Energy Recovery Inc (ERII) 2014 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Good day and welcome to Energy Recovery's second-quarter 2014 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to your host, Mr. Joel Gay, CFO. Please go ahead, sir.

Good morning, everyone. And welcome to Energy Recovery's earnings conference call for the second quarter of 2014. My name is Joel Gay, CFO of Energy Recovery, and I am here today with our President and Chief Executive Officer, Tom Rooney.

In today's call, we will provide you with information about our financial performance in the second quarter of 2014 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 strategies. 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.

So let's start with an interpretation of the second quarter of 2014's financial results followed by a thematic commentary on the status quo and our emerging views on the business. Beginning with the top line, net revenue was historically low as compared to second quarters in prior years. It is important to note, however, that the causal factors for the quarter's revenue performance are not new phenomena; namely, idiosyncratic project timing risk, and to a lesser extent, seasonality.

Comparing net revenue in the current period of $6.4 million to the prior year quarter revealed a 25% decrease; this driven by the megaprojects in OEM divisions, each producing roughly $1.4 million less. Offsetting the megaprojects and OEM revenue decrease was improved aftermarket performance and the recognition of oil and gas rental income from an IsoGen operating lease to a customer in Saudi Arabia.

Regarding oil and gas, the ability to discern the realization of a second and consecutive quarter of revenue recognition further justifies bold and continued investment in sales and marketing to advance our penetration of this crucial market segment.

Moving on to profitability, the most impactful variable again was lower revenue performance as compared to second quarters in prior years. Here, the impact was twofold. One, less gross profit generated given delayed shipments attributable to project-specific timing risk and, two, lower levels of manufacturing overhead absorption, given decreased production levels.

As compared to the second quarter of 2013, in addition to lower sales and overhead under absorption, there was a shift in product mix away from PX devices towards pumps and Turbo Chargers. This shift in mix is chiefly due to the lack of megaprojects revenue, which is predominantly comprised of PX devices. Generally speaking, volume, operating leverage, and product mix where the primary drivers to the gross margin of 48% witnessed in the current period, falling 14 points over the prior year quarter and 10 points sequentially. That is to say, as compared to the first quarter 2014.

Importantly, however, the Company continues to improve manufacturing efficiencies, specifically labor efficiencies. And as evidenced in recent quarters where sales and production volume were sufficient to allow for high levels of overhead absorption, gross profit margins in the low 60s are achievable and sustainable.

Operating expenses increased by $1 million over the second quarter of 2013 to $7.6 million, consistent with the sales and marketing campaign launched in the first quarter of this year to penetrate the oil and gas segment, and heavy investment in R&D to commercialize products in newly identified markets of strategic interest. Sales and marketing and research and development expenses increased by $800,000 and $600,000, respectively, as compared to the prior year quarter. In line with our strategy of commercial diversification, general and administrative expenses decreased by $300,000 over the prior year quarter as a result of personnel deployment to direct sales for oil and gas market penetration.

With decreased revenue, decreased gross profit margin and increased operating expenses, the Company reported a net loss of $4.6 million or $0.09 per share in the second quarter of 2014. Comparatively, the Company reported a net loss of $1.5 million or $0.03 per share in the second quarter of 2013.

The Company's balance sheet and cash position remain strong. In the six months ending June 30, 2014, $200,000 of net cash was consumed by operating activities. Considering the net cash consumed by operating activities in the first quarter of 2014 of $5.9 million, cash generated from operating activities in the current quarter of $5.7 million is notable, the majority of which was due to the monetization of receivables, offset slightly by an increase in inventory given delayed shipments.

Benefiting cash flow in the second quarter by $0.6 million was the collection of the Spanish value-added tax refund disclosed in the 2014 first quarter Form 10-Q filing.

As of the second quarter of 2014, the net loss of $8.3 million included $3.7 million of non-cash expenses, the largest of which were depreciation and amortization of $2 million and share-based compensation of $1.2 million. The Company improved net cash flow performance by $7.4 million over the prior year six-month period by producing $2.1 million in net cash flow.

