Energy Recovery Inc (ERII) 2012 Q4 法說會逐字稿

Good morning, everyone. Welcome to Energy Recovery's fourth-quarter 2012 conference call. My name is Tom Rooney, and I'm here today with our Chief Financial Officer, Alex Buehler.

The primary purpose of today's call is to provide you with information about our financial performance in the fourth quarter of 2012. However, some of our comments and responses to questions may contain forward-looking statements about market trends, future revenue, growth expectations, cost structure, gross profit margins, new products, and business strategy. Such statements are predictions based on 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 materially. A detailed discussion of these factors and uncertainties is contained in the report that the Company filed with the US Securities and Exchange Commission. The Company assumes no obligation to update any forward-looking statement made during this call except as required by law.

Well, having said that, good morning, everyone. Now that we have formally announced our fourth-quarter and year-end results, I'm proud to say that we met or surpassed virtually every goal that our team set out for ourselves at the beginning of the year. In doing so, we strengthened the Company and positioned ourselves for a very bright future.

Looking at the results, it's clear to see that in almost every financial metric, we saw significant improvement, quarter-over-quarter and year-over-year. After 3 straight years of steep revenue declines, it was great to see our annual revenues jump by 52% in 2012, including a 147% jump in the fourth quarter alone. This dramatic revenue turnaround is attributable to very significant market share gains combined with a surge in MPD projects during the year.

One of our goals for 2012 was to significantly improve our market share. And today, we are enjoying one of the highest market shares in the Company's history. It's important to note that these gains in market share did not come at the expense of gross margin. In point of fact, we were able to significantly expand our gross margins, from 28% in 2011, to 47% in 2012. We did this through a more competitive value proposition in the marketplace; through cost cutting; and through operating leverage and efficiencies.

Another one of our stated goals for 2012 was a significant reduction in operating expenses. It's worth noting that we reduced our operating expenses by more than $4 million, in a year when our revenues grew by 52%. This is all the more impressive when you also consider that in 2012 we invested $4.8 million in research and development, the largest such investment in the Company's history. This large investment in R&D will serve us well as we turn our focus and attention to the oil and gas industry.

As pleased as I am to report significant financial improvement in 2012, the Company's most remarkable accomplishment this year came from the substantial progress made in developing products that will allow us to diversify into the oil and gas industry.

In 2012, we designed and developed three new technologies for use in the oil and gas industry, while working with three high-profile oil and gas clients. These new technologies are in various stages of field deployment and testing, and the results to date are promising. We are now transitioning more aggressively into the commercial deployment stage; and to that end, we have just hired our first dedicated oil and gas sales executive. The opportunities and oil and gas are very real. Just yesterday, we reached a verbal agreement for a product sale to a new oil and gas client. We've just now begun our outbound sales effort.

In order to protect and enhance our first-mover position in the oil and gas industry, we have filed and/or have begun to file a significant number of patents covering our industrial fluid technology and solutions.

In order to facilitate Energy Recovery's evolution into a highly diversified energy recovery provider for all industrial fluids, we recently launched a totally new brand identity for the Company. Many of you have already seen this in the form of our new website. This metamorphosis has been far more than a cosmetic makeover for the Company, as this marks a wholesale cultural and technological shift for the Company. This is a shift in vision that opens us up to a vast array of brand-new industrial and municipal fluid markets, and will enable the Company to grow for many years to come.

Looking ahead to 2013, we see limited revenue growth coming from our global desalination market in 2013, with a significant percentage of that revenue coming in the last few months of 2013. Right now, we see a large number of significant MPD projects lining up for 2014, which we expect will drive our desalination business back into a very significant growth mode for 2014.

For the first time ever, we are planning to generate several million dollars of revenue in 2013 from the oil and gas sector. Assuming that we continue to make progress in our field test, we anticipate that oil and gas revenues will represent as much as 20% of our overall revenues in 2014, even with the significant desalination growth that is forecasted for 2014.

In 2013 we fully expect to continue to make progress in trimming our operating expenses and expanding our gross margins, while continuing to invest heavily in research and development. We do not anticipate large CapEx expenditures in 2013.

2012 was a very successful year for us here at Energy Recovery. And we see 2013 as the final transition year for the Company, enabling us to return to full speed in 2014 with a combination of high revenue growth, positive cash flow, and meaningful net income.

