Energy Recovery Inc (ERII) 2013 Q4 法說會逐字稿

Ladies and gentlemen, welcome to the Energy Recovery year-end 2013 earnings call, held on March 6, 2014.

(Operator Instructions)

I would now like to turn the conference over to your host, Alex Buehler, CFO. Please go ahead, sir.

Good morning, everyone, and welcome to Energy Recovery's earnings conference call for the fourth quarter and full year of 2013. My name is Alex Buehler, CFO of Energy Recovery, and I'm here today with our President and CEO, Tom Rooney. In today's call, we will provide you with information about our financial performance in the fourth quarter and full year of 2013, as well as provide an update on the progress that we are achieving in relation to our growth strategy.

Consequently, 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 forward-looking statements are 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 from those discussed. A detailed discussion of these factors and uncertainties is contained in the reports that the Company files with the US Securities and Exchange Commission.

The Company assumes no obligation to update any forward-looking statements made during this call, except as required by law. Let's start with an interpretation of the financial results for the fourth quarter of 2013.

I do not intend to convey a methodical, point-by-point analysis of the results, as this was described in sufficient detail in the press release; rather, my objective is to provide some additional context on these results from both a quarterly and annual perspective and reflect on the trend for the previous three years of operation.

Starting first with the quarterly results, we are pleased to discern the earnings power of the Company in the presence of volume. Gross profit and net margins become exceedingly compelling when the Company achieves sufficient revenue, as was certainly the case in the fourth quarter of 2013. A gross profit margin of 63% and a net margin of nearly 30% serve as a strong reminder of the profit and return profile that is attainable when the global desalination market achieves its full potential.

Both revenue and net income in the fourth quarter of 2013 were record setting for the Company. Additionally, the Company continued to hold the line on operating expenses, while not sacrificing on critical investments meant to spur revenue growth in subsequent years.

These investments manifest in several lines on the income statement to include general and administrative, sales and marketing, and research and development. To summarize the quarter, with revenue of $23 million, gross profit margin of 63%, and operating expenses of less than $8 million, we generated nearly $7 million of net income, and $0.13 per share, and this was in line with our internal budget and recurring forecasts.

Stepping outside of the fourth quarter and instead, viewing the full year of 2013, we were equally satisfied with the financial results. Although revenue grew only modestly over prior year, which incidentally was in keeping with our expectations based on the timing of large project awards and shipments, the expansion in gross profit margin was still very notable. From 47% in 2012 to 60% in 2013, the trend in gross profit margin continued to reflect the realization of manufacturing efficiencies.

To break this down in greater detail, we accomplished a multitude of critical initiatives over the last three years, starting first with the closure of our plant in Michigan, for which we recorded about $3.7 million in restructuring charges over a three-year period. This now allows us to produce our full suite of products from a single facility with much lower manufacturing overhead.

Moreover, we successfully integrated our ceramics processing facility and we are now able to produce ceramic components for far less than we were once purchasing them. Beyond consolidation and vertical integration, we have driven kiln yields to best-in-class levels; completed a successful redesign of certain pumps and turbochargers to reduce unit costs and increase efficiencies; decreased raw material expenses through enhanced procurement discipline; and achieved progressive labor efficiencies in pursuit of operational excellence.

Not to imply that we have arrived, but we are well on our way in the evolution toward world-class manufacturing. As we think of the four levers that drive gross profit margin to include price, mix, volume, and efficiency, the year-over-year comparison speaks primarily to efficiency and, to a lesser extent, production volume; that is to say price was relatively stable and mix was virtually unchanged, while production volume increased moderately to accommodate shipments in the fourth quarter.

Manufacturing efficiencies, including lower labor content, less applied overhead, and less expensive raw materials, allowed the Company to achieve decreased unit costs and expanded margins. Also in 2013, operating expenses were flat, but flat amid robust investment into the utilization of oil and gas solutions, without which net income would have been positive. So, in an effort to capstone the year, we reduced our net loss by $5.1 million, or $0.10 per share, which represents bottom-line improvement of 62%.

