Energy Recovery Inc (ERII) 2015 Q4 法說會逐字稿

Good day and welcome to the Energy Recovery year-end 2015 results conference call. Today's conference is being recorded.

At this time I would like to turn the conference over to Mr. Chris Gannon, Chief Financial Officer of Energy Recovery. Please go ahead, sir.

Good afternoon everyone and welcome to Energy Recovery's earnings conference call for the fourth quarter and full year of 2015. My name is Chris Gannon, Chief Financial Officer of Energy Recovery, and I'm here today with our President and Chief Executive Officer Mr. Joel Gay.

To begin, some of our comments and responses to questions may contain forward-looking statements about market trends, future revenue including that from the Schlumberger agreement, growth expectations, cost structure, gross profit margins, new products and their performance and business strategy including strategic partnerships. 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.

In addition, some of our comments includes non-GAAP financial measures which do not reflect the comprehensive system of accounting. Generally a non-GAAP financial measure is a numerical measure of a Company's performance, financial position or cash flows that either exclude or include amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP.

Non-GAAP measures should be considered as a supplement to and not as a substitute for or superior to financial measures calculated in accordance with GAAP. The Company uses these non-GAAP financial measures to analyze its operating performance and future prospects, develop internal budgets and financial goals and to facilitate period-to-period comparisons and to provide a more complex understanding of factors and trends affecting our business.

Now turning to the financials I will begin with a brief analysis of our financial results on a consolidated basis. I will then turn to a segmented examination of our financial results to provide further transparency and clarity to our business. As such I will discuss our three segments, namely water, oil & gas and corporate.

I will begin with a fourth-quarter consolidated results. In our revenue commentary it is important to note we have two revenue categories: product revenue associated with our water and oil & gas products excluding the VorTeq and licensed and development revenue attributed to licensing agreements with Schlumberger for the VorTeq. Revenue totaled $16.3 million in the fourth quarter, an increase of 10% from $14.8 million in the comparable period last year.

Our year-over-year revenue increase was primarily attributed or driven by increased mega-project product shipments and the amortization of the Schlumberger exclusivity fee. Of particular note, under the terms of the Schlumberger agreement the Company received an exclusivity fee of $75 million.

For accounting purposes the Company recognized $1 million of license revenue during the quarter which is representative of the straight-line amortization of the exclusivity fee over the 15-year term of the agreement. Product gross margin, which is to say gross margin associated with water and oil & gas product revenue and their corresponding costs, was 55% in the current period compared to 61% in the fourth quarter of 2014. Consistent with prior disclosure, the Company implemented austerity measures through the first quarter of 2015 that partially applied to manufacturing operations.

As the global desalinization market began to recover in the second quarter planned production was adjusted accordingly. However, the slower than anticipated ramp-up and associated impact of manufacturing overhead resulted in a margin decline quarter over quarter.

Also contributing to the margin erosion year over year was nonrecurring costs associated with property taxes, partially offset by favorable pricing and channel mix. Total operating expense for the quarter decreased by 30% year over year to $9.6 million from $13.8 million in 2014. This decrease was primarily driven by lower legal expense and lower VorTeq R&D prototype expenses.

On higher revenues, decreased margins and lower OpEx, the Company generated net profit of $300,000, or $0.01 per share for the quarter as compared to a net loss of $4.9 million or a loss of $0.09 per share in the prior year. This represents a marked improvement in our quarterly financial performance year over year.

Turning to our full-year consolidated results, the Company generated strong product revenue of $43.7 million, representing a 44% increased over the prior year. In addition, the Company recognized the aforementioned license revenue of $1 million associated with the Schlumberger agreement.

Including both product revenue of $43.7 million and license revenue of $1 million the Company generated a total of $44.7 million in revenue. This ranks as one of the strongest top-line performances for our Company since the IPO in 2008.