With our improved cost structure, a dominant market position in the desalination industry, and burgeoning success in the oil and gas industry, the long-range outlook for Energy Recovery is very bright. But we're not stopping there. Just recently, we launched an initiative in collaboration with one of the world's leading management consulting companies to map out the complete universe of industrial fluid flows where our technologies can be deployed. This represents identifying and prioritizing many new industries for our solutions. By the end of 2013, I fully expect to be able to articulate a very thoughtful road map for growth that will guide Energy Recovery's growth and diversification efforts for many years to come.

We've worked very hard in 2012 to reposition this Company for a sustainable return to profitability in the near-term. And now the time has come to set our sights on more aggressive avenues for growth in 2013 and for many years to come. 2012 was a very successful year, and the future for Energy Recovery has never been brighter.

Thank you, and this concludes my prepared remarks. We will now open up the call for your questions.

(Operator Instructions). Steve Shaw, Sidoti & Company.

Hey, Tom. Can you provide a little color on the obsolete inventory?

Sure. It's almost all coming from our -- the pump and turbo business that we moved from Michigan to California.

But, Alex, do you want to take that one?

That was about a $900,000 non-cash expense that we booked in the fourth quarter of 2012; having to do with, as Tom mentioned, all pumps and turbos inventory, at least almost all of which was related to pumps and turbos. Anything that has been obsoleted by a new ramp of a product is included in that charge. And that anything that is slow-moving or non-moving is also included in that charge. So we had a number of items trigger the slow-moving threshold at the end of this year; hence, the charge was especially large in the fourth quarter. But again, I will reiterate that all of that is non-cash.

Right.

And then, Tom, can you provide a little more color on the oil and gas industry? I know you stated that it's going to make up approximately 20% of 2013 revenue. It seems like a quick ramp up. And maybe how that is developing, and what kind of customers -- is it more of a nat gas drilling sort of thing?

I actually said it would be 20% of our revenue in 2014.

Okay, 2014. I'm sorry.

Yes. It will be several million of revenue this year. The oil and gas has been effectively no revenue in the past. I don't think we even had $1 in 2012. So it will be several million in 2013, and roughly 20% of our revenue in 2014.

And yes, it is the natural gas, or the gas processing segment, of the oil and gas industry. And there is a massive installed base of sour gas processing facilities around the world. And so the immediate addressable market is very, very large -- substantial -- hundreds and hundreds of millions of dollars just for our product. And so, for us, it's a technical acceptance and ramp up.

All right. Thanks, guys.

Jeremy Hellman, Avenue T Fund.

Guys, just wondering, just picking up on the oil and gas thread some more, it would be helpful just to have you run over again some of the value proposition that you're providing to potential customers. And how your product and service is going to compare in the marketplace with anything else that may or may not be available.

And then lastly, for every sale that you might make, how much non-hardware component might be involved in that; just vis-a-vis your desalination sales, which are primarily hardware and not much more.

So when you say non-hardware, you mean the ongoing service and aftermarket?

Yes -- service, support, consulting, anything else that might take $1 of hardware and create $2 of revenue.

Sure. So taking that half of your questions first, the oil and gas industry is very accustomed to strong service after the sale for plant uptime and whatnot. So we fully expect that the recurring revenue after an initial CapEx sail into the oil and gas industry will be significantly different than what we've seen with the desalination industry. I'd be hard-pressed to try to map that out explicitly because it is -- the dimension that we have yet to be into. But we fully expect that the recurring revenue in the oil and gas industry will be multiples of what it is in the desalination industry.

But coming back to what the original value proposition is -- in essence, we are creating an entirely new category. When I tell people is that industry is very accustomed to the notion of reuse of heat, through heat exchangers and heat recovery. And even the oil and gas industry is accustomed to reusing pressure that happens in gases, through things that are called turboexpanders, and so on.

But the notion of another form of energy that can be recycled is pressurized fluid. But there really are no devices anywhere in the oil and gas industry, or most any industry, that can capture unused pressurized fluid flows. So inside the -- specifically, the gas processing industry, there is a closed loop flow that is referred to as the amine flow, or sour gas processing, where a cleaning fluid called a amine is pressurized, used to absorb hydrogen sulfide and carbon dioxide to sweeten gases. And that is a continuous cycle that pressures up and pressures down. And we been able to successfully deploy our products into that amine cycle and giving our clients a 3-, 4-, 5-year payback period on that through energy savings. So that is the value proposition there. We are clearly a first-mover. We are dealing with some of the world's largest names, and not one has ever dealt with anyone in this realm. So we are fairly confident that we are the first-mover. And we're getting a lot of very, very eager intention from the industry in regards to this.