In the press release, we included a three-year trend pertaining to key metrics, which we believe conveys a cogent story specific to our financial and operational progress. The uplifting gross profit margin is apparent, moving from 28% in 2011 to 60% in 2013. As an intermediate year with 47% margin, 2012 included the benefit of operating leverage, pricing, and the initiation of manufacturing efficiencies, while 2013 really crystallizes the full effect of manufacturing efficiencies.

Operating expenses, while somewhat bloated in 2011 due to nonrecurring restructuring charges, also demonstrate a favorable trend when viewed in the context of our heavy investment to commercialize new oil and gas solutions. We have taken out significant OpEx and reinvested those dollars toward high-value, high-return opportunities, attempting to strike the right balance between efficiency and future growth.

Meanwhile, net loss and cash flow from operations demonstrate an undeniable trend in the right direction. To put a finer point on our progress, we have reduced our net loss from $26 million to $3 million over this time period and we have improved cash flow from operations from $8 million used in 2011 to $2 million provided in 2013. We believe that this demonstrates sound progress with respect to operational excellence and financial performance.

My conclusion therefore is this: the fourth quarter of 2013 was very strong and in line with our expectations. The full year demonstrated meaningful bottom-line improvement, due primarily to manufacturing efficiencies, and the three-year trend of key metrics demonstrates solid operational and financial improvement. Importantly, the financial view of the fourth quarter speaks to the earnings power of the Company with the benefit of revenue.

Let's now transition from the backward-looking discussion of financial performance to a forward-looking perspective regarding growth strategy. I will now turn the call over to our President and CEO, Tom Rooney.

Thank you, Alex, and good morning, everyone. Looking back on the fourth quarter, and 2013 as a whole, I'm extremely happy with the results. The financial results that we just reported are very much in line with Management's expectations for the year and they very closely mirror the actual business plan that we laid out for ourselves at the beginning of 2013.

The results that we achieved in 2013 are the direct results of sound planning and three years of very hard work by a dedicated group of people at Energy Recovery. A great deal has been accomplished over the past three years and, as a result, the Company is in a very strong position moving forward. In fact, the Company has never been stronger.

We have now proven our ability to drive dominating market share while maintaining pricing power and we've streamlined our cost structure so as to allow us to generate very appealing gross margins and cash flow. I'm proud to say that Energy Recovery is now a company that can operate from a position of strength. Looking to the future, we must always begin with an assessment of our core desalination business.

I fully realize that everyone would like for me to provide short-term guidance for our desalination business, but I'm afraid that I just can't do that. Unfortunately, the nature of the global desalination market is such that giving short-term revenue guidance is difficult at best and, frankly, borders on just educated guessing. Given the circumstances, I would prefer to tell you what I know and leave out the guesswork.

Here's what we know: over the past 18 months, we have seen a significant build-up of projects in our desalination pipeline. To be specific, our project pipeline has more than doubled over the past 18 months. This pent-up demand represents a very promising trend, but we remain somewhat uncertain as to the timing of all of these projects. I can tell you that these projects are emanating in four notable geographic regions: the Middle East North Africa, India, China, and the United States.

The MENA region has always been the number one market for desalination projects and that trend appears to be continuing. We now see a very important trend of oil-rich countries like Saudi Arabia moving away from thermal desalination technologies and towards reverse osmosis. That bodes well for companies like ours who don't work in thermal desalination.

We even anticipate seeing a number of older thermal desalination plants being phased out in favor of newer energy-efficient reverse osmosis plants. That's very good for us. The Indian market is a very interesting market to watch. The demand for drinking water in India is enormous, as well as the need for desalinated water for new power plants being built throughout India. These twin needs are beginning to manifest themselves in our rapidly growing sales pipeline.

As with other markets, the critical issue is in understanding the timing. Of particular importance is the short-term effect of the upcoming national elections in India. The national elections this April and May are considered to be the most important elections in India in 30 years and the outcomes could lead to significant changes and, quite possibly, a short-term slowdown in some planned desalination projects. In the long run, these political changes could prove to be beneficial in regards to the size and pace of desalination projects in India.

The Chinese desalination market, much like the Indian market, presents enormous upside potential for Energy Recovery. Like India, the Chinese market is driven both by the need for potable water, as well as the need for desalinated water for new power plants being constructed all over China.