The increase in product revenue was primarily driven by significantly higher mega-project shipments year over year and to a lesser extent higher OEM and aftermarket shipments. Of the $13.2 million increase in product revenue, $9.8 million, $2.8 million and $1.3 million are related to MPD, OEM and aftermarket sales respectively.

As compared to the 2014 water Pressure Exchanger revenue or PX revenue for short as a percentage of total revenue increased to 73%. This increase was primarily attributable to higher Mega Project revenue of $9.8.

The shift in total product revenue mix represents a 400 basis point favorable shift towards PXes, away from both the pumps and turbos and oil & gas products. Prior-year revenue included rental income from the 2013 operating lease of an IsoGen system to Saudi Aramco.

On higher product revenues, product gross margins increased by over 100 basis points to 56% from 55% in the prior year. A shift in price and product and channel mix drove the increase in gross margins in 2015. Once again our margin potential is limited by manufacturing austerity measures, slower than anticipated ramp-up in production and the associated impact on manufacturing overhead as well as nonrecurring property tax true-ups.

Including licensing revenue associated with the Schlumberger agreement, total gross margin was 57% in 2015. Full-year 2015 operating expenses were $37.4 million, representing an increase of $2.2 million year over year. This increase was primarily driven by nonrecurring CEO transition expenses and legal expenses, partially offset by austerity measures initiated in the first quarter of 2015.

It is important to note that our full-year 2015 OpEx includes $6.2 million of nonrecurring expenses incurred throughout the year. Excluding performance-based employee expenses OpEx is in line with our previous run rate guidance.

Our operating expenses now fully reflect the austerity measures implemented at the beginning of the year and the investment in additional engineering resources to advance our robust product development roadmap, both of which we will discuss on our prior calls. Joel will discuss our product development efforts and strategy during his commentary later.

On higher product and license revenues, increased margins and increased OpEx the Company generated a net loss of $11.6 million or $0.22 per share as compared to a loss of $18.7 million or $0.36 a share in the prior year. Excluding nonrecurring items, the Company incurred a net loss of $6 million or a $0.11 per share for the year ended 2015.

Now turning to the segment analysis, I will begin with commentary on our water segment. This segment generated full-year 2015 product revenue of $43.5 million, an increase of 47% year over year.

The increase in product revenue year over year was primarily driven by mega-project shipments as a result of strengthening demand and global water desalination markets. As a result of increased product revenues and a shift in product and channel mix full-year 2015 gross margins increased more than 200 basis points to 56% from 54% in 2014.

Full-year 2015 operating expenses were $7.6 million, a decrease of 7% year over year. This decrease was chiefly attributable to decreased legal expenses within G&A as well as lower desal R&D as a result of austerity measures and the reallocation of resources to oil & gas R&D efforts and, finally, lower amortization expense. Sales and marketing expenses increased in 2015 due to performance-based employee compensation as a result of the Company's strategic and financial performance.

In summary, an increased revenues mix and decreased OpEx the water segment contributed $16.9 million in operating income for the year or 39% of revenue. Comparatively the water segment generated $7.7 million in operating income or 26% of revenue for 2014.

Now I will transition to the oil & gas segment which consists of a hydraulic fracturing, gas processing and chemical processing. The oil & gas segment generated full-year 2015 revenue of $1.2 million bifurcated into $141,000 of product revenue and $1 million of license revenue during the year.

Product revenue decreased $642,000 year-over-year as the prior year included income from an operating lease of our IsoGen unit with Saudi Aramco while in the first quarter of 2015 Saudi Aramco exercised the purchase option on the aforementioned lease. Again our license revenue is associated with the amortization of the $75 million Schlumberger payment received in the fourth quarter of 2015.

Full-year 2015 gross product margins declined to 53% or by 47 basis points year over year as a result of a decline in product revenue from 2014 at 100% gross margin. Including license revenue, gross margin was 95% for 2015.