Great. Thanks for that elaboration. And just one more for me. Just turning back to desalination, looking out to 2014 and beyond, are you seeing any relative interest up or down in terms of geography? In particular, I have seen a lot of rumblings about the water situation in Texas and in the Corpus Christi area. Are you seeing any incremental increased interest in the US?

Sure. Well, there is a major project that has been battling to move forward in San Diego; specifically, in Carlsbad, California. That project is moving full-steam ahead. It is a substantial project that would have great impact on us. There are 19 fairly large desalination projects in one form or another in the planning phase, or the deployment phase, just on the West Coast of the United States.

Texas, to your point, has a tremendous focus on desalination now. Throughout Texas, it tends to be in more in what we call the brackish area, which is desalinating low-salinity water out of water tables in Texas. But that is definitely a burgeoning area.

We don't -- when we see significant, and I do mean very significant growth coming in 2014, very little of that is calibrated as coming out of the United States. The United States as a market for us is something that we track, obviously, very closely. But we really don't see much lift coming in the United States in any near-term forecast that we're doing. If we're fortunate, it will be a 2014, 2015, 2016, 2017 evolution of the US market. The big lift that we're seeing in desalination is enormous potential and projects coming out of China. It was about a year and a half ago that China officially mandated that the Party plan for resolving the water issues in China was officially decided to be desalination.

And so all those machinations have been underway. And there is a -- you think I was exaggerating if I told you how many projects we are tracking now in China. And so there is a wall of work coming there.

There is also a tremendous amount of work coming out of our classic Middle East/North Africa market. Chile is exploding with opportunities. So as the global economy continues to heal, and as certain large industrial -- industry-driven geographies come about, 2014 is looking to be an amazing year.

The other economy, by the way, that a lot of people will talk about around desalination is India. But India -- we don't have high expectations coming out of India, because the politics in India are just encumbered enough with irregularities that we think it's going to move more slowly than what other people think.

Okay. And just a follow-up on that -- sorry, I said one more and then I would hop out -- but if you could elaborate for everyone on the sales cycle length in China relative to the US? I think anyone that is fairly familiar with the market in the US knows that it is -- Carlsbad being a great example -- of a terribly long sales cycle. How much shorter is the sales cycle in China? And maybe a way to detail that would be if they announced a project today; how far out would it be until you would actually ship a unit if you were to participate in that project?

Sure. Well to your point, the Carlsbad project has been, one way or another, trying to move forward for 10, 12, 13 years. I would say that, in China, it is one-tenth of the time period. So when a project is announced in China, A, there is a great deal of certainty; and, B, there's a great deal of speed. So when a large project -- and they don't typically announce them per se in China. But when we are aware of a project in China, it typically means that designers and construction companies that we work with have been engaged; and roughly 12 to 18 months later, we anticipate revenue. So the fact that many of our immediate clients are working on projects all throughout China gives us a very clear line of sight as to what is coming in China.

Great. Thanks, Tom.

Sure.

JinMing Liu, Ardour Capital.

To your oil and gas projection for 2014, that 20% sales of total revenue, what needs to happen for you to achieve that kind of level of sales? Meaning, say, what has to happen with your current field trials?

Sure. So they revenue that we see coming in 2013 is an assortment of field trials where we are paid for the field trials and for the first installation. And we have first installations that are in field trials as we speak, with a very large oil and gas client. Those current clients have expressed extreme interest in moving to projects two, three, four, five, and so on.

So when we refer to 2014 revenues being rather significant, it's based on the promising results we've seen from the field trials, combined with the extreme interest from those oil and gas clients in terms of follow-on projects. But we are also anticipating that we will have other field trials underway this year. As I've mentioned, we actually came to verbal agreement with another significant oil company yesterday to move a project into field trials and commercial field trials, now, this year. And that will likely spawn additional projects next year. So it's the -- and when we refer to field trials, more and more now we are being fully paid for those field trials. Those field trials, upon success, beget many more opportunities.

So the verbal agreement that we had with a client yesterday was the first of 20 gas field operations that they would like to attack. So upon enjoying field success with one, with one large oil company, you get opportunities at multiple other installed -- installations. Add to that, adding other field installations, and you get the mushrooming effect. And in almost every -- in every case, we have not had to compete, because there just is no competition. So there's no multiple vendor procurement mode right now.