Excluding current and noncurrent restricted cash of $9 million, the Company reported unrestricted cash of $16.5 million, short-term investments of $10.4 million, and long-term investments of $4.8 million, all of which represent a combined total of $31.7 million as of June 30, 2014.

Now I would like to share our perspective on the status quo and the exciting evolution of Energy Recovery. Back in 2011, the Company announced and began executing against a three-pronged strategy. One, reduce costs to maximize gross margins. Two, reposition to achieve optimal market share and desalination, and three, achieve growth through the penetration of new markets.

Having successfully achieved and demonstrated the first two imperatives, the Company's resources have been pivoted and deployed to execute against the third objective with a particular focus on penetrating what we have generically referred to as oil and gas. As the CFO, I am keenly interested in facilitating the optimal allocation of resources to generate the highest returns for our shareholders while ensuring sufficient cash flow to allow for the healthy operation of our long-standing desalination business. In this, it is convenient to think of Energy Recovery's product portfolio in two primary categories -- mature, referring to desalination, and early-stage, or for the most part pre-revenue. Indeed, oil and gas falls into the latter category, as do other and similarly disruptive technologies that are currently under development.

While the long-term fundamentals of the global desalination market remain strong, as does our commanding market share therein, we view the early-stage and pre-revenue opportunities as representing the most explosive growth in value creation potential for our shareholders, thereby commanding peak investment and the unyielding attention of management. By design, our capital structure and balance sheet allow for the aggressive, yet thoughtful, funding of these initiatives, whether research and development, sales and marketing, or general and administrative expenditures.

Importantly, given the depth and compelling nature of the value proposition of our early stage technologies, we also have the flexibility to execute share repurchases via the existing already approved stock buyback program, should market conditions present an opportunity to do so. In summary, management has the resolve and resources to stay the course and bring to bear the several value creation opportunities embodied in our strategic plan.

In closing, I remain comfortable with the strength of our balance sheet, which includes ample cash and no debt, and it will continue to serve as the framework through which we further achievement against our strategic plan. I will now turn the call over to our President and CEO, Tom Rooney.

Thank you, Joel, and morning, everyone. The financial results in the second quarter were not a surprise, in particular as it relates to the timing uncertainty associated with megaprojects and OEM sales. While the long-term fundamentals of the global desalination market and our market-dominating position therein remains strong, we are increasingly focused on advancing our sales and marketing efforts to accelerate oil and gas commercialization, as well as research and development to perfect new technologies for untapped markets.

The levels of customer interest and proposal activity generated in a mere five months since the formal launch of the oil and gas sales and marketing campaign indicate that our diversification strategy resonates in the marketplace and is beginning to bear fruit. Having recognized revenues in consecutive quarters from an operating lease for an IsoGen device deployed in Saudi Arabia, coupled with a persistent surge of proposal activity, our level of enthusiasm is high.

Recall that in January of this year, the Company employed only one part-time sales individual to execute the early phases of business development. Beginning in January of this year, however, we staffed a dedicated global sales force that has grown to six individuals, strictly for the oil and gas market. This sales force will continue to grow as we amass proof points and gain greater traction levels throughout the various targeted verticals.

I mentioned previously recent and continuing R&D efforts, the outcome of which have a high probability of generating a truly disruptive new technology in a uniquely large addressable market. We have made substantial progress to this end over the last quarter and are highly confident in the possibilities for value creation.

The universe of possibilities to proliferate our technologies has never been broader or better defined. The level of technological innovation and spirit of entrepreneurialism found throughout the Company underscores the tremendous opportunities ahead.

Over the past 12 months, it has become very clear to me that investors place a great deal of value, and possibly the entire value of the Company, on the performance of our existing desalination business as reported in our quarterly earnings reports. I certainly understand why. Ironically, the entire focus of our management team has been and continues to be on creating shareholder value through a number of very significant and very exciting growth initiatives that will take us well beyond desalination. The disconnect between how investors value the Company and how the management team is creating value is undoubtedly the result of asymmetric information, and that is something that I intend to change.

To that end, I am pleased to announce that we are beginning to plan an analyst day for this fall. To be specific, we are currently looking at dates and venues in New York City in the late October to middle December timeframe. At that time, we plan to provide a great deal more specificity and clarity regarding the various growth markets that we are developing. And we also anticipate making an announcement regarding a brand-new, disruptive technology that we have been working on for the past 11 months. I am very much looking forward to this analyst day and I am sure that you will find it both informative and valuable.