The oil & gas segment OpEx reflects our investment to develop and commercialize disruptive technologies for emerging markets and verticals. Our sales and marketing expenditures related to the penetration of the gas, processing, ammonia and pipeline markets decreased as a result of austerity measures in demand generation marketing. While R&D activities did not decrease for the year expenses were lower as a result of VorTeq prototype manufacturing expenses incurred in 2014 which did not recur in 2015.

Finally, general and administrative expenses were higher due to higher employee resource allocation and performance-based compensation. Oil & gas OpEx expenses totaled $12.4 million for the year. This represents a decrease of $2.1 million from 2014.

Now transitioning to corporate OpEx, the Company incurred $17.4 million in operating expenses for the year, an increase of $4.9 million year over year. This increase was primarily due to $6.2 million in nonrecurring expenses associated with the CEO transition and various legal expenses as well as higher performance-based employee compensation as a result of the Company's strategic and financial performance.

To conclude my remarks I will discuss our liquidity position as of December 31, 2015. In 2015 the Company generated net cash flow of $84.4 million.

Cash generated by operating activities in 2015 was $69.1 million largely driven by the receipt of the $75 million license fee from Schlumberger. This includes a net loss of $11.6 million and a non-cash expense of $7.1 million, the largest portion of which was share-based compensation expenses of $4.1 million and depreciation and amortization expenses of $3.8 million. It is important to note that share-based compensation expenses were elevated during the period by $1.4 million due to the CEO transition.

Favorably impacting cash from operating activities was a $2 million decrease in inventory due to product shipments offset by a $1.7 million litigation settlement. Cash generated from investing activities in 2015 was $14 million. Favorably impacting cash from investing activities by $12.9 million and $1.7 million were maturities of marketable securities and the related restricted cash respectively, offset by $600,000 of capital expenditure.

Cash generated by financing activities in 2015 was $1.4 million. Positively impacting cash from financing activities was $1.3 million and proceeds from issuance of common stock related options and warrant exercises. The Company ended the quarter with unrestricted cash of $99.9 million, current and noncurrent restricted cash of $3.8 million and short-term investments of $300,000, all of which represents the combined total of $104 million.

At this point I will turn the call over to our President and CEO Joel Gay to provide a commercial and strategic update. Joel, please go ahead.

Thank you, Chris. While our core competencies of fluid dynamics and advanced materials science are central to our corporate existence our competitive advantages of world-class engineering talent, the Pressure Exchanger technology and speed and agility equally contribute to our success. As we review 2015 of all of our performance attributes, speed and agility were most central to forging the most successful year in the Company's history.

2014 was challenging. In fact, it was the second worst fiscal performance since our IPO and our business was caught within the energy and water nexus downdraft.

How did we respond? We reloaded our strategy and operating tactics as a necessary response to the early days of the continuing economic malaise and more importantly as a rebuttal to historical and suboptimal returns to our shareholders.

Let's briefly recap the timeline of events. In January austerity measures were implemented resulting in the elimination of $6 million of non-mission critical OpEx and two, we redefined our go-to-market strategy for emerging products. By February the Board was reconstructed to welcome our largest shareholder Mr. Ole Peter Lorentzen and former Energy Recovery CFO and current oil and gas midstream CEO Alex Buehler. In March Saudi Aramco put the IsoGen turbo generator system, the unit which was sold in 2013, into production in one of their larger plants in the southeastern province of Kingdom representing the first bona fide commercial installation of the product.

By April we initiated field trials with Liberty Oilfield Services for the VorTeq hydraulic pumping solution and the Board concluded its CEO search resulting in my appointment after having managed the Company since January in an interim capacity. By June the Board welcomed the former CEO of Statoil, the sixth largest energy company globally, Mr. Olav Fjell and management was top-rated to include the appointment of Mr. Chris Gannon as CFO and Mr. Eric Siebert as Vice President, Corporate Strategy and Emerging Market Sales.

In October we executed a landmark licensing agreement with Schlumberger, the world's largest oilfield service company, to provide exclusive rights to our VorTeq hydraulic fracturing technology. Under the terms of the agreement Schlumberger paid us a $75 million exclusivity fee in October. While we have received the exclusivity fee for accounting purposes it will be amortized over the term of the 15-year agreement.