Okay. How many oil and gas companies have indicated interest to you so far?

We probably have ongoing discussions with 8 to 10 right now. We actually have not moved forward with any more than the first three until just recently, because we did not want to expose ourselves to any more technology risk than we had with the first 3. We've seen enough in the trials, now, to change that. And so, as I've mentioned, we hired our first full-time sales executive just in the last few days. And we're going to full commercial sales mode. We don't see the technology risk being severe anymore. So with the 8 to 10 that we have been working with, we are now actively in discussions about moving forward with various projects.

Okay.

We could easily be in conversations with 30. I mean, what we are describing to these oil companies is so unique, and the value proposition is distinct enough; you talk 3- to 5-year payback period, it's not hard to get excited excitement going.

Okay. Switch to your desalination growth in 2014, you mentioned significant growth. What kind of growth are we looking at here -- 20%, 30%, 40% -- I mean, comparing to 2013?

Yes, obviously, we just enjoyed 52% growth last year. So I'll start it out by saying it is not that. But it's not -- it's quite a bit more than 20%, and less than 50%.

Okay, got that. Thanks.

We're very confident, by the way, that -- and we are actually able to see out further than even 2014, 2015. We're very confident in the notion that our 5-year CAGR from this point forward is in the 15% to 20% range. That seems very real to us. The concern, or the issue for us, is that we are seeing the market heat back up dramatically right now. And a lot of the projects that are in 2014 are actually teetering at the back end of 2013, the front end of 2014. So, substantial growth, with most of it teetering on the back end of 2013 and solidly into 2014.

Okay. Thanks for the color.

David Rose, Wedbush Securities.

This is Nick filling in for David. Without the mega-projects for the first half, what would the gross margin profile in the first half look like? And can the Company expect to be breakeven in 2013?

We haven't given any earnings guidance for 2013. And I would tell you that, as you look at the first and second quarter, you should take a look -- in almost every year in the past, the first quarter has been our most anemic quarter, even in our greatest years. And that same pattern will be true for us. We tend to be extremely heavy in the third and fourth quarter for revenue, and extremely light in the first and second quarter. And that is absolutely the case for 2013, and probably 2014 and so on.

Okay, thanks. And is the Company including revenue for Carlsbad in 2013 in its assumptions?

Well, we have to be careful about Carlsbad. We haven't disclosed whether we have been awarded that project. But even if we had been, I'd be a little reticent. Because the Carlsbad project has had such a long history, that it would be imprudent for us to speak as to how solid that project is in general.

Okay, thanks.

John Segrich, Restorative.

I wanted to follow up a little bit on JinMing's question regarding growth phase in oil and gas. It sounds like you guys have really turned the corner on desalination, and some of those projects are going to come back. Maybe they come a little earlier, but there is certainly a cycle ahead of you now.

When you look at the oil and gas ramp, you've got your trial customers. So it sounds like you are expecting, let's say, a low- to mid-single-digit million type ramp in 2013. And then is it incorrect to think that that could jump to somewhere in the teens of millions, if you get the uptick that you're looking at from the oil and gas industry for 2014?

Yes, what we are saying is several million in 2013, and roughly 20% of our revenue in 2014. We have to be careful, because -- in terms of trying to give more explicit guidance than that.

What I can tell you is that the field trials have looked very promising. And the conversations with the oil companies we've got going on right now suggests extreme interest. But there are certain engineering and technical bureaucracies inside of these oil and gas companies. And so as we work our way through that for full commercial acceptance, the timeline is the part that becomes least certain to us. But the level of interest is extreme. The technical success, as we say, is promising. And the addressable market is very, very large. And so as we combine those, we're confident in the notion of doing several million in revenue this year, for the first time ever; and, by next year, having it as a rather significant portion of our revenue.

But the way that -- I'm less worried about technical risk today than I would have been 8, 9, 10 months ago. I'm more bullish about client interest. And I'm more bullish about the addressable market. The part that I don't control -- and maybe I don't even have as much clarity on as I will, say, a year from now -- is that the path that you work through technical and commercial acceptance with these large giants.

We will, for sure, make it through that. But does it take a month, or 3 months, or 6 months? In each oil giant case, it seems to have a little bit different pace and speed. But we seem to be getting a great deal of attention, and moving things along nicely.

