an important win for ERI, since Ashkelon, the first such large project built by IDE, had used a competing [two-year] technology. The Hyflux win for the Tianjin desalination project in China was a milestone win because Tianjin will be the largest desalination plant in China to date. Further, Hyflux was also standardized around competing technology for their Singapore and Dubai plants and has now switched to ERI PX technology.

Lastly, the Hamriyah desalination project located in the UAE, which is being built by an Austrian company, Aqua Engineering, also contracted with ERI. This is Aqua Engineering's fourth plant in the Middle East utilizing PX technology. I would like to give you an overview of some of our strategic initiatives, especially as they relate to new product development.

It took ERI a decade to carve out a leadership position in seawater energy recovery segment. We have strong patents protecting our technology, but we know that the dramatic growth in this industry will attract competition. For that reason, we are running very quickly to introduce the next generation of products, such as the [current] PX, which we are still planning to release in the fourth quarter of this year.

This new PX product will allow PX technology to compete better in markets where the cost of electricity is either subsidized or relatively low. This quarter, we also begin beta testing the PX Titan 400 device, which can do the work of five PX-220s. Finally, as we have been doing for many years, we continue to evolve our core technology to offer increased flow-through rates and other improvements.

With the ever-increasing pipeline of projects we see, we realize the need to grow both in terms of facilities and talent. We have begun preliminary discussions on plans for a new integrated manufacturing facility that would expand our production capacity threefold. We have some of the best people in the industry and continue to build on this very talented team by strengthening our HR, IT, finance, accounting, manufacturing and service organizations.

In anticipation of becoming a public company, we made two important additions to the board, concurrent with our IPO. First, Dominique Trempont has joined the Board as a very experienced executive and he's our designated financial expert to serve as the Audit Committee Chairman.

Also, given the importance of the material science surrounding our use of high-grade ceramics in our rotating device for high-pressure applications, we feel fortunate that Paul Cook has joined our Board. Paul is recognized as one of the pioneers in material sciences, given his successful track record of founding and leading Raychem for over 30 years.

Paul has already had various meetings with myself and our CTO, Dr. Rick Stover, and we are anxious to start presenting our strategic ideas to the Board to drive other applications for our PX technology and further capitalize on our expertise in ceramics. I would like to turn the call over to Tom to discuss the second quarter results in more detail. Tom?

Thanks, G.G. Before I discuss our results for the second quarter, I believe it would be useful to discuss how we recognize revenue and the effect our revenue recognition policy has on our quarterly performance.

Our revenues are predominantly derived from the sale of our PX Energy Recovery devices to operators of both small and larger seawater reverse osmosis desalination plants. Our sales efforts target two main groups of customers, OEM customers with plants under 50,000 cubic meters per day, and our mega-projects customers, whose plants are 50,000 cubic meters per day and above.

The OEM customer base is highly fragmented and may include hotels, resorts, mobile marine units and industrial or power plant applications. At times, large EPC contractors such as GE and [Anema] also build projects in the under 50,000 cubic meter day capacity range, which fall into the OEM group sales structure.

The typical order size for an OEM customer ranges from 50,000 to 150,000. The sales cycle for OEM customers is one to three months. Over the past several years, the quarterly variability for sales to these customers has been relatively low. The mega-projects group targets a relatively small number of engineering and construction company customers, or EPCs, who build and/or operate large seawater reverse osmosis plants in excess of 50,000 cubic meters per day.

The typical order size for these customers ranges from 2 million to 5 million. Three years ago, mega-projects sales accounted for approximately 10% of our total annual net revenue, so our quarterly variability was low. Today, these large projects make up approximately 70% of our annual revenue. Our revenue recognition policy is to recognize revenue when there is evidence of an agreement, transfer of title occurs, pricing is determinable and collection is probable.

Transfer of title usually occurs when the order is shipped from our facility, but may also occur when the order is received at the project site. Our quarterly results can differ significantly when these large quarters are recognized in one lump-sum shipment. This can result in choppy quarterly performance, where year-over-year comparisons may not be particularly useful in determining a trend in our business.

For the second quarter, ended June 30, 2008, net revenue increased by $8.5 million, or 247%, to $12 million, compared to $3.5 million for the same quarter last year. The increase in net revenue was primarily the result of increased sales in our current flagship product, the PX-220 device. Approximately 94% of our net revenue in this second quarter was generated from sales of our PX devices.