In addition, Schlumberger will also pay additional proceeds subject to us meeting certain key milestones that I will discuss later in this call. Upon commercialization we will have consistent, predictable royalty income for the next 15 years that I will discuss later that conservatively equates to $80 million to $200 million in incremental annual steady state revenues. Finally, in December we successfully completed the field trials with Liberty Oilfield Services.

While there were other significant milestones achieved in 2015, the aforementioned ones rise to the level of being quantifiably meaningful. We move quickly and this ability allows us to accomplish feats that would otherwise be considered improbable given our relative lack of size vis-a-vis the massive markets we seek to penetrate.

Lastly in reviewing 2015 we further enhanced our position throughout the global desalination market, netting $26 million in large-scale capital projects and boasting a 100% marketshare in the Mega Project segment. Desalination continues to be a core business for us and the revenue growth we were able to achieve in 2015 appears at least repeatable in 2016. I will elaborate further on this later in the call.

The VorTeq licensing agreement solidified the evolution of our product strategy. Now in addition to arbitraging wasted pressure energy we can also create markets where pumping assets are subject to and being destroyed by hostile process fluids. At the center of our product strategy is of course the Pressure Exchanger, a technology whose aperture is only beginning to be defined and whose value proposition to the industrial end-user is ubiquitous.

The ultimate question of course is what's next? The answer is we can apply our technology wherever there are high rates of fluid flow, high pressure differentials and/or high degrees of capital intensity specifically in the form of pumping assets. We have a ubiquitous value proposition that applies virtually to any industry, any sector, any market or any vertical.

Now I'd like to discuss our long-term corporate strategy that we will execute against for the next three to five years. We will pursue four distinct strategic imperatives: one, to establish and drive growth in the PX and the pump market beginning with the commercialization of the VorTeq; two, to create a rapid-fire innovation machine resulting in the achievement of proof-of-concept of one derivative of the Pressure Exchanger every 24 months annually; three, to enhance our market position in desalination through the expansion of our product and service offerings; and four, to monetize the centrifugal product line, meaning IsoBoost and IsoGen, through commercial vehicles beyond the existing model.

We will adapt our business model to fulfill this strategy, migrating to a hybrid of a licensor and direct seller of technology. With a flexible model we can strike the optimal balance between risk and return. The Schlumberger licensing agreement supports this concept.

I utilize the metaphor of a reload to describe the changes made to our strategy in 2015. Now with a revitalized focus the Company is locked and loaded to generate enhanced returns.

With that, let us briefly discuss the outlook for 2016 by segment beginning with desalination or water. In virtually all geographies, the market continues to strengthen. We review leading indicators such as the advancing of previously scheduled projects into the current period and we examine lagging indicators such as a shift towards Pressure Exchangers away from pumps and turbos.

We analyze microeconomic conditions on a market-specific basis when evaluating the growth prospects for desalination as macroeconomic analysis often presents an opaque picture. However, the continued strengthening of the dollar has yet to diminish demand for our offerings from either a price or volume perspective. Furthermore, in the long run we view the monetary policies by the major national banks as continuingly stimulative.

During 2015 we were awarded $26 million in large-scale capital projects which provide underwriting for a good portion of our expected revenue in 2016. While fundamentals look positive, we remain cognizant of the cyclical nature of the global desalination market. This is why a key tenet of our corporate strategy is to expand our service offering.

In addition to the performance contracting and leasing initiatives launched last year, we have actively engaged would be strategic partners as a form of capital-light vertical and/or horizontal integration. The goal here is very simple: offer more to the end-user in a bundled package at the center of which is our Pressure Exchanger to increase our addressable market to a significantly greater value.

Additionally, we are opportunistically acquisitive with respect to bolt-on and synergistic technologies as a complement to our organic R&D programs. In conclusion, we expect another strong year in our water desalination segment with revenues and gross margins consistent with some of the better years in the Company's history.