These two needs have clearly manifested themselves in terms of realized revenue growth over the past two years, as well as in future demand detected in our rapidly growing sales pipeline. The key concern at this point is the timing of all these projects coming out of China, particularly given the recent slowing of China's economy.

Possibly the most interesting, and in many ways the most vexing, geographic market for us is the United States. We were pleased to see the Carlsbad project move ahead in 2013 after so many torturous years in the planning and permitting stages. The Carlsbad project is but one of a significant number of desalination projects that we're currently tracking just on the West Coast of the United States. The fact that Carlsbad successfully moved forward is a critical and very helpful development for desalination projects in the United States.

Add to that the fact that a drought emergency was recently declared in California and you have what appears to be a pivotal moment for desalination in the United States. I would caution everyone that the inevitable ramping up of desalination projects in the United States, and even in the drought-stricken California, may still take some time.

In summary, here's what we know: we are tracking the significant buildup of desalination projects around the world. We are seeing this buildup coming from large and important new markets, as well as from well-established desalination markets in the Middle East. In all of these existing and emerging markets, Energy Recovery is well positioned and, in fact, Energy Recovery is a dominant competitor in every one of these markets.

Here's what we're less certain about: in a word, it's timing and, unfortunately, that never seems to change in this industry. Given the uncertainty surrounding timing, we are vacating any past guidance we provided on desalination trends and we simply aren't going to try to provide specific revenue guidance for desalination in 2014. We do remain extremely bullish regarding the five-year outlook for desalination for all of the reasons that I outlined earlier.

Three years ago, when I first joined Energy Recovery, I made diversification a top priority, precisely because of the timing uncertainty that we faced in desalination markets around the world. The global demand for water and the commensurate need for desalination plants is a wonderful and durable mega-trend, and we're pleased to be one of the world's leading providers of desalination technologies.

But the unpredictable cycles and the lumpy revenues that come with desalination are tough on a company like ours and, frankly, tough on our shareholders as well. That is precisely why taking our core technologies and redeploying them in order to diversify into new verticals is critical to our future and has been a key focus of our efforts over the past three years.

So, let's take stock of what we've accomplished from a diversification standpoint over the past three years and where we go from here. Prior to 2011, Energy Recovery had only sold a handful of individual components for direct use in the oil and gas industry, and exclusively, through its recently acquired Pump Engineering division. The problem at that time was that Pump Engineering really didn't have a commercially marketable solution or even an oil and gas value proposition, per se.

As 2011 unfolded, we focused on re-staffing and rebuilding our R&D team. We also hired new product development experts and we began to align ourselves with three major oil and gas clients who were willing to pilot new gas processing technologies with us. In 2012, we poured millions into researching and developing three new platform technologies for use within the sour-gas processing industries -- technologies that we now refer to as IsoBoost, IsoGen, and IsoPro.

We did so in concert and in collaboration with our oil and gas industry client partners. By the end of 2012, we had developed full commercial scale, plant-ready versions of our IsoBoost, IsoGen, and IsoPro technologies. Several of these even made it all the way into field operations in 2012. In 2013, we continued to pour millions into developing, testing, and refining our three platform technologies.

By the end of 2013, all three of our oil and gas technology platforms had been shipped to field locations around the world. In two cases, we even acquired powerful written and video endorsements of our revolutionary new technologies. The third endorsement should come this year. In November and December of last year, I personally traveled to locations in the United States and China to see our technology in action and I heard firsthand the success stories that our clients had to share.

I was very moved by what I heard. In parallel to the project trials that were underway in 2013, our marketing group spent a great deal of time in 2013 defining and refining our value proposition in anticipation of a major commercial market rollout in 2014. The marketing team, realizing that our three new technology platforms have application well beyond simply sour-gas processing, spent 2013 mapping out a whole series of new industries and market verticals for us to attack in 2014 and for many years thereafter.

We see these follow-on markets as logical growth markets for us and they are very substantial in size. For perspective, it's important to understand that the Company intentionally kept itself in a low-profile position in regards to oil and gas sales and marketing, all the way through the end of 2013, quietly attending a handful of industry events, but never presenting publicly.