Right. So if you step back, obviously, there's a lot of excitement. And like you said, the timing is a little bit -- you can't control that. If you go out 5 years, is there any reason to think that the oil and gas revenue that you possibly could be booking would be smaller than what you are booking today in desalination? Why wouldn't it be 50% of your business, with desal being at least as big as it is today?

I think if you look out 5 years, our oil and gas business will be larger than our desalination business.

Got you. And the desal business should grow from where it is today.

Yes. I'm not at all -- I said differently, I see -- I know -- I'm confident that our desal business is going to grow 15% to 20% cumulatively over the next 5 years. And I think the desal -- the oil and gas sector, 5 years out, will be larger than the desal business.

Got it. Perfect. Thanks a lot and good luck.

Sure. Thanks.

(Operator Instructions). John Rosenberg, Loughlin Water Partners.

A couple of housekeeping questions. Tom, in your guidance, you said 2013 would not reflect significant revenue growth. So are we to -- obviously, I'm sorry, this probably was already covered before -- but, obviously, you're not going to do 50% revenue growth. But can you give us more of a boundary for what 2013 looks like?

You know, the real --

Or (multiple speakers) this time?

It is an impressive growth. And the reason I have to hedge a little bit is that we have a number of substantial projects where the deliveries are scheduled in November, December, January. So we could have revenue tip out of 2013 and into 2014. That would still result in earnings power for the Company. But the wave that is coming in 2014 is early in the year, and a little bit into 2013. And so -- and the caller had mentioned, as an example -- an earlier caller had mentioned the Carlsbad project. The timing of that project actually fits in the same category. Whether it is us or one of our competitors, somebody is going to be delivering product there somewhere between December and February. And so it's -- trying to give explicit revenue growth guidance for 2013 is treacherous, because such a large revenue wave is coming at the end of Q4 and into Q1. So the best I could tell you is we're talking single-digit revenue growth in 2013, followed by double-digit revenue growth in 2014.

Fair enough. What about gross margin on a go-forward basis? You guys have explicitly stated that you are trying to get the Company back to its former margin profile, through greater emphasis on the (multiple speakers).

For 2013, 2014, what do you -- again, everything being a forecast -- but what are you thinking about there?

Yes, so in 2013, you're going to see distinct gross margin improvement, even with minor growth, minor revenue growth in 2013. Because of operating leverage as we move into 2014, you're going to see a distinct jump in gross margins. And so because we enjoy -- are highly affected by operating leverage; and so as the revenues move up, we continue to enjoy that benefit. We also have operating efficiencies and improvements that have been made in the last year, year and a half, that will create gross margin improvement and traction this year. So what we've been saying continues to be the case; and that is, our gross margins are definitely tracking very solidly in the right direction.

Obviously, our fourth-quarter gross margins had the appearance of dropping from the second and third quarter. And one has to look very carefully at the numbers to see exactly why that is. But our gross margin traction is very solid. And it's moving exactly where we want it to be. So we see significant gross margin improvement in 2013, and then a jump in 2014.

Thanks, that's useful. And lastly, if I may, given that you've been very clear that this year is not going to be -- certainly it would be very hard to duplicate the type of growth we saw last year. But it's not going to be that exciting. And given that we all know how cyclical your primary end market -- what is your primary and market right now is -- are you going to be able to offering the same metrics either on future calls, or as releases, in terms of ways that the investors can track your progress with the oil and gas initiative?

Yes, when we get signed agreements in the oil and gas space we will likely, as we do with the desalination industry, will likely issue press releases. Not in every case, because in some cases we can't announce the names of the oil and gas companies we are working with, but we'll likely give tell tales as to our success through press releases upon signed contracts.

Okay. Great. Well, I wish you every success. Thank you very much.

Thank you.

JinMing Liu, Ardour Capital.

I just want to get some idea about your oil and gas margins, once you get the ramp up in sales in 2014 and beyond.

So you want an assessment of those markets?

Yes, the margins, the gross margins for your oil and gas applications, comparing to your desalination applications.

Sure. The oil and gas industry is a very large, complex industry with a significant number of fluids and gases. You can think about water inside the oil and gas industry; you can think about gas; you can think about crude oil and refined products and so on. So there is a myriad of fluids, and, therefore, fluid opportunities for us.

