Energy Recovery Inc (ERII) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Energy Recovery First Quarter 2011 Earnings Conference Call. During today's presentation all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions.

(Operator Instructions)

This conference is being recorded today, Thursday 5th of May, 2011.

I would now like to turn the conference over to Tom Willardson, Chief Financial Officer. Please go ahead.

Good afternoon. And welcome to Energy Recovery Incorporated first quarter 2011 earnings conference call. Joining me today on the call is Tom Rooney, ERI's President and Chief Executive Officer.

Before we begin, I will make a brief statement about the forward looking remarks you may hear on today's call. The purpose of today's call is to provide you with information about our first quarter 2011 financial performance. However, some of our comments and responses to questions may contain forward-looking statements about market trends, future revenue, growth expectations, new products and business strategy.

Such statements are predictions based on our current expectations about future events and are subject to the Safe Harbor Provisions of the US Private Securities Litigation Reform Act. Forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and other factors that could cause actual results to differ.

A detailed discussion of these factors and uncertainties is contained in the reports the Company files with the US Securities and Exchange Commission. The Company assumes no obligations to update any forward-looking statements made during this call except as required by law.

Turning now to our financial performance for Q1, we generated $10.4 million in net revenue. That figure includes the $5 million in shipments that slipped from Q4 of last year into the first quarter of this year that we referred to in our last conference call.

The decrease of $2.2 million, compared to the same quarter last year was the result of the decrease in shipments of turbochargers and pumps, a decrease in the average selling price of our PX devices due to intense competition, and a decrease in the sales of our aftermarkets parts and services.

Sales to foreign customers for the full year accounting for 92% of our net revenue with shipments to India, China, Cyprus and Spain making up 27%, 17%, 11% and 10% respectively. Revenue from customers representing 10% or more of total revenue included IDE Technologies, UTE Desaladora Qingdao our Befesa Agua entity, which accounted for approximately 38% and 16% of our net revenue respectively.

Our margins in the first quarter decreased from 58% in the previous year to 45%. The gross margin related to our PX and related products and services was 50% compared to 64% in the prior year.

Our margins will negatively impacted by several factors including the deterioration of our average selling price of our PX devices on several mega projects, higher overhead costs from our new expanded production facility in San Leandro, where we produce our Pressure Exchanger devices, and increased overhead costs from our -- from underutilization of our recently completed ceramics facility.

For the TurboChargers and pumps the gross margins decreased from 30% to 16%, principally due to low production levels in our manufacturing facility in Detroit. For 2011, we expect continued pressure on our gross margins for our Pressure Exchangers, due to under utilization of our manufacturing facilities including our ceramics facility and intense competition.

As a phase of new construction of desalination plants hopefully improves over the next two years. And assuming we've remained successful and winning the majority of these projects as we have demonstrated over the past six years, we expect to see the benefits of leveraging the fix nature of these capital investments as throughput increases.

G&A expense increased by $324,000 or 9% to $4.1 million, notwithstanding the overall reduction in the average headcount from 41 to 36.

The savings from the headcount reduction were more than offset by the $639,000 in expenses primarily related to the retirement package for the outgoing CEO that was recognized in Q1, and the expenses related to recruiting and hiring the new CEO. Most of the expenses related to the change of CEO up from the retirement package for the departing CEO and our non-recurring.

Sales and marketing expense, which includes sales commissions and marketing programs increased in the first quarter by 6% to $2.1 million or 20% of net revenue, compared to 16% of net revenue in the previous year, the increase as a percentage of revenue was principally due to increased sales commissions paid to outside contractors for the projects we shift in Q1.

Research and development expenses increased by $201,000 to 10% of revenue, compared to 7% in the previous year, principally due to costs associated with improvement to our ceramics formulation. We believe that continued spending on research and development to develop new PX devices and other products for Energy Recovery applications in markets outside of desalination is critical to our future success, and consequently we expect to increase research and development expense in future periods.