It's also extremely important to note that our R&D and legal teams filed for and/or received more patents in 2013 than in all the Company's previous 20 years combined. So, at the beginning of 2014 and now with the benefit of critical client endorsements, a highly-refined value proposition, and a strong portfolio of patents, we made the critical decision to commence our full-scale, high-energy launch into the oil and gas market.

In January, we hired and assembled a talented six-person oil and gas sales team, up from one part-time sales position in 2013. Just last week, we debuted our Energy Recovery technologies at our very first major oil and gas international industry conference. I'm very pleased to report that the interest level and feedback at that conference was overwhelmingly positive and the inbound interest has already spawned numerous follow-up opportunities for our sales force; including specific requests for commercial quotes, as well as high-level strategic meetings.

If that wasn't enough, on the very same day last week, our technologies were also debuting at an ammonia conference in France, with equally promising results. Our focus in 2014 is aggressive sales and marketing of our IsoBoost and IsoGen technologies in both the oil and gas industry, as well as the ammonia industry. The sales cycle in these two industries can be long, but we remain confident that we will achieve revenue in 2014 with serious growth leading into 2015.

Where we sit today, I feel very good about how far we've come in three short years. We have spent the past three years steadily and patiently building our position in the oil and gas industry to a point where, today, we are now comfortably moving into full-speed commercial rollouts. The long-term potential for Energy Recovery in the oil and gas industry is immense.

By our analysis, the total addressable market for Energy Recovery solutions in the oil and gas industry is well in excess of $1 billion per year and that doesn't include the ammonia processing industry, which is large, in and of itself. Looking back over the past three years, we've done the hard work of strengthening our core desalination business to the point where it's now in an excellent position to dominate competitively and financially for years to come.

With desalination as our strength and our foundation, we've also made incredible progress over the past three years in positioning ourselves for huge growth opportunities in diversified industrial applications. I'm very proud of what we accomplished in 2013. I would argue that 2013 was the most successful year in the Company's history.

The core business is now the strongest that it has ever been. In 2013, we opened and developed significant new avenues for growth and our innovation engine is now generating more new patents and technologies than ever in our history. 2013 was, indeed, a fantastic year.

True shareholder value creation will come from taking a long-term perspective in aggressively building and capitalizing on these new industrial markets, while staking out a strong IP portfolio all along the way. I feel very comfortable that we have and are doing exactly that. These are very exciting times at Energy Recovery.

Thank you, and we'll now open up the call for questions.

(Operator Instructions)

Laurence Alexander, Jefferies.

This is actually George D'Angelo sitting in for Laurence today. Are you guys happy with your footprint in the oil and gas area or would it be worth looking for bolt-on acquisitions to help accelerate the sales cycle?

Yes to both. We're happy with our footprint, but we're being opportunistic and we are aggressively, and have had a corporate development effort for the last eight months or so, looking for intelligent acquisitions in the oil and gas space. The problem with that, George, is that the oil and gas industry is so hot right now that valuations are virtually unrealistic. As much as we might like to find a bolt-on acquisition to accelerate ourselves, the cost of such an acquisition is somewhat irrational.

Okay, thanks. That makes sense. Would you say competitive pressure for desal applications is increasing or stable?

Competitive pressure, you mean competitors against ourselves?

Or just industry dynamics, yes.

I'll interpret your question to mean, does Energy Recovery have more fierce competition today than ever before? Yes, every day, we get more and more competitors that enter the industry. The challenge is that our technologies are disruptive. They're advanced and they're recognized as such.

Even in the area of pumps and turbos, we've invested so heavily in the last two years to advance our technologies in pumps and turbos that we're actually more competitive in pumps and turbos today than we were a year ago. I think like any industry, we see more and more competition every day. That's the bad news. The good news is we're far more competitive today than even we were a year ago. So it hasn't had any effect on us.

Thank you.

Jim McIlree, Chardan Capital.

You talked about spending millions of dollars in R&D in the prior years, but it sounds like a major portion of the product development's now behind you. Does that mean that R&D is going to come down or do you keep R&D at current levels and just invest in new projects?