Thank you. And, with that, we will now open up the call for your questions.

(Operator Instructions) David Rose, Wedbush Securities.

I was wondering if I can follow up on a couple items on the margin explanation. You indicated that it was a lack of fixed cost absorption, but yet your revenues were greater than first quarter revenues. So your revenues were actually double first quarter revenues. So I would have expected substantially greater fixed cost absorption.

And I understand there is a product mix issue, but in Q1 you didn't have any megaprojects either. So maybe you can help us understand a little bit on the margin side. Then I have a follow-up question.

Sure. David, in terms of absorption, while in the long run sales and production certainly marry up, from a cost accounting perspective, absorption occurs at the point of production. So revenues will trail production. So it is quite conceivable that you could have lower revenues in one quarter and higher rates of absorption, and then consequently, higher revenues in the subsequent quarter and lower levels of absorption. And that is what precisely has happened this quarter.

In real-time response to demand and potential project shipment delays, we adjusted our level of production, and therefore incurred higher levels of under absorption.

But your inventory levels in Q1 were up. In Q2, you are up 30%. So is does that imply you will see a 30% increase in revenues in Q3 or Q4, so that you can actually keep up with those production levels?

Yes. That's a good question, David. We like to think of inventory in the context of maintaining a sustainable inventory turnover ratio. And if you look at our inventory turns this quarter over the prior year quarter, it is basically the same, so 1.4 versus 1.8 respectively. So while we are adjusting production in real time, there is a base level of -- or base degree of level loading. So I wouldn't utilize inventory as a leading indicator, per se, of future revenues.

But, just to be clear, last year, when you built up inventory, Carlsbad was pretty clearly yours and flowing into the fourth quarter, as you had called out previously. There are no other major megaproject announcements, so I don't see how Q4 coincides with the inventory build, given that you generally build six months ahead of time. Can you help me (multiple speakers) reconcile that?

Yes. So David, let me take that question, and it really turns on the assumption that we don't -- that we haven't announced megaprojects through press releases. The fact is, that is the case. And I think embedded in your question is the assumption that, because we haven't issued press releases around megaproject victories, we don't have any. In point of fact, we do.

We made a decision nine, ten months ago to deemphasize press releases on MPD projects. In fact, I don't think we have had an MPD press release in maybe a year. And I can tell you, as a matter of fact, that we have megaprojects under contract that in years past we may have chosen to issue press releases on.

So we do, in fact, have megaprojects in the pipeline and they will, in fact, or they are being manufactured towards. So we simply made the choice that too much emphasis on the Company was on our desalination business, and we were exacerbating that problem by making all of our press releases around what I guess I would call the run-of-the-mill MPD announcements. And so we made a decision upwards of a year ago to deemphasize those press releases.

We never -- we were never in the perfect cycle of announcing every MPD. We announced several or many or most, but never all. And we simply have taken it now to the extreme where we simply don't announce MPD or any desalination contracts unless they represent something strategic, something unique, something newsworthy for investors.

So, based on the megaprojects that you have not announced that are in your backlog, is that up over last year or is it down over last year?

We don't give that -- we have never given backlog advice or guidance in that regard. It tends to have people take that and try to calendarize it. It is tough enough as it is.

No, I understand. Projects can be moved around. I was just trying to get a better sense of reconciling that inventory growth with the revenue expectations based on the megaprojects, since you are no longer announcing them. It is a little harder for us to gauge what Q4 will be like. But maybe the last one, if I may, you are no longer announcing projects for desalination, but do you plan to announce projects for the new oil and gas projects?

To the extent that we can, David, yes. I can tell you right now that at least one contract that has been signed in oil and gas, somewhat allows us to issue a press release if we can get it through their legal department. But we can't, therefore we cannot issue press releases. So I guess the answer to your question is maybe, if conditions allowing. But we would attempt to do so.

I can tell you, as an example, we signed a contract yesterday with a third-party and we won't be announcing that. So there are conditions that permit us to make announcements and there are conditions that do not.