We been very disciplined about attacking exactly one single fluid. And that is inside of gas processing, the cleaning fluid referred to as amine fluid. And that is a substantial sector inside of oil and gas. It's a substantial sector, and it's a great first opportunity for us, because it's such an obvious application of our technologies. And there's a huge installed base -- 600 to 1000 gas processing plants already built around the world. And because of gas finds every day, natural gas and frac gas and so on, new plants are being built.

So we've stayed very disciplined in only attacking one fluid flow inside of oil and gas. That one fluid flow alone -- and the fluid is referred to as amine -- will propel us. And it is an addressable market that could be as much as $400 million just in our energy recovery devices. So we could be satisfied with the terrific growth trajectory just on that over the next 5 years.

Having said that, with each oil and gas company that we meet with, upon seeing what our devices can do, they seemed to bring up other fluid flows that they want us to attack -- crude oil pipe movement and so on. And so one of the exercises we have underway right now -- so first of all, we are remaining disciplined about attacking the one fluid flow and creating a very sound and solid beachhead there. And it's got enough growth for us that it's a worthy endeavor in and of itself. But what we're also doing is beginning to map out every other fluid opportunity inside the realm of oil and gas that will create opportunities that are actually multiples of the amine opportunity.

The effort is complex enough that we reached out to one of the world's best management consulting firms to work with us to actually map out all of the addressable markets inside of oil and gas; and then also worked to map out every other fluid flow across every other chemical processing, food processing, and on and on, industries. It appears almost staggering, the number of opportunities that exist out there. So what we're doing is creating a very logical, sequential road map as to how we are going to deploy ourselves so that we do it in a most opportunistic and intelligent way, and create a 3-, 5-, 10-year roadmap to opportunity and growth creation.

It is becoming very apparent that, in effect, we are a category creator now. And I'd like to say that 10 years from now, we will all -- the industry will look back at this category and see it as obvious as heat recovery and heat exchangers are.

But we are forging ahead as rapidly as we can. I would tell you that, if we look at oil and gas, we can look at it simply as the amine gas processing. We could look at it as amine gas processing plus 10 other fluids inside of oil and gas. But then we can also look at 10 other industries that go well beyond oil and gas.

Okay. And how about your product margin structures setting into the oil and gas industry compared to your traditional desalination products?

Yes, so desalination has been a market for us where we singularly sell our products into greenfield, new (multiple speakers).

Right. But you currently have about 50% to 60% gross margin for the desalination applications. But once you get into oil and gas industry, I know your product is just a tiny portion of the whole system. What kind of margin structure we should look at?

Margin structure, sure; we see the same 50% to 60% gross margin going into the oil and gas space, partially because we have unique positioning in the market. But the product differentiation that we have, it is as extreme as it is in the desalination market. So at this stage, we think that the gross margins achievable in the desalination market are comparable to what we're currently achieving and expecting to achieve in desalination.

Having said that, the first-mover advantage is so significant and so important to us that the several million of revenue that we expect in 2013 -- we are truly not focused on gross margin. We are focused on deploying as many devices on as many continents as we can, with as many high-profile clients. There's definitely gross margins, but if I had the choice of 60% gross margins or three more clients, I would take three more clients.

So 2013 is going to be gross-margin-positive in the oil and gas industry. 2014 and beyond will be optimizing gross margins.

Okay, got that.

And then lastly, just a housekeeping question. How much was the pump and turbo sales in the fourth quarter?

In the fourth quarter, pumps and turbos (technical difficulty) almost $3 million.

Okay, got that.

For the full year, they were about $8 million of the $42.6 million.

Okay. Thanks a lot.

Sure. Thank you.

(Operator Instructions). Laurence Alexander, Jefferies.

Two quick ones -- on the various chemical fluid applications, are there any areas where, because of either the chemical interaction with your ceramics or -- are there any interactions which makes certain areas not be applicable for you; where you can just say you're just not going to go into those categories or those particular chemistries?

And the second question I have is, as you look at the road map, you've seen various companies roll out kinds of water momentum or energy transfer products for the retail market or the restaurant market, or small-scale applications. Does it make sense for those smaller niche markets to just license the technology to someone else, as opposed to deferring it and then targeting it 5 or 10 years down the road?

That's a good point. Your first -- help me with your first question. What was that again?

As you look at how your materials interact with the chemistries -- are there are certain chemistries where you just say, you can't handle those fluids because it will change the chemical compounds, there will be some kind of incremental (multiple speakers) reaction?