Our income statement includes many expenses that are non-cash in nature. Non-cash share based compensation expense for the first quarter was $607,000 compared to $597,000 for the same period last year. And depreciation and amortization expense was $1.2 million, compared to $1.1 million in 2010.

We generated $268,000 foreign exchange gains in the first quarter due to the strengthening of the euro against the dollar. The majority of our contracts and purchase orders are denominated in US dollars, our functional currency. We have a handful of receivables denominated in euros that benefited from the exchange rate shift.

We recorded a tax benefit in the first quarter of $906,000. Given our expected loss position for the year, we will need to look at our ability to use our loss carry forwards each quarter. For modeling purposes, assuming we can use the tax benefits against future pre-tax income, we are using 34% for the tax benefit when -- in a loss position.

Our net loss for the quarter was $1.8 million, compared to breakeven for the same quarter last year. We generated a loss of $0.03 per share compared to $0.00 per share on a year-over-year basis.

We ended the first quarter with $52.6 million in cash and $1.2 million in restricted cash supporting letters of credit, for a total of $53.8 million. This figure does not include the $4.6 million of restricted cash in contingent escrow funds related to the purchase of Pump Engineering.

We had no debt outstanding under our revolving credit facility, which was put in place to issue standby letters of credit. As of March 31, 2011 there were no changes in the recognized amounts of goodwill resulting from the acquisition of Pump Engineering.

Our guidance for the full year 2011 remains unchanged from what we gave in March, although our expectation is that we are likely to be at the lower end of our guidance range. We hope to have a clear picture for the year and more particularly the fourth quarter when we report our Q2 results.

That concludes my financial review. I would now like to turn the call over to Tom Rooney, ERI's President and CEO.

Good afternoon. Today as we report our first quarter earnings, it's quite apparent that the global desalination industry continues to work its way through a very predictable downturn that came about as a result of the global recession which began in 2008.

Desalination project are large and capital intensive, and despite the urgent and growing need for clean water all over the world, numerous desalination projects were put on hold as a result of the global economic crisis of the past few years.

These same projects along with many more are due to return in the future, but today we are feeling their real impacts of a global slowdown in contracting for desalination projects.

With fewer desalination projects underway around the world, we're seeing heightened competition for any desalination projects, which do move forward. This heightened competition inevitably leads to more aggressive pricing and lower margins. ERI is the global leader for Energy Recovery devices, but we are not immune to the forces of competition during [the] market slowdown.

ERI is currently experiencing sluggish sales, low revenues, competitive pricing, higher costs and lower margins. The lower revenue levels are particularly challenging for ERI because of our strategic position as a vertically integrated manufacturer. With low revenues, we experienced very high operating expenses due to our fixed manufacturing expenses.

These same fixed manufacturing expenses will serve us well in the future when we begin to see revenues rebound. The global demand for clean water has never been greater, and it continues to grow everyday and throughout the world. As global economies begin to rebound, we fully expect to see the demand for desalination projects to rebound as well.

Our sales and marketing teams are already reporting a rise in activity levels, which portends well for future growth in revenues in 2012 and beyond. As we work our way through the end of this downturn in demand for desalination projects, ERI is focused on three primary goals; operational excellence, innovation and revenue growth.

Our focus on operational excellence means that we're looking to sharpen every one of our essential business practices, so that we can operate more efficiently, drive our costs and be more competitive now and well into the future.

By essential business practices, we mean everything from purchasing materials more strategically to managing our manufacturing processes for greater efficiency, the streamlining our corporate business practices and so on all of way to our organization. Simply put, this is what great companies do in -- do year-in and year-out to stay lean and competitive.

Our focus on innovation is really a return to the core of what made the ERI so successful in the first place. Innovation today means investing in the people and processes that will allow us to take our existing products for the next levels of advancement, while at the same time driving out costs and driving in reliability.

Innovation also means looking for new applications for our existing line of products in markets outside of desalination, markets such as the oil and gas industry, mining, ceramics and general industrial operations.

