Aug 2, 2012
Executives
Alex Buehler – CFO Thomas Rooney – President and CEO
Analysts
Laurence Alexander – Jefferies & Company, Inc. Dale Pfau – Cantor Fitzgerald Patrick Jobin – Credit Suisse Michael Legg – ROTH Capital Partners JinMing Liu – Ardour Capital Investments Robert Smith – Center for Performance Investing Steve Shaw – Sidoti & Company John Rosenberg – Geneve Capital Group
Operator
Welcome to the ERII Second Quarter 2012 earnings call, on the second of August 2012. For today’s recorded presentation, all participants will be in a listen-only mode.
After the presentation they will be an opportunity to ask questions. (Operator instructions).
I will now hand the conference over to Tom Rooney, Energy Recovery’s CEO. Please go ahead Sir.
Thomas Rooney
Good morning everyone and welcome to Energy Recovery’s Second Quarter 2012 conference call. My name is Tom Rooney and I’m here today with our Chief Financial Officer, Alex Buehler.
The primary purpose of today’s call is to provide you with information about our financial performance in the Second Quarter of 2012. However, some of our comments and responses to questions may contain forward looking statements about market trends, future revenue, growth expectations, cost structure, gross profit margins, new products and business strategy.
Such statements are predictions based on current expectations about future events and are subject to the safe harbor of 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 could cause actual results to differ materially.
A detailed discussion of these factors and uncertainties is contained in the reports of 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 we’re pleased to report a profit for the Second Quarter of 2012, our first quarterly profit since 2010. Being able to report a quarterly profit is an important first step in returning Energy Recovery to greatness.
We have a long way to go rebuilding the company, but there is a great deal of good news to record in this quarter, including a net profit, substantial revenue growth, significant gains in market share, increased gross margins, reduced operating expenses, strong cash management and tangible progress in new product development in the oil and gas industry. Much of the current good news does not come as a surprise to the management team.
As we defined our strategy more than a year ago, we diligently executed against that strategy and over the past six months we have watched a number of positive indicators turning in our favor. Most notably are rapidly improving market share and growing backlog.
After more than three years of declining revenues, it’s great to finally be able to record strong revenue gains in the Second Quarter. The substantial revenue jump in the Second Quarter is attributable to a rebound in the global desalination market, combined with significant improvement in Energy Recovery’s market share.
The desalination industry and mega desalination projects in particular had been in a serious contraction mode since late 2008 when global capital markets and global economies faltered. Energy Recovery’s revenues fell significantly from 2009 through 2011.
We began to detect the early signs of a global industry rebound in the mega desalination market about one year ago, a rebound which manifested itself in the form of increased bidding opportunities toward the end of 2011. Energy Recovery was extremely well prepared for that market rebound and as a result notched impressive market share gains.
Roughly 15 months ago, the company set out to improve its market position within the desalination industry. Energy Recovery built an impressive market share throughout a period from 2000 to 2008, reaching a high point in 2008 with approximately 70 to 80% market share.
Then, with a rapidly shrinking global market and competitive forces, Energy Recovery saw its market share fall back year-over-year to a low point of roughly 50% by the middle of 2011. In the spring and summer of 2011, the company performed an extensive market assessment and a reevaluation of its overall product value proposition as seen within the global desalination marketplace.
In the late Summer of 2011, almost exactly one year ago today, Energy Recovery launched a new and much more highly focused value proposition for the desalination market. The net result was that Energy Recovery competed for and was awarded every single mega project in the world over the past 12 months.
That overwhelming MPD success, combined with roughly 80% market share in the OEM scale projects has given Energy Recovery roughly 90% total market share in the desalination industry over the past 12 months. The combination of an unusually high market share and a rebounding global market has enabled Energy Recovery to generate unprecedented revenue growth in the Second Quarter this year and underpins the company’s previous guidance of 40% year-over-year revenue growth for 2012.
For many companies, such large gains in market share come at the expense of prices and profit margins. But that was clearly not the case for Energy Recovery over this past year.
I’m happy to report that prices have been stable over the past year. And that combined with lower manufacturing costs has enabled us to generate reasonable gross margins.
Considering our recent transition to a more vertically integrated manufacturing platform, which gives us a high fixed cost structure, we experienced significant operating leverage with revenue swings. Our strong gross margins in the Second Quarter are the direct result of stable prices combined with substantial revenue increases in a highly leveraged manufacturing cost structure.
One might describe this scenario as the perfect combination of factors required to produce strong gross margins. Having said that, we do see these gross margin levels as sustainable and even improvable.
On the cost side, I’m pleased to report that we’ve been able to maintain our operating expense discipline for the quarter despite the significant revenue jump in the quarter. Operating expenses for the quarter were down almost $1million year-over-year despite nearly double the revenues from the same period last year.
This is the direct result of 18 months of corporate cost cutting and the overall leaning out of the organization. It’s also worth noting that operating expenses would have been even lower in the period if not for the significant investments currently being made in new product development in the Oil and Gas industry.