One customer, Multiplex Degremont JV and its affiliated entities, accounted for 37% of the total net revenue. The remaining 4% of net revenue comes from sales of booster pumps, spare parts and services. For the fourth quarter, typically our largest quarter of the year, we are expecting the large projects from our mega-projects customers to exceed 80% of total net revenue.

Prices for our PX devices were relatively constant for the second quarter on a year-over-year comparison basis. We recently introduced the PX-260 pressure exchanger, which was designed to capacity the flow-through rate by 18% compared to the PX-220.

Due to the increased flow-through rate, the PX-260 sells at a premium. Exports to international customers accounted for 90% of our net revenue in the second quarter, with Spain and China making up 38% and 14% of the total, respectively.

Gross profit as a percentage of net revenue was approximately 61% for the second quarter, after excluding the reversal of a warranty provision in the amount of $688,000, or 6%, related to the cancellation of an extended warranty. The 61% margin is a significant improvement of seven percentage points over the 54% margin generated in the second quarter of last year.

The gross margin for the six-month period ended June 30, 2008, was 61%, excluding the $688,000 warranty provision reversal, compared to 58% for the first six months of 2007. Sales and marketing expense, which include sales, commissions, and marketing programs, decreased from 35% of net revenue in the second quarter of last year to 12% of net revenue in the second quarter ended June 30, 2008. This decrease as a percentage of net sales was realized even though we increased headcount by over 60% from 11 employees to 18.

For the second quarter of 2008, sales and marketing expense increased by $229,000, or 19%, to $1.5 million, compared to $1.2 million last year. We expect sales and marketing expense in the future to increase in absolute dollars as we grow our business.

General and administrative expenses consist primarily of personnel in our executive finance and accounting and human resource organizations, as well as fees for professional services, including outside legal, accounting and audit services.

General and administrative expenses decreased as a percentage of net revenue from 28% in the second quarter of last year to 24% in the second quarter ended June 30th, 2008. This decrease as a percentage of net revenue was realized despite an increase in headcount from 11 last year to 25 in the second quarter of this year.

In terms of actual expense for the quarter, general and administrative expenses increased by $1.9 million over the same period of last year to $2.9 million.

The primary reasons for the increase in general and administrative expenses relates to costs associated with our growth in operations and preparing for our initial public offering, which result in higher headcount, including the recruitment of two officers, the rental of additional facility space and infrastructure costs.

Of the $1.9 million increase, $1 million related to professional, legal, and accounting services and $545,000 related to compensation and employee-related benefits. Research and development expenses include costs associated with the design, development, testing and enhancement of our products. As a percentage of net revenue, research and development decreased to 5% from 13% a year earlier.

Research and development expense increased by $96,000, or 22%, to $536,000 from the previous year. We believe that continued spending on research and development to develop new PX devices and other products is critical to our success and, consequently, we expect to increase research and development expenses in absolute dollars in future periods.

Net income was $1.8 million for the quarter, or $0.04 fully diluted, compared to a loss of approximately $400,000, or $0.01 per diluted share in the second quarter of last year. The diluted share count will increase in the third quarter as a result of the additional 10.1 million primary shares we issued in July as part of our IPO.

Turning now to the balance sheet, we ended the second quarter with approximately $1.7 million in cash and only $471,000 of long-term debt. As a result of the IPO in July, the Company raised $77.1 million of net cash proceeds after IPO-related expenses. The accrued IPO-related expenses of $3.4 million as of June 30, 2008, are included in prepaid expenses.

Inventories increased 48% from $4.8 million at December 31st, 2007, to $7.1 million at the end of June. The inventory is increasing in anticipation of expected large shipments in the fourth quarter. Our DSOs, our days sales outstanding, were 220 days as a result of a strategy to increase market penetration by offering attractive credit terms.

Now that we have established a leadership position in the industry, we expect to see a reduction in our DSOs. As I discussed at the beginning of my comments, provided the other terms of our revenue recognition policy are met, we recognize revenue when we ship product and transfer title either at our loading docks, or occasionally at the project site. The timing of shipment is dictated by our customers and can vary significantly from quarter to quarter depending on the construction schedule of these large desalination plants . We recognize that these quarterly variances make it challenging from analysts and investors to forecast our quarterly performance. For that reason, we will give guidance on the upcoming quarter, as it would be very difficult for the outside investment community to forecast our shipping days. We will also publicly announce significant PX contract awards, as we did recently with the Hadera, Israel, Tianjin, China and Hamriyah, UAE, projects.

In addition, at the beginning of each year, we will give guidance for the full-year revenue and earnings and update that guidance each quarter. In our press release today, we provided guidance for our expected third quarter revenue and earnings results.

