Energy Recovery Inc (ERII) 2008 Q3 法說會逐字稿

Good afternoon, my name is Erica and I will be your conference operator today. At this time, I would like to welcome everyone to the third quarter 2008 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. Miss. Pique, you may begin your conference.

Thank you, operator. This is Tom Willardson. I'm going to begin my -- begin the call. Good afternoon and welcome to Energy Recovery's Third Quarter Earnings Conference Call. Joining me today on the call is G.G. Pique, President and CEO. Today we will discuss the financial results of our third quarter, the near-term outlook for the overall industry, including the likely effect of the current debt crisis on our industry and an update of various strategic initiatives. In the press release today, we provided guidance on our upcoming fourth quarter and our projected results for revenue and earnings for the full year.

Because we will be making some 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 and exchange act of 1934 and section 27A of the securities act of 1933.

Accordingly, we wish to caution you that such statements are just predictions based on 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 to update any forward looking statements to conform the statements to actual results or changes in the Company's expectations. Turning now to our third quarter results, ERI achieved net revenue of 9 million, which compares favorably to the guidance range of 6.8 million to 7.2 million that we provided in our last conference call.

ERI reported net income of 623,000 or $0.01 per diluted share, which also compares favorably to the guidance of break even that we provided in our prior call and press release. 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. In the call today I will discuss the near-term outlook for our business as well as the effect of the turmoil in the credit markets on our prospects for 2009. I would also update you on the strategic initiatives. Following my remarks, Tom will review the financial results of the third quarter in more detail and then I will make some concluding comments. Afterwards, we will open up the lines to take questions from research professionals.

The near-term outlook for the desalination plant business remains strong, this is partly because the industry has been operating in a sold out mode for over a year. While places like Spain and Australia have been suffering from severe lack of drinking and irrigation water, the capacity of the desalination industry to meet this demand has been constrained by a shortage of engineers as well as pumps and other critical equipment, resulting in long-term project -- in long project lead times.

As a result, there is a backlog of large funded projects which will keep the capital equipment suppliers like ERI busy to 2009. The industry is still catching up from this [poor] situation. These large projects being built today secure their financing before the melt down in the credit markets and based on the information we have today, we believe that they are on track with the scheduled completion dates and plant commissioning.

Our OEM division which covers projects under 50,000 cubit meters per day had a stronger than anticipated third quarter and continues to see a steady flow of business coming from China, Egypt, Turkey, Mexico as well as desalination units installing ships. ERI will have the strongest fourth quarter ever in this current quarter.

For our large projects, over 50,000 cubic meters per day, we have signed contracts and firm orders that underpin the guidance we provided today. Since our last call, we have announced new mega project awards such as the 150,000 cubic meter per day [potential] project in Kuwait, the 200,000 cubic meter per day Mostanganem plant in Algeria and 140,000 cubic meter per day mining project in Western Australia. And most recently a 55,000 cubic meter per day retrofit project near Barcelona, Spain.

The OEM group is having a very strong year and has already booked more than their budget forecast for shipments in 2008. As for 2009, we will be giving guidance early next year for revenue and the earnings for the full fiscal 2009. We are still tracking over 135 large projects and several hundred small ones, which are planned to be executed over the next two or three years with our total potential revenue for ERI in the $500 million range. Most of these mega projects are from municipal supply, largely sponsor funded and backed by governments.

As part of getting ready for this conference, we have interviewed dozens of our OEMs and EPC clients as well as major engineering companies. As we look at the effect of the credit meltdown on the desalination business, we see that the timing and intensity and the impact will depend on project size, intended use of the water, and geographic location.

We believe the turmoil in the credit markets will have a greater initial effect on small desalination plants related to new construction of resorts in the Caribbean and Mexico. The credit crisis does not seem to be affecting offshore and ship units, farmers in the Canary Islands or retrofit of existing plants to save energy.

We do not yet see an effect of the credit crunch on the large municipal desalination projects factories in Israel, Spain, Australia, Algeria, China, India and the Middle East, because many of these projects are driven by severe water shortages and are government owned, sponsored and guaranteed.

While the majority of these projects are being built and scheduled, so may be subject to delays beyond our control. Projects may be delayed due to factors already mentioned such as temporary shortage of high pressure pumps and membranes, modified plant designers and construction and operating personnel. Projects such are [couched] that are being delayed by California municipality politics and environmental litigants. While we have not seen delays of large projects resulting from the current turmoil of the debt markets, we realized these are unprecedented times and we are monitoring the funding programs for major clients.