No, R&D is not going to go down. We are investing in new products. We have, what I would argue, are a couple of blockbuster technologies that we're working on right now that we will invest several million in, that represent tremendous opportunity for us. One of the comments that I had made was that our marketing department in 2013 investigated other verticals in other markets where our core technologies and platforms could be applicable.

That has led us to recognize a few incredible upside potentials for us. We are now investing very heavily in those areas, in and around oil and gas. I don't want to comment much more on that. But we have no shortage of fantastic places to take our technologies and we don't see pulling back from an R&D spend anytime soon.

We've reignited an innovation engine at the Company and it's throwing off tremendous technologies and advancements and patents for us. Given our focus of creating value over the next two to three years, there's no reason for us to back off on the R&D spend.

And so that touches on my next question is that you mentioned in your diversification comments, you were talking about additional markets besides oil and gas that you're going after and then you identified ammonia as one of them, but I'm assuming that there are one or two or three others that you've identified that you're working on product development as well as market development. Is that correct?

That's right, yes.

Okay, great. This year, 2014, I just want to make sure I understand what you're saying about the oil and gas market. You think you're going have some initial sales in that market, but 2015 is the real big year for that market. Is that right?

That's right. There's no question we will have revenues this year. We, actually, have at least one executed contract that I'm aware of and actually received payment from one client. I don't think there's any doubt at all we will have revenue in the oil and gas industry this year.

How much revenue we have from oil and gas this year is considerably less important to us than piling up wins that will drive revenue for us in 2015 and 2016. As has been pointed out in the past, the lead time for delivery of our technologies can be on the order of six, seven months. We're overwhelmed right now with commercial requests for proposals and contacts in the industry.

I would say without question, we'll have oil and gas revenue this year. It may be an unimpressive amount, but that really doesn't matter. What we're really focusing on is stacking up contracts this year that will drive important revenues for us in 2015 and 2016 and beyond.

You talked about a lengthy sales cycle in oil and gas. Can you go just through what that might be? The initial contact is to which group and then you have to do testing or prototypes or trials and then there's evaluations. Can you just break it down into some simple steps and timeframe on that sales cycle?

Yes. The oil and gas industry has certain clients that are early adopters and like to try technologies early, others are incredibly conservative and want to see the technology working elsewhere. What we're seeing right now is, where we sit today we can literally take a client to a plant location and show them an operating plant with exactly the technology that we're referring to with a very happy client and that is a very convincing moment.

We actually have that right now. We have clients who are extremely happy with what we've done. The device has been operating for a lengthy period of time and they're a powerful endorsement. We've even produced white papers and presented those white papers at conferences. Now that we have that and our technology is evolved, the fastest I think we would see the sales cycle would be from an early conversation, we can be taking a commercial proposal in 30 days.

The fastest movers might make decisions 90 days thereafter and we'd be six months thereafter to deliver products and begin to see revenue recognition. Interestingly enough, if the assignment is large enough and the acquisition is put into a capital budget, some clients will wait until their annual funding cycle, which would mean that we would have to wait until the annual turnover. Because of that, you see the cycle time going anywhere from six to nine months to two years, is how I would describe it to you.

Great. That's very helpful. Very exciting. Thanks a lot and congratulations. Good luck with everything.

JinMing Liu, Ardour Capital.

First, to follow up on the R&D expense into next year and into the future, can you share with us what your [upside and assets] on the R&D front, whether you are trying to get more application into the oil and gas or improve your current pressure exchanger or get some other applications like the osmotic power.

JinMing, most of what we're spending on will be breakthrough new technologies that enable us to penetrate market verticals that we're not currently in. But of course, there will be some monies spent on refining our technologies. I would give you, as an example, we have IsoBoost, IsoGen, and IsoPro. IsoBoost is now a proven technology and it's the one that's very appealing to the oil and gas industry.

At the core, there's a turbocharger. IsoGen is a device that generates electricity; also at the core, it uses a turbine. IsoPro is the stallion, if you will, the very, very high efficiency device; the core of which is the pressure exchanger. Its performance is so extreme that it requires specialized operating protocols at a plant because it knocks out so much of the energy requirements at the plant that it causes the plant to change its operating protocols.