Recovering stranded energy through the conversion and reuse of pressure is a much needed cost benefit in many industrial sectors outside of the desalination. And we intend to use our core expertise to penetrate many of these new industrial sectors. Despite the sluggishness in desalination, we're actively investing in our R&D group in order to spur innovation for the future.

Our third and final goal is to focus intensely on revenue growth, despite the lingering downturn in our core market. To do so, we are focusing a great deal of effort on protecting our sales and marketing approaches in order to maximize market share in our core products such as PXs and turbochargers, as well as our newer products such as high pressure pumps.

Enhanced sales and marketing, combined with our effort to innovate our existing line of products, should allow us to optimize revenues from our core desalination products.

In addition to driving revenue growth through organic means, we are now beginning to turn our focus to growth opportunities through acquisitions. One of the primary objectives that our new CFO and I will be focused on in the coming months is strategic acquisition to enable top line growth, as well as penetration of new markets.

The next few quarters will remain challenging as we work our way to the end of a very predictable downturn in the desalination market. We have our work cut out folks. But I continue to bullish about the long range prospects to the desalination industry, and for ERI as the industry leader in Energy Recovery devices within the desalination industry.

Add to this our ongoing investment and focus on penetrating new industrial markets for our Energy Recovery devices and we see a very bright future for ERI going forward.

With that, we'll open it up for your questions. Operator?

Thank you.

(Operator Instructions)

Our first question comes from the line of Chris Kovacs with Robert W. Baird. Please, go ahead.

Hi. Good afternoon. Thank you for taking my question. I think, a couple of quarters back I think it was Q3, you guys mentioned you're responding to some bids for -- I think it's around 20 or so different projects. Can you provide an update with regard to the kind of activity that you guys are responding to in particular.

And maybe to elaborate on that, I think you mentioned last quarter that's a lot of the projects that you having a pipeline are kind of a pushed towards the back half of this year, which is kind of accounting for the range of your guidance. Have you seen any kind of push out of those into maybe 2012 because of the slowdown in the industry you're seeing?

Good questions, Chris. So, taking the second question first. We haven't seen any push out of the projects that you're referring to. We don't expect to see significant revenues coming from the larger projects in the fourth quarter, although we do anticipate some.

But we haven't really seen any specific push outs on the products or projects that we see in Q4. A number of them are actually straddling the end of the year when we may have partial shipments in the fourth quarter and more substantial shipments in the first quarter and we're still seeing that. So, for the projects that we do see straddling the end of the year it's about the same now since our last call.

As for the 20 or so products or projects that we referred to in Q3, I can't really speak to that; we don't have (inaudible) on the line right now. What I can say is that the majority of the projects that we are responding to right now have a delivery date that straddles the end of the year or well into 2012.

Keep in mind that a lot of these very large CapEx desalination projects move very slowly -- took a while for them to slowdown in the aftermath of the downturn, and equally take a fairly long time or long cycle time in moving back up.

What we are able to measure right now is a significant pick up in all of the activity level, but having said that they don't move to contracts and to deliveries quickly. So, we're seeing an interestingly high level of activity that portends well for 2012. We don't expect to see any big positive surprises until 2011.

Great. Thank you, guys. I appreciate it.

Thank you.

Our next question comes from the line of Dale Pfau with Cantor Fitzgerald. Please go ahead.

Hi. Good afternoon, and welcome aboard.

Thank you.

Could you talk about -- are you seeing any kind of pickup in your OEM business? In the past, you kind of -- trying to view that as precursor to pickups and the other things. And second question is, how long before you might have announced [little] project -- products for the oil and gas industry? Thank you.

Okay. So, yes, the OEM projects tend to be the precursor for larger projects, because they tend to go towards the smaller projects and they move a little bit more nimble -- move little more quickly. So we've got counter balancing trends right now.

We were starting to see a pickup in that activity, but it's been balanced now by a pull back in the OEM sector, because of the Arab Spring as it's referred to -- the unrest in some of the Middle Eastern countries.