(Operator Instructions) Patrick Jobin, Credit Suisse.

Just want to follow up on the growth question, maybe with a different angle. I appreciate the fact it is a lumpy business and certainly you don't want to over emphasize the exposure to desalination, given all the other exciting R&D efforts. But, maybe help us understand what you see as the industry growth within desalination, maybe your market share, just so we have appropriate expectations for where growth for the core business could end up, depending on timing for some of those megaprojects. I'm just trying to avoid disappointment from the sense that, from an investor or market perspective, we have very little visibility now, without project announcements, backlog disclosure, and the like.

Sure. So I guess the way I would characterize it, Patrick, is this. For not quite three years now, so -- if you go back in time, in the beginning of 2011, we held about 50% market share. And so, market share would have been seen, I guess you would say, as a variable. So our revenue -- if you -- if someone could perfectly predict the desalination industry, then they would have to try to predict our market share in order to predict our revenue.

But, we made some strategic corrections in the middle of 2011 and, for not quite three years straight now, we have held 90% market share. I can only think of one project worth more than $1 million that we did not win in the last three years. So where that puts us today is that we have become kind of a pure proxy, if you will, for the health of the global desalination business. If desalination -- if global desalination demand is high, we tend to be high.

Now, I can't say that we will hold 90% market share forever, but where we sit today and looking back at close to three years, we have -- our market share has been ferociously dominant. So we have become a near-perfect play on the desalination market. Therefore, the question becomes, can anyone predict the global demand for desalination.

The simple answer is, I don't think so. We certainly can't. We can see sometimes a quarter or two ahead, but then again there is a lot of noise, even a quarter or two ahead. We routinely see $2 million and $3 million MPD projects slipping back and forth by a quarter. So even we have a ton of noise in predicting two quarters ahead.

But I think at this stage only a fool would try to forecast global desalination. We do know this. The fundamental drivers for desalination are significant. I am sitting here in California and we are in an epic all-time drought. The same can be said for China and India. And these are all old stories.

But, then, trying to take that need and calendarize it and predict global desalination, many smarter people than I have tried and failed. And so, that is where we have kind of resolutely come to the position that we are not going to try anymore to make long-range forecasts. And I fully recognize that that creates a horrible position for people like you and others to forecast the future and, therefore, forecast our revenue.

I guess we are kind of doing our part, which is to say we are dominating what exists out there and capable of producing good margins when there is work there. But I would love to tell you I have some special way to forecast the future in terms of desalination. I simply don't.

What I do know is this. It is in the best interest of our shareholders to diversify away from that lumpiness using our core technologies into new diversified markets. That is what we are focusing so intently on. So that, with hard work, maybe three or four years down the road, we will look back and desalination will be a highly valued part of our business, but it won't have the damaging cycling effects that we now feel.

And so, the vast majority of our time is not spent trying to forecast desalination in the future. It is more about building a portfolio of value creation that obviates the painful cycles. That is a really long-winded way of saying, I can't give you any forward guidance.

No, I think we appreciate no one has a crystal ball here. On the oil and gas, a few questions on that topic; you mentioned you are really excited about the quote activity that you are seeing -- early sales, types of indications. Clearly, some very aggressive commentary around the investments you are putting in place.

So I guess the two questions I have on that market would be, what is the magnitude of quotes that you have issued to prospective customers and can you quantify that from a dollar perspective, and number of customers relative to a quarter or two ago? And then, from the commentary about aggressively investing in sales, given the explosive growth potential, can we just maybe ballpark how we should anticipate your OpEx to ramp, given that investment?

Okay. So there were a handful of questions there. I think we announced last quarter that after our outbound marketing efforts that began on February 23, I believe, we had close to $100 million of commercial interests. We have -- that number continues to grow, and I would prefer not to quantify that anymore and kind of get into that cycle, but let's just say it continues to grow very nicely, and we are putting together and issuing commercial proposals against that interest level.

Where we see activities now, we have a few installations that we have executed in the past. And where we are now is, we have actually scheduled and conducted on-site visits for new clients to see past installations. And, suffice it to say, the results have been eye-popping.