In our press release today we provided guidance on our range of net revenues and earnings for Q4 and for the full year. For the large projects we have good visibility of approximately six to nine months from a water shipment of product -- due to the longer sales cycle. For the smaller project, the sales cycle is much shorter, but there is less variability between quarters.

As we discussed in our last conference call, the fourth quarter tends to be our largest quarter of the year due to the desire of large customers to take ownership of our energy recovery devices to recognized procurement [piece] before December 31st. We are beginning to see a shift from our flagship product, the PX260 which yields [18%] improvement in flow over from the PX220. Sales of the PX260 represent 48% of the large project revenues in the fourth quarter. We expect this percentage of PX260 to exceed 75% next year revenue as most of the large orders ship over from the PX220. We are hard at work developing the next generation of pressure exchangers.

The [com] PX will allow PX technology to compete better in markets where the cost of electricity is either subsidized or relatively low. Beta testing on the com PX began in Egypt last month and we're expecting to sell this product commercially in the first half of 2009. We continue testing the PX titan -- 200 titan device which can do the work of five PX 220s. We have hired [Doug Iceberg] to promote brackish PX applications as well as other PX applications.

Finally, as we have been doing for many years, we continue to evolve our core PX technology to offer increased efficiency, flow throughputs 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.

However, in view of the sudden precious value of cash, we have decided to undertake all of our needed expansions as frugally as possible. We have begun preliminary discussions and plans for a new integrated manufacturing facility that will expand our production capacity three fold. This building will also serve as our corporate headquarters and will be used for inventory storage. To this end, we have signed a nonbinding letter of intent to occupy a refurbished building very close to our existing manufacturing facility, which will be retrofitted in phases.

This will allow us to integration into one location all over our regional office, manufacturing and warehousing needs, which today are separated between locations in Auckland and San Leandro. The federal lease terms that we have negotiated would reduce our multi-rent payment while giving us room to grow the Company.

We have some of the best people in the industry and continue to build on this very talented team of -- by strengthening our HR, IT, finance and accounting and manufacturing and service organizations. We recently hired a senior general counsel with strong patent and M&A experience to oversee our legal activities. We will make an announcement when the GC comes on board in mid-November.

As was mentioned in our previous call, we feel fortunate that Paul Cook has joined our Board. Paul is recognized as one of the pioneers of material science and has already had various meetings with myself and with our CDO, Dr. Rick Stover, regarding the potential for applications of our PX technology after all the seawater desalination field. We are also working with Paul regarding our plans to develop and strengthen our expertise in ceramics material science. We continue to be approached with new business ideas in the water space.

As we look at these opportunities, we're finding that as cash becomes scarce, and multiples are marked down by the market, business expectations of asset sellers are becoming more realistic, hence the purchasing power or our $80 million in cash has been multiplied by a factor of two or three in the span of one quarter. Our advisors tell us that this cash will become even more valuable as outside economic events unfold. I would now -- I would now like to turn over this call to Tom to discuss the third quarter results in more detail.

Thank you, G.G. Before I discuss our results for the third quarter, I will review again our revenue recognition policy and the effect that 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 large 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/power plant applications.

At times, large EPC contractors such as GE and [Anema] also build projects in the under 50,000 cubic meter per 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 or construction company customers, or EPCs who build and or operate large SWRO 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 project sales accounted for approximately 10% of our total annual net revenue, so our quarter to quarter variability was low. Today these large projects make up a majority of our net 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 vary significantly when these large orders 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 third quarter ended September 30, 2008, net revenue was 9 million compared to 11 million for the same quarter last year. The decrease in net revenue compared to a year ago was primarily the result of the timing of shipments of our mega projects division. The percentage of net revenue derived from mega projects customers was 45% in the third quarter of 2008 compared to 63% a year earlier.

Our OEM division contributed 5 million in net revenue in the third quarter, or 55% of the total, which exceeded our forecast by approximately 25%. Approximately 87% of our net revenue in the third quarter was generated from sales of our PX devices with circulation or booster pumps contributing 6% of revenue and spare parts making up the remainder. No one customer accounted for more than 20% of total net revenue.

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 in that quarter. We recently introduced the PX260 pressure exchanger which was designed to increase the flow through rate by 18% compared to the PX220. Due to the increased flow through rate, the PX260 sells at a premium to the PX220. Approximately 10% of our mega projects division revenue in the third quarter was generated from the sale of PX260s.