Now shifting to oil & gas excluding fracking which I'll discuss later on this call. Beginning with gas processing and pipelines, we remain focused on two target geographies: the Middle East and North America.

Specific to the Middle East our primary focus remains Saudi Aramco and to how to grow and expand that relationship. We seek to establish a beachhead here from which a broader Middle East-North Africa campaign can be launched.

The process began with the installation of our IsoGen in March of last year and continues as the unit remains as a core fixture in the plant, crystallizing our value proposition with every megawatt produced. Our goal is to secure additional purchase orders with Saudi Aramco in 2016 and are executing accordingly, including the analysis of a multi-phased deployment of our technologies throughout their entire production portfolio.

In North America the market is challenging with downward pricing pressure on crude and its associated commodities. This, however, has not deterred the evaluation of potential strategic partners who have larger and established distribution channels and whose brand equity in the marketplace could significantly advance our market seeding efforts.

Specifically we have been engaged by or are engaging licensors and/or packagers of gas processing plant technology who directly sell to the end-user, namely the owner operators of the plants. Our approach for gas processing in 2016 is therefore two-pronged: one, continue organic market development efforts in Middle East-North Africa and two, identify partners and commercial vehicles in North America that will result in a broader adoption of the technology.

Specific to chemical processing, our marketing strategy is to seek adoption from upstream licensors and packagers of the plant technology given the strong relationships that they have with the end-users. As with gas processing, we are evaluating potential strategic partners to facilitate product adoption and ultimately monetize the underlying intellectual property.

These potential partners are similarly the licensors and/or packagers of plant technology and in turn sell directly to the end-user. We are confident that 2016 will yield meaningful progress for the advancement of the IsoBoost and IsoGen products through either the generation of purchase orders and/or the consummation of a strategic partnership that would ultimately lead to wider spread adoption of these technologies.

Progressing now to the fracking vertical, specifically the commercialization of the VorTeq. In December 2015 we successfully concluded field trials with our test partner Liberty Oilfield Services, culminating in the delivery of profit to a well in the Bakken formation under extreme weather conditions. The Liberty field trial successfully demonstrated the validity of our gen-one technology.

Since the field trial and further evidence of our speed and agility we developed and produced an improved second-generation of the VorTeq that includes both mechanical and hydraulic torque as driving mechanisms. We are confident that the second-generation technology will perform well throughout the milestone process under the Schlumberger agreement in 2016.

As previously disclosed, the licensing agreement includes two milestone tests with each successful test triggering a $25 million payment for a total consideration of $50 million. Milestones one and two contemplate five and 20 frac stages respectively performed at a Schlumberger test facility and an actual well, also respectively.

In addition to utilizing the gen-two VorTeq for these milestone tests, which further improves the probability of our success, we can immediately begin broadening the product's aperture to include frac chemistries beyond slickwater such as linear and cross-linked gels. Our timetable for commercialization for non-slickwater chemistries begins in 2018. However, we are encouraged by the operability of the gen-two offering and believe that this timeline could potentially be compressed.

So what does this all mean for 2016? While challenges have and will continue to present themselves, we have reaffirmed the belief that achieving both milestones one and two in 2016 and therefore triggering $50 million in additional consideration recognized as revenue this year is well within the realm of possibility.

To be clear however, while a $50 million cash payment is significant, the future royalty income estimated conservatively at a steady state of $80 million to $200 million per year with upside is what excites us the most. As we further approach milestone one we will update our investors accordingly.

Lastly, I'd like to discuss our product development efforts and the strategic imperative of developing derivatives of the Pressure Exchanger every 24 months in annual cycles. The most frequent question I'm asked by a potential investor is why should I invest in Energy Recovery?

My response is simple. Other than our dominant market share and desalination, the potential of the IsoBoost and IsoGen products and even the licensing agreement with Schlumberger for the VorTeq, the near limitless opportunity for market creation throughout the industrial fluid flow universe is the most compelling aspect of our corporate identity.