The level of interest when a future client looks at a past installation has been nothing but amping up the excitement level for future clients. We have had clients fly in from the Middle East to see installations in North America. We have a client flying in from Asia to do the very same thing next week.

So, where we sit today is we find at first high level of interest for us to quote commercial projects. The next step, then, is show me what you have already got in place. Let me talk to your existing clients. We are seeing those things stack up and lineup in a beautiful way.

What the next phase then tends to be is what does the -- when does this installation calendarize into somebody's plans. So, an existing plant that is going to have a retrofit done to it typically will have a shutdown cycle that might take a week or two and happen once or twice a year. We then have to schedule when that would happen inside of their plant. And so there is sort of this methodical timeframe that things go through.

So what we are seeing is, we opened the dam, if you will, on February 23; inbound interest well in excess of $100 million; commercial contracts, technical vetting, field plant visits, again, which have been spectacularly well received, and then beginning to talk about calendarizing things.

Unfortunately, in some cases, people might say, well, I am definitely going to do this technology and my next plant shutdown is December, and if we can't get it into December, then it has to be the subsequent December. So you get kind of this timeslot alignment issue. But with enough clients looking at enough deals with us, that doesn't become a problem as time goes by.

So we are forging ahead. The level of interest is high. The activity level is very high. Not every deal that we look at pans out. Sometime the economics are strong; sometimes they are not. Sometimes the technical fit is great; sometimes it is not. Some clients move fast; some clients move -- most clients move slowly. That is one thing we have learned. But the activity level and the interest level has been very, very positive. On the other question, which was OpEx --

On OpEx, right.

Do you want to take that?

Yes. Sure. So Patrick, go ahead and reiterate your question so I can answer it best.

Well, I am looking at a few million of incremental OpEx spend growth quarter on quarter (multiple speakers) some very aggressive commentary around bold investments being made in sales with six headcount in the oil and gas sales vertical. Just help me understand what is left to build out within that infrastructure and the investments that you want to continue to make, what's in place. And I have one follow-up on the early-stage R&D. Thanks.

Actually, let me take it in terms of what is left to be done in sales and marketing and so on. So we put in place a dedicated six-person sales force in January, really launched into the marketplace in February. We were, at that time, primarily focused on just the sour gas processing sliver of the oil and gas industry and, therefore, launching marketing campaigns into specifically oil and gas.

We now, though, have found a rich source of opportunities a very similar to that in the synthetic gas or syn gas industry, a large portion of which is ammonia processing. So we are ramping up marketing campaigns into syn gas. We also are looking at another vertical that will align with the technology investment that we have been making. And, as I say, and we are really not going to disclose much about it, but we have devised a completely unique, new utilization of our core technology, and that will attack yet one more vertical. And so we are lining up a marketing campaign there.

We are increasing the headcount. We have already hired an additional salesperson operating out of the Middle East, North Africa, and an additional dedicated salesperson operating out of Asia, both of whom start in the next 60 days. And so, much of what we are doing is increasing the number of people we have dedicated towards this, increasing the number of verticals we are attacking in terms of marketing campaigns. So that is where a lot of our -- that is where the focus of a lot of our sales and marketing expenditures will be.

How that translates into dollars and cents, Joel, I don't know if that means we will be 50% run rate higher than where we are now by the time we get to January, but that is about where I would expect it to be.

Yes. Sure. So Patrick, there are some onetime expenses that are reflected in the year to date OpEx. So Tom mentioned the FTEs that we are bringing on board. Clearly, those costs are going to be sticky and you can extrapolate from that to the end of the year. Also, when evaluating OpEx, keep in mind that in the first quarter we did book the back reversal at a P&L impact of around [850], so as you are building your models, you will want to contemplate that.

Okay. That's helpful. And so just to be clear, 50% potential growth off of this quarter's OpEx is kind of maybe the target level for the organization looking out a year or so. And then, just on the R&D, just want to make sure I understand it correctly. It is early stage, but not within oil and gas and not within desalination?

So first of all, let me clarify the 50% growth. That would only apply to sales and marketing, not the entirety of OpEx.

Okay. Thanks. And then, was I correct in my understanding of this early-stage technology plan to be unveiled at the analyst day?