Exports to international customers accounted for 84% of our net revenue in the third quarter with China and Spain making up 30% and 17% of that total respectively. Gross profit as a percentage of net revenue was approximately 61% for the third quarter, which is equal to the gross profit margin in the second quarter after excluding the reversal of a warranty provision related to the cancellation of an extended warranty. The gross margin for the nine month period ended September 30, 2008 was 61% excluding the warranty provision reversal compared to 60% for the first nine months of 2007.

Sales and marketing expense, which includes sales commissions and marketing programs, increased from 12% of net revenue in the third quarter of last year to 16% of net revenue in the third quarter ended September 30, 2008. The increase was primarily related to the decrease in our net revenue for the quarter compared to last year. For the nine month period, sales and marketing expense decreased to 14% of net revenue in 2008 from 18% in 2007. 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, information technology and human resource organizations as well as fees for professional services including outside legal, accounting and audit services. General and administrative expenses increased as a percentage of net revenue to 30% in the third quarter of 2008 from 10% in the third quarter ended September 30, 2007.

The primary reasons for the increase in general and administrative expenses relates to the costs associated with our growth in operations and costs related to the transition from a private to a public company. Compared to a year ago, our general and administrative headcount increased from 11 to 25.

Much of our increased G&A headcount was in our accounting organization which needed to be enhanced to meet the ever increasing SEC public reporting requirements. Compared to a year ago, the additional expenses include 954,000 relating to increased head count, 358,000 related to increased professional services, 66,000 for director's fees, 78,000 in recruiting fees and 67,000 for additional space near our headquarters in San Leandro California. We are working hard to reduce our reliance on outside professional services and were able to reduce those expenses by 642,000 compared to last quarter.

Research and development expenses include costs associated with the design, development, testing and enhancement of our products. As a percentage of our net revenue, research and development increased in the third quarter of 2008 to 8% from 4% in the third quarter of last 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 absolutely dollars in future periods.

Non-cash stock based compensation expense for the third quarter of 2008 was $357,000 and is included in the cost of revenue, sales, marketing and general administrative and research and development expense lines on the income statement.

Including in other income expense for the third quarter of 2008 is 420,000 of interest income determined on our IPO proceeds, offset by a foreign currency loss of 202,000, which was the result of an unfavorable change in foreign currency exchange rates and an increase in the percentage of receivables denominated in euros during the third quarter. Most of our contracts are denominated in US dollars. The four contracts we have that are not denominated in US dollars are denominated in euros.

Net income was $623,000 for the quarter or $0.01 per share, fully diluted compared to net income of approximately $2.4 million or $0.06 per diluted share in the third quarter of last year. Turning now to the balance sheet, we ended the third quarter with approximately $80 million of cash, no outstanding debt under our revolving credit facility. And only $672,000 of debt related to equipment financing.

As a result of the IPO in July, the Company raised $76.8 million of net cash proceeds after IPO related expenses. All of the $3.6 million in accrued IPO related expenses were netted against additional paid in capital on the balance sheet as of September 30, 2008. Inventories increased 104% from $4.8 million in December 31, 2007 to $9.8 million at the end of September. The inventory is increasing anticipation of expected large shipments in the fourth quarter.

Our DSOs, or day sales outstanding, were 119 days, which is a significant improvement over last year and the first two quarters of this year. In our press release today, we provided guidance for our expected fourth quarter revenue and earnings results. For the fourth quarter we are projecting net revenue in the range of $20 million to $22 million and net earnings between $3.4 million and $4.1 million.

For the full year, we also provided guidance of $50 million to $52 million in net revenue or an increase of approximately 46% over fiscal 2007 assuming the midpoint of that guidance. We projected net income in the range of $6.8 million to $7.5 million for the full year. Historically our fourth quarter is our largest 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 third quarter financial results. I would now like to turn the call back over to G.G. for some concluding remarks.

Thank you, Tom. As you have heard today, our industry continues to grow at a rapid pace and we are solidifying our leadership position as the premiere energy recovery technology provider in the desalination industry.

The factors driving the construction of new desalination plants including population growth, climate change, and increasing demand for water for food and power production continue to intensify. While the worldwide turmoil in the debt market is affecting almost every industrial sector, the need for water is basic and is a national imperative for most counties. Energy Recovery devices, like our pressure exchanger, have made desalination affordable.