We're working to refine and develop that technology to marry up well with these plants. We will indeed, over the next 24 months, continue to invest in the development of that technology, but I would say that the majority of the spending, we have one project right now that we may spend $2 million on, an incredibly advanced disruptive technology that opens a $1 billion market to us.

It is a brand-new technology. We haven't talked about it and it's altogether new. It is the result of two things. One is the marketing study last year highlighted a very special market for us to enter and at the same time, one of the top engineers that we hired had specific expertise in that area. Between our R&D acumen and an identified market, we made the decision in the fourth quarter of last year to invest very heavily to attack that new market.

That's an example of where we're not refining an existing technology but advancing a brand-new disruptive technology. By the way, we would seek to have two or three of those opportunities every single year.

Okay. That's good. What is your current mix in your pressure exchanger sales, whether your newer model like PX-300Q is the predominant in the mix?

I would say that the Q technology has been so rapidly adopted by the industry, we almost always sell the Q version of the devices. Alex, you want to take a stab on the size models?

Let's step back and speak about mix broadly first. For the year, it was 80% PX devices and 20% pumps and turbos and that was largely in line with 2012. JinMing, if you look at Q4, it was 86% PX devices, 14% pumps and turbos. If I unpack the 80%, about 50% of that is PX-300s.

That model's been around for a couple of years and it's very quickly becoming our highest volume product. Moreover, if I unpack the MPD sales revenue, almost 100% of that is PX-300 or more specifically, Q300s. That product line has really taken off over the last few years.

Okay. Good. If I remember correctly, you have to produce the ceramic for the Q300 in-house, right?

We produce all ceramics in-house for all of our PX models now, including the Q300 and the PX-300.

Okay, good. Lastly for me, Tom, can you comment on the mining industry in South America? I saw quite a few projects in that region. Also, regarding the US market, what do you see going forward in here? Whether it's more -- for you it's more about mega project sales or just smaller OEM sales in the US?

Specifically as it relates to mining?

No, for US, actually, those are two separate questions. US, whether it's OEM or mega project in the US and what is going on in the mining industry in South America.

Okay, so let me take the second half of that question first, that is to say the US market. This past year, as you know, we saw the first mega shipment in probably forever for our Company in North America. That was the Carlsbad project. It stands out on its own as a unique data point. If you set that aside, the US market, from a water standpoint, a desalination standpoint, has been historically essentially unimportant to us.

Our North American, I don't want to say it's unimportant, but from a revenue standpoint, it's just not one of our most significant markets and it's been all very small devices and small applications. It's not likely going to change in that regard. The key issue is when will the large projects in North America light up. I think it's worth noting that Benjamin Netanyahu was here in the Bay Area yesterday, essentially lecturing the Governor of California on why Israel doesn't have water problems.

I'd relegate it to being an almost embarrassing episode where California can't get out of its own way in terms of water. Having said that, I can opine on what California and the West Coast and the United States needs to do, but from where I sit in my chair the US market is something we're going to watch and scratch our head about.

I couldn't give you any thoughts in terms of when California or the US becomes a market of important revenue for us. Unfortunately, we're a US Company and US market for many companies is a big portion of their business. For us, it's statistically unimportant to us. The first part of your question, though, was about mining in South America.

The mining industry down in South America, most notably in Chile, has driven a tremendous amount of economic growth in the country of Chile and with that, has come the ability and the need to provide more and more water, both for the people of Chile and for the mining industry. We benefited tremendously from that.

I'm only aware of one project that we were not awarded in Chile in the last so many years. It's been a fantastic market for us. Some of our people even are policy advisors to the policymakers in Chile. We have a very strong position and frankly, what's been driving all of that water business for us is, in fact, the mining companies. The mining companies use a tremendous amount of water to do their mining.

Having said that, and it's probably not well known, we're actually working directly with the mining companies on some advanced material science opportunities that we have using ceramics. I believe this month, we will ship materials to a very large mining company in Chile as a trial. It's a pure ceramics play for us.

I really don't want to get into the nitty-gritty specifics of it, but we've been working for the last several years on potential opportunities for Energy Recovery to use its ceramic material science advantages to help the mining companies do mining and do it better and smarter. Which, by the way, I would say to you that we are pioneering and working on some ultra-advanced materials science here at Energy Recovery.