So, our OEM sector typically fairs extremely well in places like Egypt and Algeria and Libya, and so on and so forth. And so, on the one hand, yes, we're seeing higher activity levels through OEM. But on the other hand, that's the one part of our business that's been slowed down a little bit with some of the political unrest in the Middle East.

On the second question in terms of how soon we'll see activity level in the oil and gas space, we're really focused right now on product development and we're actively in the mode of hiring project managers and product managers for that space.

We have half a dozen beta sites, where we actually have working product for oil and gas companies. But in terms of how quickly we're going to start to announce revenue, I don't expect any announcements in 2011 in terms of significant revenues for 2011, but we're likely to start to have meaningful announcements towards the end of this year and into 2012.

Thank you. Our next question comes from the line of Patrick Jobin with Credit Suisse. Please, go ahead.

Hi. Thanks for taking my question, guys. First question relates to the strategic acquisitions that you're talking about. Just maybe some more color around what metrics you're using to evaluate those. Is this part of the strategy to diversify with some of the new markets? And kind of what size acquisition are we looking at? Thanks.

Yes. We are going through the process in terms of answering all of those questions right now, but strategically, what acquisitions mean to us are opportunities to enter new market, so if we can acquire a technology or a presence in a new market that would be the highest priority for us.

As to the size -- and obviously our capital structure avails there's a certain opportunities, but what is most important for us is to be able to diversify into new markets be that -- be it a large acquisition or small.

The critical element for us is to be able to move into adjacent and alternative markets where our core technology plays well. And so, we really are going to be focusing on that quite intensely over the next two quarters.

Okay. And then, just another question here -- could you may be walk us though your go-to-market strategy for some of the new product offering? It seems exciting that you are in half a dozen beta sites in oil and gas industry.

I am just thinking through the operating model when we look -- as you introduce new things. Is it going to be similar to how you approach desalination today? As far as attacking the end markets, is it a similar sales approach?

Well, different sales approach because the buying patterns in the oil and gas sector are different. I mean, as an example, you don't have any -- you typically don't have government agencies operating as the end users in oil and gas like you do in the water space.

So the buying patterns and the inclination towards economic and returns on investment are different, the terminology is different, the investments cycles are different, the capitalization structures are different.

So, I would be remised if I made it sound like we're going to use the same sales strategy. We're not. In fact, the talent that we're currently recruiting is -- we're recruiting out of highly regarded firms inside the oil and gas space, so as to avail ourselves of the opportunity to play well in those spaces.

What we do know is this, in a lot of industrial sectors outside of water pressure is a form of energy and that form of energy is not being harvested, in fact, it's being lost. And so, we're looking at our core technologies around reuse and recapture of pressure energy, as that which will drive us into those spaces.

And so, whether you look at the oil and gas space or lot of other industrial areas, there is a very strong desire to harvest that stranded energy that currently exists in the form of pressure and fluid.

So our core technology, our core approach to harvesting and reusing that energy is the same, but the sales technique towards oil and gas and other space is not. So having said that, we are -- we've kind of like we're back to the year 2000 with [PXs] in the water space.

We've got to approve the technology, and we've therefore place the number of pieces of equipment in use in real live application so that we can gather data and prove the technology and prove the reliability. So that's underway. That's been underway. And the next step then is to prove out the economics. Of course, once you proven the economics and the reliability you have a clear path to market. So, that's what we are doing.

Okay. Can I ask one quick --

Sure.

-- follow-up on your guidance? Just looking at -- you said the low end of your range is probably where you'll come in. And then you mentioned that there is some project timing issues where the bulk of the revenues going to be kind of straddling the end of the year.

So my question is, is the low end of your guidance assuming all the projects come in this year, or it's a low end of your range assuming that there is some partial slippage there?

Partial slippage. We take a look at a portfolio of projects that are scattered out over the next five or six quarter, and what we have to do is predict what percentage of those will move forward and what fashion. It would be irresponsible for us to take the most optimistic of any of those. So we are using our best judgment in terms of how those projects will time themselves out, needless to say there is a fairly high degree of uncertainty based on that.