Yes. We prefer, at this stage, not to describe where it will be applied. There is a lot of detail that is going on and, in fact, the contract that we signed yesterday is pursuant to that for a field trial. So at this stage, we are maintaining a high degree of stealth mode.

I will tell you that, just as for example of the level of the R&D work that we are doing, I think, if I am not mistaken, the Company has had about six patents in its first 20 years, just to put things in perspective. And with those six patents, we were able to dominate the desalination market up through today. We filed 27 patents this year alone, 35 in the last 12 months.

So we have spent a great deal of time in the last three years rebuilding the culture of innovation, hiring some brilliant research individuals, brilliant engineers, finding verticals, and so on. And it is now beginning to result in a great deal of intellectual property generation and terrific opportunities for us to move. With that, we also want to maintain first mover advantage. So we are being cryptic, if you will, about where we are going, Patrick, and I hope you can bear with us in that regard.

But the fact is, we will be much more clear in the analyst day later this fall. And, in terms of the markets that we are headed into, what we have got in terms in front of us to unlock, but at this stage I would just avoid trying to answer the question as to which vertical we are moving towards. Having said that, diversification is always a bad thing, but this is diversification by verticals using our core technologies in a novel way.

(Operator Instructions) JinMing Liu, Ardour Capital.

First of all, regarding your rental income from the oil and gas in the second quarter, is that just a traditional operating lease? Or, and also just for your future contracts, are you considering a kind of saving pace, the rental income? Or are you just simply straightforward operating lease?

We are considering all, and very seriously considering evaluating various different commercial vehicles. The one commercial lease that we have operating right now was done for convenience to help the client understand technology and economic risk. And this was just a comfortable vehicle for them to use at the time.

It is not necessarily something that we would do in that particular vertical on an ongoing basis, but I can tell you that we have looked at individual discrete sales as we have done in the past. We have looked at leases and renting, as we are doing now. We have also looked at performance contracting where we get paid based on a value generation. But, yes, I think you can anticipate that we will use a number of those vehicles on a go forward basis and rather aggressively.

Okay. And, actually, I have just one last question. I saw you have -- you spent a little bit more than $2 million CapEx in the last quarter. What is that for? Was that related to the new project you announced or it's just -- simply relates to some oil and gas activities?

That does relate to this new and undisclosed technology. So it is an R&D -- well, it is an R&D CapEx. It is CapEx to vet and develop to this technology.

Just follow up on that, I'm trying to understand why you spend money on CapEx for that technology. I'm just trying to see where -- are you going to build some new equipment just to put into field tests for -- by your customer and whether you will realize some future revenue from that.

It has to do with the sheer act of developing the technology. This is a radically new deployment of an old technology, but it requires us to have in-house under our roof here certain technologies for developing that ultimate technology. So the CapEx that you see now is not CapEx that will move out to some client site or location. It has to do with creating and developing the technology. And -- but, in the future, we may have other CapEx associated with the same technology that would be pursuant to specific client deployments.

Okay. Yes. Should we expect any more CapEx on that front?

Yes. Yes. And we actually wrestled with even disclosing to analysts and investors that we were working on something radical and disruptive. And our choice would have been to say nothing, to be frank, until we were ready to say everything. But we knew that both our OpEx and our CapEx was going to balloon around this and that you would detect it, as you have.

And, rather than be unable to answer your questions, we made the decision in the last earnings call to begin to discuss that we were making significant investments in a (technical difficulty) territory, and just so that we would be able to explain the OpEx and the CapEx expansion. So that is what is going on. And, yes, you will see more of it over the next 12 months.

Robert Smith, Center for Performance Investing.

Tom, can you share with us -- how do you feel about the Carlsbad facility coming on stream, and the importance to future work in California?

Yes. The pundits would tell you that if California behaves or reacts in the same way that we have seen other markets around the world, and most notably I would give you Spain and Australia. Both Spain and Australia had sort of epic battles about whether or not to do desalination. Then the pivotal first project went forward at each of those locations. The pundits were proven wrong, that it wasn't environmentally bad and that water -- new water created this way was a very powerful thing.