We have used the same alumina to work our pressure exchangers and what have you and that's been an advancement that has helped the Company and it's created barriers to entry for our PXs and whatnot. One of the areas that we're going to be spending significant dollars and have already began to spend significant dollars is next generation material science for use in our pressure exchangers.

We see, as one of our core competencies, advanced materials sciences. On the one side, that means we're going to be spending tremendously in the R&D arena to forge what is the next generation of those materials and on the other side, it may soon represent a revenue opportunity for us when we collaborate with industry to harden what their core business already does.

Those are some of the exciting things. We will begin to directly do business with mining companies, but we're also benefiting indirectly from the draw that they have on the water side. Hopefully that answers both of your questions.

Yes. Thank you a lot. Thanks a lot.

David Rose, Wedbush Securities.

I was hoping to follow up on a couple other questions and then maybe build out on the O&G side. But particularly as it relates to guidance, last quarter in the conference call, you stated you had 10 months of visibility and you've got to have some visibility for a quarter or two, so I was hoping maybe you could provide what your expectations are for this quarter up or down versus last year? If you can give us a range, a handicap, the bottom end of the range and the top end of the revenue range for this year in terms of up or down.

Could you be down 20%? Could you be up 20%? Based on what I'm looking at in terms of mega projects, I'm looking at about 800,000 cubic meters in desal capacity for 2013. If I think about that, what capacity have you been awarded for 2014 to get you to the bottom end or the top end of the range? Can you incorporate those into the guidance range for the next two quarters and for the year, top end and low-end?

Lastly, if you could, give us an idea of how you're going to build out inventory starting in Q1 and when you start to level load your factories so you can get those margins that you got in 2013.

Yes, let me answer the last question first. We've been level loading for 18 months or so in our factory. That's the only way to run an efficient factory. If you look at the last four quarters, you see tremendous lumpiness; obviously, Q3/Q4 of last year represents that in its entirety, so we do level loading. It's the only way to run an efficient factory. But the first part of your question is really just driving at trying to get us to give guidance.

The way I look at it is this -- we give guidance if we think we can do so intelligently, without guessing, without much uncertainty. If we give bad guidance, we destroy shareholder value. We have to give good to perfect guidance to create benefit for our shareholders. Unless or until I think we can do that, we simply won't give guidance. I've come to the conclusion and frankly, I look back at how things played out last year.

We gave very high-level broad guidance at the beginning of 2013. We gave guidance as to what the revenue levels would be. We gave guidance that it was all going to be back-ended very, very heavily in the fourth quarter and then we got beaten up all year long.

Our stock price got pounded when the lumpy revenues that we knew were going to happen came in. And what that really signals to me is that giving guidance tends only to create a negative effect in terms of shareholder value. The truth be told, for our Company, investors are investing in our Company for the potential that we have over the next two to three years. The potential that we have over the next two to three years is very significant.

The entire Management team has an outlook, the 24- to 36-month outlook. We're very fortunate to have an incredibly supportive Board in that regard. We're also very fortunate to have some very strong balance sheet and our core business is operating perfectly. We're one of the few companies that has the opportunity to aim at the two to three year horizon. We focus every single day on running efficiently, so we never lose track of the short-term.

But, David, to sit and give guidance on a quarterly basis, as you're suggesting, or even a yearly basis is just destructive. And a lot of companies, frankly, are moving away from giving guidance. We're very clearly doing that. I'm happy that we're doing that. I know that doesn't make analysts happy, but the fact is, if all I'm doing is giving educated guessing, I'm not sure what that value is anyway.

I appreciate that and last year, you provided a forward guidance of two years of over 20% growth and this last year you put up 1% growth. Can we still say that you're on that two-year track?

We're simply not going to give guidance, as we've suggested, David. With all due respect, you can ask me the question 10 different ways and that's the answer.

Okay. I appreciate that. Maybe we can shift to the oil and gas side. In your press release, you'd said you expected meaningful awards in 2014. I think that implied that would be 2015 revenues.

Can you give us some guidance or maybe clarity around what meaningful means? Is it greater than $5 million? Is it greater than $10 million? Just so we have an idea of what the growth outlook is for two years out in 2015.