But we use our best judgment in terms of taking into account the likelihood of being awarded a particular project, and then the likelihood of the project being delivered in the time sequence that would match the year. And we think we've approached it in a rational fashion, but uncertainty is always embedded in those equations.

Great. Thank you.

Thank you.

Thank you. Our next question comes from the line of Laurence Alexander with Jefferies & Company. Please, go ahead.

Hi. This is Lucy Watson on for Laurence this afternoon. Just a quick question on R&D for a product diversification, you've spoken a little bit as of your new technology for oil and gas companies. Do you have products in the pipeline ready to enter the other markets that you mentioned, I guess, specifically industrials and mining? Or do you anticipate needing to do acquisitions to penetrate those markets?

We think, we have to do both. We think we have to look at acquisitions in order to acquire certain technologies but we also think, we can do it organically. To do acquisitions, would be to help and accelerate our opportunities in some of those areas. In the oil and gas and the mining space and in others, we can do it 100% organically, but we can enhance our efforts by also looking at acquisitions to bring more of a set of solutions and to be able to do so more quickly.

Okay. And I think you also mentioned that your gross margins on turbochargers and pumps declined 16% in the quarter. Was any of that due to pricing?

Lucy, let me just correct something, they declined to 16, not by 16%.

Okay. From 30%, right?

Correct.

And was that due to pricing or how did that bridge -- or how do you bridge the difference year-over-year?

It really is more than negative operating leverage of just lower throughput going through our factory in Detroit. So it wasn't the same kind of pressure on ASP that we saw with the Pressure Exchangers.

Okay. Thank you.

Thank you. Our next question comes from the line of JinMing Liu with Ardour Capital Investments. Please, go ahead.

(Inaudible) my question . First question is related to your high pressure pump of that product line. Before it was mentioned that your company is looking at to sell high pressure pumps along with Pressure Exchangers, have you seen any activities on that

Yes. Yes, we continue to sell pumps in conjunction with our Pressure Exchangers, needless to say ERI is a more proven name in the area of Pressure Exchangers and turbos. And so, we're just earning our way up on the pump side and developing more products and more technologies. We continue to spend on the R&D side to protect our products and to offer a wider product offering. And, yes, we are looking at combining solution between pumps and Pressure Exchangers give more of a total solution for our clients.

Okay. My second question is related to your ceramic facility. It was mentioned before that you all -- you all use that same facility to produce some products, but I think it related to desalination, but have very similar characteristics. Is that -- can you just give us more clarity on that front?

Yes. We continue to look at -- so what we have is essentially two value added offerings, one is that we have a grossly underutilized ceramics factory. So we can generate contribution margin simply by utilizing the unused capacity of our ceramics factory rather significant unused capacity. We are probably running at 10% to 15% capacity of our ceramics facility, which is to say we're well suited for when the PX market climbs. We're going to see extreme benefits from operating leverage as we walk through that.

But in the near-term, we see an advantage from the stand point that we have underutilized capacity. And so, that avails us to the opportunity to go after a wide range of ceramics products outside the desalination industry. Having said that, there is really three -- probably three stages that we can look at in terms of products. One, is simply to go in and OEM commodity product in ceramics in any sector, and that would simply utilize our unused capacity. That's the lowest use of our facility.

The next higher use of our facility would be to co-develop products with parties that are looking at venturing into ceramic technologies in lieu of another material. And we actually are working with the big 10 university in some other locations some very interesting next generation products that people themselves want to see potentially done in ceramics.

And if you think about that, ERI actually has some unique talent in the area of ceramics because we have an ability to work ceramics in high structural need areas with very tight tolerances and larger products in ceramics than are customarily done.

So, our typical PX Pressure Exchanger is a large structural product made out of ceramics with very high tolerances, and that makes us a bit unique as we're finding out.