Got it -- technical applicability; and then the second part of your question was licensing. So on the technical applicability front, you are absolutely right, there are fluids and pseudo-fluids that may or may not be suitable for any one of our devices. I would say this; in 2009 we bought a company Called Pump Engineering.

Yes.

And with that, we got pumps and turbochargers. So the fact that we have high-tech pumps; we have turbochargers; and we have ceramic-based pressure exchangers, gives us an interesting toolkit to attack the universal fluid flows. And so if all we were sitting with was a classic ceramic-based pressure exchanger, we would have to pick and choose very carefully the fluid flows that we would go after. The fact that we have the pumps and the turbos and the pressure exchanger -- and by the way, we've added a new technology in the last year, which is a half of a turbocharger, which is a turbine combined with electrical generators. We refer to that as an IsoGen. And that enables us to go into locations where the clients actually doesn't want the energy returned as a fluid. And instead, they monetize the reuse of that energy in the form of electrical power generation.

So we have the different products, and we have the pressure exchanger. And now we can also generate electricity. Because we have that assortment, that toolkit, if you will, the envelope in terms of what fluids we can attack is much, much broader than where we were prior to buying Pump Engineering and prior to investing in the IsoGen device.

So it is not only possible but highly probable that we will come across a fluid that we either can't or choose not to interact with. But I guess I would say it's going to be -- our ability to attack fluids is very broad. And it's likely only going to be a few locations where we can't.

As to the licensing and so on in small applications, there's no question about it -- we're a small company. We are 120 people. And we're onto a virtual category creation across a number of gigantic industries. And so our road map that we are mapping out right now is likely going to give us an embarrassment of riches and of opportunities, if you will. And we are going to have to be disciplined to sequentially attack those in a prioritized fashion. If we identify a very lucrative and significant fluid flow in a large and lucrative addressable market, that for one reason or another we can't get two for 5, 6, 7, 8, years, we will make strategic decisions as to how to better attack that, and not wait the 6, 7, or 8 years. And it might be licensing. It might be collaboration with another firm. It could be that we do an acquisition to jump-start our ability to get there.

So the first step for us was to prove that we could attack fluids other than seawater. We've done that. We then have to map out the universal fluid flows that are ahead of us -- we are doing that. And when that map is on my desk, that will then guide me in terms of whether we need unique or different strategies to attack those markets.

And so we will logically and sequentially go after all that. But on the technical applicability side, very few limitations. And in terms of sequentially attacking these markets, we will come up with some pretty interesting strategies this year to go after them.

And then maybe if I can just follow up on both of those -- on the technical side, if you just look at the core technologies and put the pump acquisition on one side -- broadly speaking, is the issue where you do see areas where there might be difficulty going after the fluids? Is the issue acidity, corrosion; is it viscosity? Can you give a very rough sense of how you think about the space?

And then on the licensing side, it sounds as this is probably a 2- to 3-year process. Is that fair -- before we see anything dramatic or significant in terms of the change in strategy on that side?

Well, I don't think it's a change in strategy. It's more of an acceleration of strategy.

Yes.

If what you're saying is, 2 to 3 years to see revenue coming from some unique fluid that we are not currently talking about -- yes, maybe.

I'm thinking to get the road map, make the decisions, find the partners, get it launched -- it takes a while.

Well, we'll be making those decisions before this year is over.

Okay.

We are only several months away from culminating the study that we're doing. And assuming that it tells me what I believe it's going to tell me, we will be making some interesting decisions in terms of aggressive moves that we need to make.

On the one hand, we're onto, in effect, a new industrial category. And that gives us a unique window of opportunity to act in the absence of competition. But those advantages are short-lived. Our technological advancement or advantage will hold for a certain amount of time, but we will need to and want to move quickly. But having said that, we have roughly $40 million in cash and cash equivalents, and 120 people. So we're not naive enough to try to attack 20 large industries at one time.

Okay. Thanks.

Sure.

Well, I think that -- I don't know if we have another call.

There are no further questions. Please go ahead, sir.

Great. Well, that brings us to the end of the call. I appreciate everybody's involvement. We're very happy with our results for 2012, mostly from the perspective that it positions us exactly where we intended to be, in terms of driving the Company forward. Our goal has always been to create lasting and sustainable value through powerful growth in large growth margins. And we are very much looking forward to the next several years.

So thanks, everybody, for being involved in the call today.