Let me say this, I'll give you the full range. In the last several weeks, we proposed on deals that range in size from $800,000 to $20 million. The contract terms and conditions on those range from a one-off sale to performance contracting, which means that we provide the technology for free and we get paid on energy savings.

The revenue recognition from a performance contract would stretch out over years, as much as a decade. Hopefully my answers, or hopefully you can digest what I'm saying, which is, the scale of the deals that we're looking at, as I say, range from $800,000 to $20 million, and the revenue recognition side could come quickly if it was a capital sale or could come in powerful recurring revenue over a decade. With all of that in play, you have to divine what that means in terms of revenue recognition, which I think is what you're try to get after. Is that helpful at all to you?

That does help, actually. I appreciate it. With that said, in the fourth quarter, your comment suggested that we should see some announcements, in the first quarter, of awards. You commented on the call that you have one award. Should we start to see some announcements in March or is that pushed out a little bit?

I would just say that you're going to see a stream of announcements over the next six months. Exactly when the timing comes, I don't know.

Okay. Over the next six months. Thank you very much.

(Operator Instructions)

Robert Smith, Center For Performance Investing.

Congratulations on the quarter and thanks for the wow profile of the business. Most of my questions have been answered. Thanks for the additional color on the word meaningful. My question is, when you mentioned Israel's, they said that they would, offering to assist California. Do you have any inkling or color on that, what is meant by that?

I could do give you the politically correct answer or I could --

I mean as far as product goes and where you might come in.

Okay. Let me just say this, several of the most successful developers of desalination projects in the world actually come from Israel. To put a finer point on that, the Carlsbad project that we're operating under or that we're helping to build is actually being built by IDE Technologies out of Israel. IDE is one of our very strong partners.

We've done a significant number of projects in Israel with Israeli players and those same Israeli players are successful and operate all over the world. As to what technologies Mr. Netanyahu -- or support and advice are giving I think maybe he'd be thinking more along the lines of drip irrigation and water recycling. His commentary was in three areas -- drip irrigation, recycling of water, and desalination.

From the desalination standpoint, California is already benefiting from the technologies in desal. My half-kidding comment about political correctness is that, in my opinion, the best help that Israel could give to California is around policy. If Prime Minister Netanyahu can advise California and California policymakers, that's going to be the greatest help. California is essentially dysfunctional right now in terms of water policy.

I was very pleased to see Israeli leadership helping California leadership figure out water issues. I think it's less about bringing technology to California. I think it's more about bringing enlightened water policy.

Thanks. When you say a $1 billion market, say in oil and gas, is that market opportunity in your specific product areas?

That $1 billion is exactly and exclusively our specific product area.

You said it was annually recurring?

Yes.

You spoke of the new materials, is one of the new materials that you're beginning to work with graphene?

No.

No? Okay.

Graphene is very interesting but our assessment of graphene as it relates to our industry is that it's still years away. But no, it's really advanced materials science, at the core of our products.

You made a comment about India being, the political scene there being short-term limitations, but long-term promise. Can you just give me a little clarification of that?

India has major national elections coming up in April and May. Some of the pundits would suggest that one party may win over another. And I'm not going to get into that, but some of the candidates that are running are seen as incredibly business friendly and some of the candidates are seen as more or less corrupt than others. A lot of that which ails India today is a lack of power.

They have intermittent power and they don't have enough power. The reason that's relevant to us is that with every new power plant in India, they have to use desalinated water to cool them and so that's a tremendous business opportunity for us. If a pragmatic government takes place in India, you'll see more power, more water, and therefore, a big lift for us as a Company. We don't get a say in who gets to rule countries, but we're carefully watching what happens there.

Thanks. And if I went to your website would the three Isos be explained and is it profiled on the website already?

Yes.

Okay. Great. Congratulations, again, and thanks for the exciting times. It's wonderful. Good luck.

Great. I think that brings us to the end of the questions. Thanks, again, everybody for participating in the call. We feel very good about where the Company is positioned and where we're headed going forward. Thanks, again, for participating.

Thank you. Ladies and gentlemen, that does conclude the conference call for today. Thank you for your participation. You may now disconnect.