I have often used the asset portfolio management metaphor to describe the business, moreover as a means of arriving at an equitable valuation. Namely Energy Recovery consists of a cash cow, our desalination business, and a number of real options with varying betas, each real option corresponding to a given segment and vertical.

In 2015 we exercised one such real option resulting in the most explosive value creating event in the Company's history. The question, the only question that matters is which option will be exercised next?

Our product development roadmap is that the guiding principle that determines R&D resource allocation. It presents potential opportunities beyond our existing segments of water, oil & gas and chemical processing to include industries such as mining and pulp and paper that we could pursue at some point in the future.

For 2016, however, we will focus on development areas within oil & gas, specifically the upstream as it is the most target-rich environment specific to high rates of fluid flow, high pressure differentials and inordinate CapEx. Our bogey is to achieve a 24-month product development cycle, concept to proof-of-concept.

We will then seek to monetize the intellectual property through a commercial vehicle that again balances risk and return. To facilitate this objective, we are making significant investments in human capital to further build upon our world-class engineering core.

In closing, our future as a Company has never been brighter or more promising. We enter 2016 with a robust balance sheet and a significant backlog of commercial opportunities in our existing desalination business. We have mobilized to achieve the two major milestones associated with the Schlumberger licensing agreement in 2016 and our long-term strategy focused on innovation, commercialization and execution will lead our Company to a more predictable growth profile for years to come.

Indeed, 2015 was a year of transformation. 2016 appears to be the year of delivery. Given our dedicated employees, top graded management team and reloaded strategy I'm excited about our Company's future.

With that we will now open up the line for questions.

(Operator Instructions) Patrick Jobin, Credit Suisse.

Hi, thanks for taking the question and congrats on the quarter and all the progress. A few questions from my side.

First, I guess when you think about breakeven profitability in 2016, I guess maybe help us with some of the inputs into that. I think you said revenue growth the same if not higher than 2015. Any other context there would be helpful, and then on the cost front-end OpEx.

And then I guess the side question to that is are you including any of the milestones in that revenue forecast? I'd assume it would be recognized all at once for those. Thanks.

Hey, thanks, Patrick, and great to talk to you again. So when we think about breakeven profitability let's bifurcate the analysis which is to say profitability with either of the milestones, because as you know if we achieve one milestone at $25 million at 100% gross margin by default we would not only being breakeven but we would be significantly into the black. So let's just think about the business excluding the milestones, so excluding the potential of $50 million.

The steady-state business, I stated that revenue prospects for 2016 for the desalination business should be as good as 2015 if not better. Once you contemplate the $5 million associated with the $75 million exclusivity fee you're going to get to a revenue number with an assumed gross margin and an OpEx estimate of anywhere from $31 million to $32 million where we will be very close to breakeven profitability if not moderately in the black. So then now when you contemplate the milestone payments if we achieve either milestone and we recognize that revenue as per GAAP then, yes, we will be significantly into the black.

Got it. That's helpful to clarify.

My second question, just thinking about the status of the missile right now I know gen two, has that been tooled out or is that on its way down to Schlumberger? Or any context on timing of that. And then one follow-up, thanks.

Yes, sure. So we're right on schedule in terms of our internal timeline as to beginning and hopefully successfully concluding the first milestone test. Our focus is really on milestone one.

If we achieve milestone one I won't say that milestone two is a fait accompli but the probability of success would increase exponentially. We are in the process right now of retrofitting the missile that was utilized with Liberty during our field trials last year. It is being retrofitted to accommodate the gen-two cartridge.

But more importantly, Patrick it is being redesigned to contemplate the many lessons that we've learned in the oil patch last year and the several lessons that we continue to learn in our R&D facility here in San Leandro and most importantly through the interaction with the Schlumberger team. We have had a tremendous amount of synergy that arose immediately after signing the agreement and they brought a great deal of value to how we're designing this second generation of the prototype if you will.