For the third quarter, we are projecting net revenue in the range of $6.8 million to $7.2 million, and net earnings of breakeven to a small profit of approximately $300,000. From time to time, we may experience a lighter than normal quarter in terms of revenue and earnings as a function of our revenue recognition policy and the timing and terms of delivery and transfer of ownership of our large order shipments.

Our third quarter tends to be lighter due to the presence of our large EPC customers, many who are Spanish, to delay shipment until after the summer holiday period. For the full year, we also provided guidance of $49 million to $51 million in net revenue, or an increase of approximately 45% over fiscal 2007.

We projected net income in the range of $6.5 million to $7.3 million. As you can deduce from subtracting the third quarter guidance from the full-year guidance, we are forecasting a very significant fourth quarter. Historically, our fourth quarter is our largest quarter, due to the buying patterns of our large EPC customers.

Because EPC companies cannot recognize procurement fees until they take ownership of the equipment and most are on a December 31st calendar year end, they tend to request shipment in the fourth quarter to recognize their fees in the calendar year.

That concludes my review of the second quarter financial results. I would now like to turn the call back over to G.G. for some concluding

Thanks, Tom. As you have heard today, our business continues to grow at a rapid pace. We believe that the factors driving the construction of new desalination plants, including population growth, climate change and increasing demand for water for food and power production are intensifying.

The other key factor driving growth is the dramatic decrease in the cost of desalinating water made possible by Energy Recovery devices like our PX unit. We set out to make desalination affordable, and I believe that we have delivered on that goal. The IPO has instilled a renewed sense of purpose throughout the organization.

Being public has caused us to improve our discipline, controls and processes. I believe the IPO has also raised our stature and visibility in the industry. We are no longer thought of as a small private company headquartered in San Leandro with limited resources. Today, we are viewed as the leading cleantech company with sufficient capital resources to carry out the strategic initiatives that will reinforce that leadership position.

This visibility helps because we are now getting a steady flow of new internal ideas and outside opportunities brought directly to us. We have worked hard for our shareholders up to the IPO and we will continue to work hard for our new shareholders.

I would like to turn the call back to the operator and open up the line for questions from the research analysts.

(OPERATOR INSTRUCTIONS). Your first question comes from the line of Leone Young with Citigroup.

Yes, good evening.

Hi, Leone.

Congratulations on the IPO, by the way, and it seems from your commentary, G.G., that if we had to characterize the pipeline, it looks like it's largely the same as we discussed at the time of the IPO, and you also noted some of the things that could cause delays, but that doesn't seem to be any material change either. And I was just wondering if you could comment that things then look fairly status quo in terms of the outlook.

Yes, the delays are normal things. The comment was that we don't see any specific delays related to the financing difficulties out there. We see, if you segment the market, we see Spain has gone through a fantastic cycle related to the elections. It's a four-year cycle, and that is pretty much wrapping up and there's a couple of big projects coming in Catalonia in the Barcelona area.

Israel that pretty much finished their cycle, now they have decided to expand all of the existing plants by 30%, and that gives us a tremendous chance to go back in and retrofit things like the [Pumashin] plant that was built with [pumping] wheels. And the reason you retrofit is that when you have a shortage of pumps, the quickest way to get water is to go in and retrofit something that's already there. They can get water pretty quickly.

And also places like Algeria are 50% funded. 50% of the projects are already funded and going, which is a total of seven projects which we have underway, and about seven more in the pipeline. The exciting things come from places like India. We are working on Chennai, but the Chennai plant is only about 10% of what needs to be built.

China is only about 20% along in the five-year plant on what needs to be built in 2010, 2011. Mexico and the Caribbean is very strong. One of the reasons Mexico and the Caribbean is very strong we think is that if you go into Europe in the last year, being a tourist in Europe is very, very expensive, so we see that the dollar tourism is picking up. So Hattie estimates that 40% of her US sales are going to Mexico and the Caribbean.

South Africa, Namibia, are very, very strong. Asia is picking up quickly, the rest of Asia, Singapore. And then the U.S. market with the Poseidon plant is starting to pick up. So we see a lot of new projects coming up. Hattie just came back from China, and China as a country can do things nobody else can do. They have decided to relocate the entire steel industry to the coast and that will mandate the building of four large desalination projects. So we see a lot of new projects coming into the pipeline for the pipeline builds into the future.

Great. Thank you.

(OPERATOR INSTRUCTIONS). Your next question comes from the lie of Kevin Boylan with Bluefin.