And so, you might imagine moving parts in industrial application that needs to be manufactured to high structural content and tight tolerances, so the second best or the second higher utilization for ceramics factory is these strategic components.

We see evolving ,though, over time -- and this is the one that takes the longest -- is to actually evolve products that would become branded as ERI products, where we are looking for next generation ceramics technologies or ceramics applications using our technology.

So we intend to climb that ladder from just manufacturing commodities for other people through collaborative products that we might to do with third parties, all the way to ERI branded products. Because we think we have some unique talent expertise and capacity in the area of ceramics. That's going to take some time for us to evolve, but we think it's a unique opportunity for us to create value.

Okay. Thanks.

Thank you. Our next question comes from the line of David Rose with Wedbush Securities. Please go ahead, sir.

Good afternoon. I was hoping that we can go through three quick questions. The retrofit strategy if you can discuss it just a little bit in terms of how it's working, what are your thoughts on going forward?

And then, secondly, a follow-up to the previously question regarding the guidance, if the guidance in fact does entail this new ramp-up in the infrastructure for the new products. And third, we can -- the options -- if you have to reset any options to retain existing talent given the share price?

Okay. So, you got three questions. So resetting the options, I can tell you that like many other firms that are looking at employees with large amount of underwater option, yes, we're looking at various options there, don't have any insight for you. We will probably make some kind of a move to in the next 60 to 90 days to address the issue of employee retention and motivation around underwater option.

As you are probably aware, there is handful of different ways to do it with pros and cons and we're going through those right now. And we'll likely have an intelligent approach to that, as I say in the next 90 days.

The retrofit strategy, yes, we're definitely seeing projects move forward where our PX devices and in some cases our turbos are being used to retrofit competitive products in the market place. They are either less sufficient then what the clients would like, or have reached an age where they like to retrofit them.

You know as the [desal] industry and products that have been built moves down the path we expect to see the replacement of aged infrastructure -- aged desalination infrastructure become more and more important within our revenue. And so, we are constantly addressing that. It's very slowly building up into an interesting piece of business for us. So, that's two of your three questions. I apologize I can't remember the first.

The third one, David, I think you asked -- this ramp up in R&D, was it included in the guidance that we gave?

Yes, it is not just actually R&D, Tom, it's also the sales force everything entailed to growth in your business lines.

It's included but it's an ever evolving investment that we are making. And so, that's one of the areas that could cause us to break guidance on the low end, would be our progressing investments in the areas of R&D.

So, I guess the answer to your question is to some extent we've included that. But, as our investment and our sense of urgency grows, we are balancing the effect it could in fact cause us to break guidance on the low end.

But if and as we do that, it would be seen as a value added opportunity for us and -- but as we sit here today I would say that it's represented in our guidance.

Okay. And I am sorry, if I may one follow-up question to the previous question. Regarding acquisitions -- and I know you are still looking, but can you give us a ballpark of the upper end of which you're willing to pay for an acquisition in terms of absolute dollars?

We've never acquired anything more than a $1 billion. No, I am teasing. Actually -- no, we really haven't set strict parameters on ourselves in that regard. I would say that it's been well discussed that Tom Willardson is stepping down as our CFO and we're brining on a new CFO; somebody that I have worked with in the past, who is actually had some very deep experience in doing water acquisitions or acquisitions in the water space.

And in large measure, his expertise and his experience, along with mine in that space, will enable us to craft a rather aggressive strategy in the area of acquisitions in the water space and potentially mining in some of other areas.

So, we'll have better information for you and better guidance in the future calls, but there -- its become very obvious to us that given the overhead that the corporation has by virtue of being public, we have a lot of unused capacity that we need to grow into.

And intelligent acquisitions that are strategic and that enable us to move into new market is absolutely part of our strategy going forward. And obviously, we have to avoid deal heat and just getting into buying for the sake of buying, but we're really wanted to let everyone know that that is very clearly part of our strategy going forward, without trying to be explicit as to sizes, timing, and things like that.

Okay. Thank you very much. I appreciate the color.