So I'm not going to provide quarterly guidance or even semiannual guidance as to when we expect to achieve those milestones. What I can tell you is from where I sit today we believe that it's quite possible that we could achieve both milestones in 2016. Now whether or not both milestones happen in November or December or sometime before that's the uncertainty around the process that I'm not comfortable speaking to.

Understood. And then last question, appreciating that it's I guess speculative on your behalf, but maybe just your best guess would be helpful here. Liberty had gen one in the field and certainly completed successfully.

Any thoughts as to a potential timeframe of additional orders considering they have a certain carveout not subject to exclusivity you have with Schlumberger? Are they waiting for the milestones to be met with Schlumberger or is gen one enough to make them interested in potentially adopting to a fleet or so? Thanks.

Sure. What I can tell you about our relationship with Liberty is that it's fantastic. They were very pleased with the performance of our technology throughout the field trial process, in particular how it performed at the well that we fracked in December.

And they are expecting delivery of the first commercialized unit in 2017 assuming of course we keep to the same timeline that we've articulated since we announced the deal with Schlumberger back in October. So in terms of the timing of orders, I'm not necessarily focused on that for the VorTeq, our focus is really just on milestone one getting through that, then milestone two. And once we get through those two stages of this development process, the orders will be -- they will naturally flow.

In terms of other commercial milestones within our oil & gas business, Patrick, without exclusively focusing on the VorTeq I'll spend a minute talking about gas processing and chemical processing, specifically our centrifugal product line, namely IsoBoost and IsoGen. As I stated in my prepared remarks, we are bullish on the prospect of generating meaningful purchase orders against those two product lines this year. So in terms of the timing and the cadence we're going to focus on milestone one and milestone two without really worrying about orders from either Liberty or Schlumberger and in terms of commercial milestones and imminent purchase orders we're very much mobilizing around the gas processing and chemical processing opportunities.

Thanks so much.

(Operator Instructions) Brian Uhlmer, GMP Securities.

Hey, good afternoon, gentlemen. Yes, I wanted to stick on the gas processing for a little bit here.

I was curious A, do you have orders in hand and then could we expect revenue in the front half of the year for that? Based on the cycle time to get through what would it take in terms of the order front to see something flow through on the revenue line in the front half of the year? That's the first part of the question.

The second part of the question is talking about Aramco and generally a slow-moving machine over there and talking about some large potential development. Is that something that you foresee happening in 2016 in terms of some purchase orders or something that is more testing and whatnot and more of a 2017 event?

Yes, great questions. So let's start with the question of purchase orders. No, we don't have any purchase orders in hand.

If we did I would have been most pleased to make an announcement because our investors have been waiting very patiently for those purchase orders. But if you look at how we've restructured our emerging market sales team under the leadership of Eric Siebert and frankly how we changed our go-to-market strategy coupled with the very successful performance of our IsoGen unit within one of their larger plants in the southeastern province of Kingdom, all of those indicators as well as the activity within our pipeline, all of those indicators bode well for a purchase order in 2016.

Now that could be with Aramco or it could be with another customer in the broader GCC. We speak about Aramco simply because we have been able to establish something of a beachhead with that Company given that we've been developing that relationship for the better part of three or four years and finally last year in March we were able to put one of our IsoGen systems into production.

And that IsoGen installation has been the subject of a lot of media coverage within Kingdom. So also what I referred to in my prepared remarks was this portfolio concept which is to say there is interest within Aramco of deploying our technology throughout their production base which is to say within their asset gas removal trains or their gas processing plants as well as some selected pipeline terminals.

Now in terms of the timing, you stated it. Aramco is a phenomenal company but they do have the habit of moving at a glacial pace and we've experienced that over the last four years. So I can't give you the timing on that deployment.

All I can say is that the indicators look good for some meaningful purchase orders this year. When they convert into revenue, that's a different question. Because you have to think about is this a greenfield opportunity or is it a retrofit opportunity.