We work very hard to complete our IPO before the fourth of July weekend and summer holiday months when the IPO market, even in a good year, tend to be soft. Given the benefits of hindsight, we are very fortunate to have completed our offering before the new issuance market almost completed right up in August. It is a good feeling to have $80 million in cash in the bank and zero debt under our credit lines.

We are seeing a continual flow of acquisition opportunities which would potentially enhance shareholder value. We feel we have developed the best team in the business to evaluate, integrate, manage and grow water related businesses and technologies on a global basis and we have the financial flexibility to move quickly. I would now like to turn the call over back to Erica, the operator, and open up the line for questions from research analysts.

(Operator Instructions)

Your first question comes form the line of Debra Coy with Janney Montgomery.

Thank you. Good afternoon G.G. and Tom. A couple of follow up questions, on the existing business -- Tom, thanks for the walk through of how it breaks down between the two segments. Looking ahead to the fourth quarter, it seems to me that my quick math suggests that to come in at the revenue numbers that you are outlining to us and the net income number that you are outlining to us that we'll see a fall off in gross margins sequentially into the lower to mid 50s range, is that correct and can you explain kind of what's going on in terms of business mix?

Debra, I'm not sure how you're doing your calculations. We've been holding the gross margin in a range of 60% to 61%. It can tweak a little quarter by quarter depending on the volume of revenues and how we -- how we can cover our fixed costs. So I would expect there to be just a slight bit of pressure in Q4 because we're shipping big projects, which tend to get some minor volume discounts, but I would expect for the year that we'll still be in that 61% range on our gross margin.

Okay, well that's helpful. So, I guess what that implies that we will still see a little bit of -- a little bit of sequential increase in SG&A expenses and R&D expenses for the fourth quarter?

Are you saying in percentage terms or in absolute dollars?

No in absolute dollars. No, in percentage terms it's certainly go down.

(inaudible - multiple speakers) we're really starting to level off with our SG&A expenses. We're going to be adding a general counsel, as G.G. mentioned, but for the most part, as I mentioned, we've reduced our professional fees from $1 million in Q2 to 300 and some odd thousand for 642,000 decrease. So we're going to continue to chip away at what I would consider more one time costs of getting us public and reducing the number of consultants that have helped the Company get to where it needed to get very quickly.

Okay, that's helpful and we can talk further offline about the details of how it works down through the income statement. Taking the bigger picture of you, G.G., what you're hearing in terms of the market certainly fits with what I'm hearing. That the demand seems in place that will carry you through expectations in 2009.

Are you willing to talk about kind of where your bookings are at this period? Or -- I know we've had this discussion in terms of how you define backlog and bookings, but can you give us any visibility at all, at this point, ahead of guidance, which I guess is a few months away, in terms of how things are shaping up for '09 bookings?

Yes, we can give you some idea. For the large projects group, we have already booked roughly about 20% to 25% of our big projects, and this is typical for this time of the year. Usually you want to -- by the time you hit June, July you want to have most of the bookings in place. But we feel very comfortable that we have a good chunk of the big projects already in the backlog.

Okay and the OEM business that was surprisingly strong this quarter, I think you said $5 million was the revenue run rate for the quarter, would -- do you think you maintain about that level over the next several quarters or is -- was that unusually high?

When we were doing the road show, we always talked about this group doing about $4 million a quarter, and that's typical.

Yes.

And they -- for a lot of reasons they can get a couple of projects, but -- and a couple of -- again I mention a couple of the smaller projects in the Caribbean can vaporize and these are projects that resort type of hotels in the -- funded by Lehman Brothers. Those things vaporized. So but on the other hand, they brought in a whole bunch of projects that -- in excess of what they normally [do]. So they did almost like $2 million better than usual for the quarter.

Okay, so we would expect that to subside a little bit probably over the next several quarters.

Probably. Right. Again, the run rate of this division is usually about $4 million a quarter.

Okay, great. And lastly, well, two last questions. One, if you can give us some update on what you're seeing on the competitive landscape. There has -- there's been some talk of the turbocharger guys being pretty active in the market. I saw recently that KSB has brought its first isobaric project to market. Are you still gaining share in this market or how do you see the competitive landscape? Surely the overall market growth, as you said, was very, very strong for everybody I think in 2007, 8.

Right. Yes. We still getting about 70% market share, the turbo chargers are still getting share in those places where power is very cheap, like $0.02 per kilowatt. We are deploying the com PX early next year to start going after that market more aggressively. And yes the everybody is more -- a lot more aggressive these days.