Politicians, then, would stand at the new water plants and brag about all the great new drinking water and how it is helping their economies and so on and so forth. And because of that, in both Spain and Australia, you saw the first project sort of unleashing a wave of projects to come thereafter. So if California followed that same pattern, then, yes, Carlsbad would be the pivotal project.

The Carlsbad project is moving forward. As you know, we shipped our devices there last, I think it was, December. The construction continues on the Carlsbad project. I think it is a great project, probably going to be very successful.

My guess is you will see politicians lining up at the ribbon-cutting ceremonies and talking about the great water, which, by the way, all of which will take place at a time when California is in an epic drought -- I mean, a drought that is on the news day and night. And I think the word desalination will suddenly enter the conversation in terms of a real viable solution.

Having said all that, and therefore, Carlsbad would likely, in that pattern likely open up the way for dozens of other projects to move forward, and move forward rather aggressively and quickly. And we have calibrated roughly 19 desalination projects on the West Coast of the United States as a consequence.

I have to temper all that by saying that California is unique in its uniqueness. I live here and I love the people that live here and whatnot, but I loathe to try to predict how California will behave in the future around something that has economics and environment and everything else. But, if the pattern follows Australia and Spain and a few other countries, it would be a breakthrough moment for the desalination market. But we all have to wait and see.

And, with respect to oil and gas, so you gave us that initial number of $100 million proposal activity. Then you said it has continued to improve. Is there any way to look at -- without divulging an additional number, the pace of activity there?

Well, the $100 million, and it is certainly quite a bit more than that now, is as much as we can handle in terms of processing and pursuing and so on. And so we are attempting to digest what we have on our plate at this stage, while at the same time traveling the world and meeting with new clients and looking at new opportunities and so on. So I don't want to try to quantify it any more than that.

I think the more important question for investors to think about is the time to commercially transition or the time to turn those into contracts. And heretofore that has been -- we have missed the mark on that. I would have thought the industry would have a slightly quicker pace in terms of bringing this to actual reality.

The level of interest -- and I know certain pundits have said, oh, this value proposition doesn't resonate. I can just tell you that about three weeks ago, one of the most prominent oil and gas giants in the world was actually telling us that we were grossly understating our value proposition, that our technology actually materially improves plant uptime and that that was near gold to them, and actually suggested that he meet with our marketing department to help clarify just how powerful our value proposition is to them in the oil and gas space.

And, furthermore, this individual wants to write a white paper and present it in an industry conference. So, when you see that level of deep appreciation for our value proposition and extreme interest, but then you watch the pace that it takes to then get the contract and put the contracts into the field, you start to feel there is a little bit of disconnect. But I think what we are learning is that this industry has some very large players and they move at their pace, and we have to conform to their pace.

So I think possibly a more interesting question for investors to think about is not, is there $100 million-plus worth of pipeline activity -- sales pipeline activity, but exactly how quickly will this turn into revenue. We are learning. We will disclose the information as quickly as we can to investors, but at this stage, that is the big x-factor for us, more so than is there a lot of interest and how big is the interest. It is how quickly can that interest be translated into revenue dollars on the income statement.

And that is a bit of a journey for us right now. We are very excited about it. When we get the kind of feedback that we have gotten in the last two or three weeks, it amps us up. But there is a pace and we are not going to change the oil and gas industry's pace. It has been around for 100 years. They operate at a certain pace. We will conform to that.

But we also like the idea that if we can add more of these projects into our pipeline, some of them will fall through more rapidly. That is the way I would suggest that you try to think about our revenues going forward, more so than is there enough in the pipeline. It is how quickly will the pipeline transition.

Thanks for sharing that with me. I hope you have that meeting with this fellow soon. And also I look forward to the fall investor conference. And, just an aside, I assume with the price action in the stock you might be interested in initiating some buyback activity at this time. Anyway, it is just a thought. Thanks so much and good luck.

Thank you, and it does go without saying, we are in the market. We have -- we have already instituted a share buyback. We fully expect that we will be buying shares back with that, so great question.

Thank you, everybody. These were good questions. We appreciate everybody's involvement on these calls and attention, and look forward to future conversations. Thank you.

And that does conclude today's conference. We would like to thank everyone for their participation.