If it's a greenfield opportunity and you understand the cadence at which these large plants are built just because we receive a purchase order in 2016 doesn't necessarily mean that we're going to monetize that and rec it as revenue in 2016, it very well could be a 2017 event. But what we're focused on is crawling before we walk and certainly walking before we run. So before I begin pontificating about revenue I'd like to get a purchase order in hand.

Fair enough. Good answer. Very helpful.

Following up on that when we look at the balance sheet now, and we think about North America which definitely eschews any type of CapEx that is not something that's entirely proved or entirely necessary at this point in time, is the strategy there to go towards if you're talking $3 million for a unit at a gas processing plant to structure more of the lease and potentially start gaining part of the market share that way? Or is there a way around this current doldrums we have in North America for you guys to actually start getting some product in the field here?

Yes, so let's talk about North America. Definitely the most challenging market and environment that we are attempting to penetrate. But when you think about Energy Recovery's value proposition, so just go ahead and consider all of our products to be a monolith per se, we have an omni-cyclical value proposition which is to say we can play offense at every point of the cycle.

Why? Because our products offer cost efficiencies to the end-users. Now we've seen evidence of that in the form of the Schlumberger agreement.

But hydraulic fracturing is markedly different from gas processing. So what we're doing in North America in gas processing as I stated in my comments is we are in discussions with several would be strategic partners. These are strategic partners that play in the upstream; not the upstream conventionally as you think about upstream, midstream, downstream, but these other licensors or packagers who've designed the plant technology and in turn sell them to an end-user.

So we are attempting to define a framework that would allow for us to penetrate the value chain with the licensor packager making the decision to adopt our technology by the end-user much less of an issue than it has been historically. So as those discussions progress, I look forward to providing a more substantive update.

So our market penetration is twofold. We do have boots on the ground, we are doing your typical prospecting and business development but we're also attacking the market from a corporate strategic relation perspective like I said in attempting to define a strategic vehicle with one of these licensors or packagers that could help us more broadly proliferate our technology in the marketplace.

Okay, thanks. And one quick one for Chris.

I apologize. Did you give G&A R&D guidance for the quarter and the year?

No, no we did not.

Okay. You did mention adding more engineering heads, etc. What's a good run rate to use off of the Q4 number and is the expectation for some continued growth in the maybe the 5%, 10% range or is that a good ballpark?

Let's just say maybe $32 million -- $31 million, $32 million for the year. We're really not going to give quarter-by-quarter guidance.

Okay, that's good. That helps.

I will turn the back over. Thank you gentlemen.

(Operator Instructions) Patrick Jobin, Credit Suisse.

Thanks for the follow-up. Just going back to my notes here, I think you said $26 million of projects awarded in 2015 for large-scale desalination plants.

How much of that has been recognized? And I guess of those orders, how much would fall into 2016's plan? Thanks.

Yes, Patrick, we'll follow-up with you at the precise number. But I think we recognize about $14 million of that in 2015 which would mean of course that we would carry about $12 million of that into the current year.

So we don't report backlog but we do report contract awards or we do announce contract awards. So we're in a very good position as it relates to desalination for 2016.

Got it. Great visibility. Okay, thanks for the follow-up.

(Operator Instructions) Dan Davis, Stifel.

You had mentioned in a news release here about a month or so ago that you were going to be buying back some shares. Have you bought any back during the quarter?

Yes, we did. So the Board approved a share repurchase plan for a gross amount of $6 million and to date at least through the end of February I believe we repurchased approximately 678,000? Is that right, Chris?

Yes, $4.1 million worth.

Thank you.

(Operator Instructions) Speakers, it does appear we have no further questions at this time. I will now hand it back over to you for any additional or closing remarks.

All right. Well thank you for joining us on this call and we look forward to speaking with you all again in May. Thank you.

That does conclude today's program. We'd like to thank you for your participation. Have a wonderful day and you may disconnect at any time.