Regarding the testing of the KSB unit in Malta, as far as I know, that's kind of a give away, this like a demonstration plan that KSB give away. And it's either not working or not working very well so KSB has a lot of work to do yet. But doesn't -- KSB is a big company. It's been around for 120 years and they have a lot of muscle so we expect to continue to see them. Their technology is a lot more expensive than our technology, plus again, we're out there fighting. And we're still getting 70% market share.

Yes. And it sounds like everything added up, your pricing is holding where you would have expected it over the last few months as you're getting these new bookings that have come in, pricing is remaining stable.

Yes, right. Keeping mind two things. In regarding your calculations of profit margin that I mentioned that in the fourth quarter 48% of our large project revenues were going to be the 260, the 260 whichever way you price it is still the higher margin products. We -- that will be very favorable for the quarter, also volume always helps us because we can absorb the shock overhead better.

Regarding competition, our philosophy is that we don't sit and wait for the competition, we're running -- we are running ahead fast -- we run faster than anybody and we run very smart and we will be very aggressive next year with new products that will compete against all of the other products out there in the market.

Okay, helpful. And then that's actually related to my last question, which is you mentioned that you're seeing acquisition opportunities that are getting more attractive in terms of valuation. Can you talk a little bit about the kinds of things you're looking at, what sort of technologies or products or related water types of treatment devices or whatever would be attractive to you and what kind of end markets that you might be looking at in addition to the large and small [deal] plants.

Yes, the obvious answer is any technology related to seawater desalination or any extension of the PX device to other industries is our -- takes some more looking at.

Short of membrane.

Yes, we're not really out there looking for acquisitions. I mentioned during the last call that when I was working for a big hedge [fund] that's what we did. But here we just doing -- running our business, we're following our model and then people are coming to us with this ideas and they're -- but they're starting to look more and more interesting as the expectations become more real.

Also, I guess, I'm sorry, I do have one very last follow up question then. So if acquisitions aren't an imperative, you do have $80 million on the balance sheet, as you said, you mentioned the new building, can you tell me what the CapEx plan is for 2009 at this point?

Debra, we're in the middle of doing our budgeting process. What I will tell you, on the headquarters building, we're certainly not going to be buying that building. It's a retrofit of an old building that was probably built in the 1950s and it's very near our present location so the move hopefully will be an easy one. And we -- we've been able to negotiate terms such that the rent will be cheaper than the combined rent of the three facilities that we have in the San Leandro open area. So we're going to be pretty frugal and not putting money into a fancy headquarters.

So, you're not actually buying a building, and you're doing some -- I suppose some costs related to moving lines and so on, but you're --

We're (inaudible - multiple speakers) in and the developers is putting some TIs in so, it's one that we have shared TI expenses. But we're not out to buy a building. We don't want to be in the real estate business and we think there's better uses of cash than real estate.

And to expand on that a little bit more, Paul Cook has been pushing the Company now for quite a few weeks for us to own the material science of what we do. That's mostly ceramic technology, without going into more detail, one of the plans of the Company is to look into owning -- having complete ownership of ceramic technology for PX and other applications.

Okay, go it. Thanks, guys.

Thanks, Debra.

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

Hi, it's Gary and Patrick. Not sure there are any questions left after that.

Hi, Gary.

Hi, how are you. Let me just start with one on China. They announced they're spending more on infrastructure and obviously you've got operations in China. Do you see any of that flowing into -- any indications of some of that possibly flowing into your business?

Probably in two steps. Let me describe a process that I've seen out there. These municipal water factories are socially disruptive and what we have seen in Australia, in Israel, in Algeria, in Spain is that once you get one of these things going and people see the quality that you can get, the quality of water that you can get, that people start demanding more plants.

Now, in the case of [Shanghai], we're starting up a plant in Shanghai in about -- in early next year, in about 14 weeks. That's number one and the demand is for ten more. And also [high flux] is building a plant in [Tianchin] which will be the first big one and so we expect that once Tianchin goes in that they will do a lot more. So, people need to see it running and people need to see that these things really work and they produce really good water and that the water doesn't kill the plants and the farmers need to see it making the plants green.

And once that happens, it's magical and we -- and that's what we saw [ashcolum] double in size quickly and then have their -- and then a big explosion in Israel, big explosion in Australia and we expect to see the same thing in China, but after the Tianchin plant starts. So even in our forecast before, we had China in for 2010. For the big expansion.