Hey, guys. Just had a quick question for you. I think you touched on it a little bit before, but out of the three projects that you have announced, I know the dates were kind of different. Some were farther along than others.

Could you just talk about out of those three projects, are all of them built into your guidance for this year, or some of them I think sound like the projects are a little farther off? Thank you.

All three of those projects are built into our guidance.

Okay, perfect. Thank you.

Well, excuse me. There is one -- this was the Hadera project, that we had done a press release on and that is -- that's going to be in '09, and we didn't give guidance for '09 yet.

Okay, that's great. That's what I was asking.

We're pretty much time to book on '09 now, so a lot of things that you hear announced over the next few months will be '09 projects and '10 projects. We've pretty much booked all of the things we need to book to do '09 already.

'08.

Great. Very helpful. Thank you very much.

Your next question comes from the line of Gary Balter with Credit Suisse.

Thank you. First of all, congratulations on your first quarter as a public company. A question that we had is just following up on the previous question on the backlog, how do we think about it in terms of what's going to be measured in revenue for this year, the visibility into '09? How, as we're modeling it out, would you suggest that we think about that?

Gary, the way I would answer that is what is built into the guidance that we gave today is there's various definitions of what people term as backlog. What we book into our ERP system is when we have a signed, sealed and delivered contract where there's no more negotiating to do on that contract. We also have a number of contracts that we expect to ship in 2008 that are also built into the guidance. They technically don't get into our ERP system until the final signatures are on the contract.

And so what is assumed in all that guidance, we have very good visibility on all these large projects, at least six months, so today we know pretty much what is available to be shipped as far as these large projects over 50,000 cubic meters per day. So there is nothing in our guidance that isn't known. There's nothing in our guidance where we aren't either -- we have either a signed contract or we're in the process of negotiating contracts, so that guidance is based on that.

But as we look into '09, there was a comment made earlier about 18 months, 30 projects, about $100 million. Is that essentially from now until '09 things we should be thinking about for you guys? Obviously, you may not win all of that.

Right. On this project-tracking list, which we refer to as our sales pipeline, every couple of weeks there's new projects coming on that are announced. Occasionally, a project might fall off or get delayed on that. But the pipeline is the visibility that we have over the next several years, I'd say two, three and some of these projects might end up -- we might end up booking because of our revenue recognition policy even four years from now.

But it's a very dynamic pipeline that has been increasing pretty steadily over the past several months and we expect it to continue to build as the projects that are getting announced are getting larger by capacity and demand. And, as I say, the projects that compose this over $490 million, they have a project sponsor, they have a name, they have a capacity and we're actively tracking to these to make sure that we're the technology of choice. I'll let G.G. add to that, if he'd like.

Yes, and, as I mentioned in reference to the Chinese steel mills, some of the new projects that have been developed will go beyond this three to four-year period. So we're starting to attract projects that will extend beyond the normal horizon that we usually track. So it is fairly -- for us, because we've been doing this -- now, as a management team, we'll be doing this for six years, it is becoming a little bit easier to track projects and try to predict probabilities. It is almost impossible to do it on a backlog basis because of revenue recognition.

Things like Hadera you're thinking you're shipping sometime next year, but you have to deal with the accounting rules. But so far we have been very, very accurate on predicting the things that we forecast.

Right, and the one thing I mentioned in my earlier remarks is that at the beginning of every year we will give you guidance for the year, so at the beginning of 2009, we will give you guidance for the full year in earnings. And, as you might suspect, the guidance will be a little bit wider range at the beginning of the year.

When we hit the half-year point, that range will narrow, and certainly by the time we hit the third quarter we pretty much know the day that it's going to ship out of our facilities. And so then our range will be very, very tight. So we'll keep tightening that up as we progress through the year.

Let me give another distinction on that. The Company has two distinct businesses. We have the OEM projects. Those are hundreds of projects that we're tracking. Those are small to medium projects and that's a $4 million a quarter business right now. Hattie runs that division and that has been growing about 15% a year.

And then big projects, anything over 50,000 cubic meters per day, that is the area that is growing very, very fast. It's growing at 55% per year and those are the ones that are really, really difficult to predict. So it's easy for us to track the small ones because we can book them and ship them usually in the same quarter or the same month. The hard part is these big projects, such as Hadera, because they're so lumpy.

It might consist of two or three containers, and we have to wait for the two or three containers to be loaded and for the client to be ready to take it at the site for us to ship. So that's what makes it a little bit unpredictable.