Sure.

Thank you. Our next question comes from the line of Peter Mahon with Dougherty. Please go, ahead.

Hi, good afternoon, guys. I just had one follow-up question. Just -- you guys talked about continued pressure on your margins. We saw margins of 45% in the March quarter, just wondering how much additional pressure you guys expect to be put on margins. Could we see something in the low, low 40s, would that be possible later as the year progresses?

Yes. So the margins are really coming about from two reasons, one is price pressure and the other is our negative operating leverage, and so you'd have to break the two apart. So the negative operating leverage exists and will continue to exist, and the pricing pressure remains the same. I don't know that we are going to see more extreme pricing pressure than what we've seen.

We think that the industry is really at the bottom in terms of the revenue and the market demand. So as demand increases -- and there's a set number of competitors in this space. And so, as demand increases pricing pressure should relief to an extent. So we don't see pricing pressure becoming worse. We don't see operating leverage moving against this much more.

The third thing actually that we always see as well as product mix. So depending on size of products or projects and the mix in the products, we could also see a change in gross margins. Obviously, the turbos generate slightly less margins than the isobaric Pressure Exchangers. But then, we also that our -- you have a mix in terms of OEM versus the mega projects. And the mega projects typically gone or slightly lower margins than in the OEM.

So the mix -- I guess, the biggest risk for a gross margin change is going to be in the area of product mix and a variable gross margin that go into that more so then price pressure, in general, or negative operating leverage.

Okay. Perfect. Thank you for that color. And then, just one additional question, you guys talked about a few meaningful projects that were scheduled for delivery towards the end of the year, that kind of straddled the year end. Could you -- could you quantify that amount for us? Is it a few million dollars that could lie in the balance or hang in the balance?

Yes. It's several million dollars, and it's at this stage in or out ,and how much in or out. It's certainly not $10 million worth of work.

Okay. Perfect. Thank you, very much.

Sure.

(Operator Instructions)

Our next question comes from the line of Shawn Severson with ThinkEquity. Please, go ahead.

Thank you. Good afternoon.

Good afternoon.

As you look into some of the new market opportunities in applications -- and obviously you're down the road more with other -- than others. But what is the ROI, do you think of the products more for like let's say an oil and gas application?

I mean, can we look at it and say that, okay, the incremental cost of the technology and the implementation into an oil and gas process saves you ex percent on energy and gives you payback period of Y?

I mean, I assume that's part of what you're doing, but I was trying to understand as to how valuable the addition will be into those process industries?

Yes. And it depends on what aspects of the process you are talking about. Given energy prices at the levels they are right now, there is a tendency to avoid anything that might disrupt the process, particularly in the oil and gas space.

So the degree to which you have a product -- that we have a product that is highly reliable and at the same time going into an element of their process that it doesn't put the entire plant in a point of vulnerability, you then can talk about periods of -- return on investment periods that are longer.

And to the degree that a technology one of our products would go into an aspect or an element of the oil and gas processing making an entire plant vulnerable, there is no ROI high enough to consider going in there.

So, on the one hand, we have to work with oil and gas clients to identify aspects of their processing where they would be willing to consider Energy Recovery, and at the same time we have to work on our products reliability and even potential redundancies.

The good news is that Energy Recovery and our technologies are typically known as extremely highly reliable, and that works well for us in those spaces. But there is not -- there is going to be cut specific answer for return on investment in these areas.

The good news is, we've been pleasantly surprised at a degree to which the oil and gas industry and specific players in that industry have wanted to talk to us about Energy Recovery inside of their processes as long, as we respect the fact that they are elements of their process that they want nothing to change inside of.

So it's a learning exercise in both parts, and we are fairly well down the road in terms of learning about that.

Great. Thank you.

Thank you. So, I think that brings us to the end of our questions. And we thank everybody for being involved in the call today.

And with that, I'll turn it back to the operator.

Ladies and gentlemen, this concludes today's conference. You may now disconnect. Thank you for your participation.