There's lots of plants in the pipeline, I think, they have -- the Chinese have a unique way of accelerating things when they want to.

When -- obviously a big selling point in your whole process is the fact that it saves so much on energy, which is why it's called Energy Recovery. As you look at what's going on with oil pricing and with energy pricing in general, are you getting any sense that there's some potential customers who are rethinking it because of -- recognizing this is a longer-term situation, so they're looking longer-term, but rethinking it just because they're seeing their energy costs start to go down and wondering if its worth the extra investment.

Yes, let me put this thing in perspective. Tom and I were in a (inaudible) conference in London two weeks ago and we were talking to people who make solar panels, solar panels, PV solar panels, they have $4 per watt CapEx, they run six hours a day. They're 40% efficient. We make a device that runs 24/7, its 98% efficient and it's not $4 per watt, its $0.10 per watt. We sell the PX at $0.10 per watt. And that is [deceiving] that these clients get and it's not subsidized by anybody, it's out there in the free market, and so the savings are tremendous.

So one of the things we see going forward, even with $60 oil. $60 oil is not cheap to us, is that you -- we're going to be doing a lot of retro fits going forward in Spain. I already mentioned the one that we're doing in the Barcelona area, but there's a lot of plants in Spain with the old [built] wheels. We're going to be doing some retro fits in Israel, Malta would like us to go in and retrofit their plant.

Tampa needs to be retrofitted, Trinidad needs to be retrofitted, that's the old ionics plant. And then there's other plants in Saudi Arabia and the emirates. So $60 per barrel, which equates to probably $6 to $7 per thousand cubic feet or per millimeter use in gas and about -- probably about $0.10 per kilowatt, that's very attractive to us.

Right and these are 20 to 30 year plans.

Right.

And you can pick your forecasts on oil, but people are saying this is a temporary malaise with oil and its going to go to $200 a barrel in the next couple of years. So I think these guys are looking long-term. I'd say the other comment is that if you don't have water, doesn't matter what the cost of power is or electricity, you just have to have it.

It's really helpful. Tom, G.G. this is Patrick here with Gary as well. Just wanted to ask a quick follow up question, if I may. I remember last quarter you had some credit terms that you were giving out. Have you seen that? Have you had to give some generous credit going forward to grow some of the OEM and the large plant business or is that remaining pretty healthy then?

The credit terms that we -- let's divide that up in to the two groups of customers. For OEM, basically it is cash on delivery, so we collect the money up front and then we ship. On the large projects, the patterns of us granting credit have really not changed. If anything, we're starting to pull in the term of the accounts receivable. As you can see, our days outstanding for our receivables have come considerably down.

So I think a couple of years ago we were differentiating ourselves by offering extended credit terms that some of our competitors couldn't match, and now that we're more established in the industry and our reputation is such that we're starting to push back on that. And that will continue by our sales force into 2009.

Great, that's very helpful, thank you.

Thank you.

Your next question comes from the line of Kevin Boylan with Bluefin.

Yes, I think most of my question have been answered, but if you don't mind, how about a recap, I think you started to talk about the com PX but just new products in general, the titan as well as far as timing and how they help you to get more plants. Thank you.

Yes, the -- lets start with the Titan. The Titan because it is targeted to very large projects will need two years of running before we even start offering it and to do that we have to complete our new manufacturing facility. The com PX is running -- has been running in Egypt since Columbus Day. It's doing really, really great. It's a great product.

And one of the things we're doing because I think I mentioned during the road show that we might be starting to sell it this fall, one of the -- one of the things we find out -- every time we launch a product, one of the early first articles ends up in [Frankenthal] in Germany, which happens to be the KSB factory and then KSB takes it apart.

So this time we're not going to be -- we are launching it, we're going to have 12 of them installed in different places by the spring, but we are more careful with the IP because we -- there's two or three patents we want to lock on this product before we actually offer it in a broad way and this is pretty much defending our IP.

Does the com PX by any chance help you win any retrofits, or it doesn't really have anything to do with that.

The com PX will help us do retrofits because if the client is worried about CapEx it will be a much cheaper way of doing it. It will help us -- especially in those places like Egypt where power is still subsidized at $0.02 per kilowatt.

Great. Thank you.

(Operator instructions)

There are no further questions at this time.

Thank you, operator.

Okay, thank you. And if anybody has any questions please call us here at ERI headquarters. Thank you, thank you -- have a nice day.

Thank you.

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