Right. But, without putting words in your mouth, it sounds like if anything the potential is that it will be higher than the numbers you had, just given what's going on in all these different countries of focus, as you look at five years.

-- is the guidance that we gave and we feel pretty comfortable with it.

But let me emphasize what we said. There's a shortage of high-pressure pumps. There's a shortage of membranes and there's a shortage of people, and especially with people, the industry is trying to grow very fast, but it can't, because it doesn't have all of the above.

Okay, that's great. Thank you very much.

Your next question is a follow up from the line of Leone Young with Citigroup.

Yes, thank you. Just to follow up on the latter question, so even though you don't have formal guidance for 2009, if you think back to a couple of months ago, the project that basically you were tracking and felt had a good probability of coming into '09 versus slipping into '10, is that about the same level or comparable, or have any of them either accelerated or slipped?

Leone, we're getting better and better on this, so it's pretty much on track.

Okay, appreciate it. Thank you.

(OPERATOR INSTRUCTIONS). Your next question comes from the line of Debra Fiakas with Crystal Equity.

It's Debra Fiakas, and I wanted to ask you about your research and development plans. You mentioned in your opening remarks that you anticipate maybe a little more competition and you want to work on -- beef up your product line. Can we anticipate an increase in R&D spending in the next few quarters? Or is this something that we'd see coming along more gradually?

Yes, Tom mentioned that in absolute dollars -- the problem is that when you're growing the Company so quickly, as a percentage of revenues, it's difficult to catch up. But Tom mentioned that in absolute terms we will grow our R&D dollars, mostly into variations of PX products and into new ceramic applications, which we're going to be looking at pretty hard.

And then I'd ask another question. I'm new to following your company. Does it make sense in your industry to expand your presence in the market through acquisition and through expansion into maybe adjacent products that are also used in the desalination plants?

Yes, but carefully. Yes, the Company -- I could be labeled, because I used to work for Dick Heckmann at U.S. Filter and we acquired 163 companies. So the first thing that Dominique Trempont asked me before he would join our Board and Audit Committee, he said, are you guys going to start going on an acquisition binge? And the acquisition is no, we're not going to do that.

We're going to carefully look at -- there's a lot of opportunities being brought to us right now. We are looking at two or three right now very, very carefully, but we are going to be very, very selective and we're going to do the right things.

Okay, and then also, I'm just asking this question as a means maybe to get a little better educated. You mentioned a shortage in membranes and a shortage of high-pressure pumps. What will relieve those shortages? Is this temporary or do we actually need to see some new production capacity added?

Yes, on the high-pressure pumps it's pretty easy. Once we go down to $60 per barrel oil, I think the shortage will go away, because we are competing. The other major user of these pumps is the oil industry, and they're paying premiums for the pumps, and we seem to be getting some relief there. And then on the membrane side, people like Dow are putting -- people like Dow have doubled their capacity, doubled their capacity again, so as long as we have major players with [big focus], they can keep reinvesting in the industry.

Okay, thank you very much.

Okay, operator, we have time for one more question.

(OPERATOR INSTRUCTIONS). Your next question comes from the line of [Daniel Begman] with ING.

Hi, how are you. Thanks for taking my question. I was just curious, what level of oil prices, when your customers look at it, or energy prices, does your product become more or less favorable versus the competition, is my first question?

Yes, interesting question, because there's an item in our S-1, if you'll study that carefully, that is based on 2006 numbers, and what that shows is that seawater RO desalination is about $0.50 per cubic meter, and then it shows thermal at about $0.70 per cubic meter.

What has happened since is, number one, metal prices went up and those thermal plants, built mostly in the Middle East, take a huge amount of heavy metals. And the other one is that the price of oil, as you know, since then has pretty much tripled.

So as a result, what happened is that the cost -- there was an article published in the Global Water Intelligence last month, and they showed that the cost of thermal desalination has pretty much come to about $2.00, $2.50 per cubic meter and seawater RO went up 40% to about $0.70. But $0.70 is still about half of what people are paying for river water in places like Barcelona and San Diego and Los Angeles. It's still very, very competitive.

Okay, and just one follow-up question. As you ramp up your business, do you have a target operating income margin that you'll try to achieve?

That's something that we haven't given out publicly yet.

Okay, thank you.

Thank you. I would now like to turn the call back over to management.

Okay, thank you for helping us to get the Company to where it is today and thank you for participating in the call. There were a lot of participants, and we'll get back together in about three months and we look forward to your calls if you have any detailed questions. Thank you.

This concludes today's conference call. You may now disconnect.