The company’s cash position remains extremely strong. Current assets actually increased in the first half of the year despite the use of $4 million for share repurchases.
It’s invaluable having such strong liquidity in this volatile and uncertain global economic times. I’m pleased to report that the company continues to make great strides in the area of new product development for the oil and gas industry.
For competitive reasons I will not go into great detail on exactly what we are doing around the world and for which clients. I will say that we are working with three prominent oil and gas clients on three continents to deliver Energy Recovery devices on site deployment in the gas processing industry this year.
We believe that this represents the most significant growth avenue for the company over the next five years. And in all likelihood we’ll outpace the growth and the scale of the desalination industry.
For more than a year now we have been intensely focused on our three-prong strategy of cost cutting, driving revenue growth in our coremarkets and diversifying into new industries. Our Second Quarter results are the first tangible proof that the first two prongs of our strategy are absolutely taking hold.
Over the next 12 months, we expect to continue to report additional progress in executing our strategy and we also expect to deliver unmistakable proof that our ongoing effort to diversify into the oil and gas industry is a success. As I mentioned when I started this call, it’s an absolute pleasure to be able to report a quarterly profit for the first time in a very long time.
I see this as the first of many steps in building back investor confidence. By that, I mean confidence in our industry, confidence in our strategy and ultimately confidence in the management team.
We have a long way to go in order to build real and lasting shareholder wealth. But I feel very good about the progress that we are making, I see enormous potential and I am excited about what I see on the horizon, the future for Energy Recovery has never been brighter.
Thank you. That concludes my prepared remarks and we will now open up the call for your questions.
Operator
Thank you. (Operator instructions).
The first question comes from Laurence Alexander from Jefferies. Please go ahead.
Laurence Alexander – Jefferies & Company, Inc.
Good morning.
Thomas Rooney
Good morning.
Laurence Alexander – Jefferies & Company, Inc.
I guess two quick questions to start off. How much of a drag on your P&L for the year or for the quarter is the effort to break into the Oil and Gas industry?
Alex Buehler
So far for the year it’s been about $500,000, but our spending is significantly kicking up in the second half of the year. We expect it to total about $3 million in the second half, about half of which is going to be capital.
The other half will be R&D expense. So in total we’ll spend in excess of $3 million including capital expenditures to accelerate the oil and gas initiative.
Laurence Alexander – Jefferies & Company, Inc.
Okay. But the quarter would have been – the margins would have been even higher with expats.
I guess the second question is as we think about the incremental margins in the core desalination business, how much would capacity need to ramp for before incremental margins starts dropping off and you need to look at adding capacity or either from the units or in terms of rough sales number?
Alex Buehler
Yeah, I know we’ve formally given guidance of 20% compounded growth starting next year for the next five years. And so we will be several years before we will need any significant capital expenditures for that growth.
Laurence Alexander – Jefferies & Company, Inc.
Okay. So you should see incremental margin gain go up to a plateau probably in about 2014, 2015 as the way to think about the margin evolution in that business?
Alex Buehler
So the operating leverage that we have right now, we will benefit from that through2014, 2015 in an almost linear fashion. We still have a tremendous amount of unused capacity.
Laurence Alexander – Jefferies & Company, Inc.
And then, not that you need more things to worry about. But are there are any other adjacencies similar to oil and gas that we should be thinking of that will become levers for growth beams in the next couple of years?
I mean should we expect sparking incremental spending for that?
Thomas Rooney
Yes. We will be mapping out in the next six months or so in the world of fluid flows with the mindset being anytime you have both volume and pressure combined.
You could look at say food processing, chemical processing and other industries. Our strategy is fairly simple and that is the first industrial process of large magnitude that we identified was oil and gas.
And so we are currently developing and deploying this year four platforms technologies that we think will be almost universally applicable through across a lot of industries and so our first step was to make a powerful move into oil and gas and frankly just one sub-set of oil and gas which is gas processing. Penetrate that deeply and we feel very good about where that’s going but at the same time develop these four platforms of technologies that then become almost universally applicable across a lot of industries.
But we’re looking at total addressable markets in the $2.5 billion dollar range cutting across a number of different industries. But first and foremost for us was to be powerfully successful in oil and gas in 2013 and 2014 and branch out into two or three other fluid flows by 2014.
Laurence Alexander – Jefferies & Company, Inc.
Okay. Thank you.
Operator
The next question comes from Dale Pfau from Cantor Fitzgerald. Please go ahead be your questions.
Dale Pfau – Cantor Fitzgerald
Congratulations on turning profitable. It’s a great milestone.
Thomas Rooney
Thanks Dale.
Dale Pfau – Cantor Fitzgerald
A follow up to the previous question. You said that you’re going to be spending might I say an additional $3 million, about $1.5 million in R&D in the second half over and above what is already in the model.
Is that the way I should treat that?
Thomas Rooney
Yes.
Dale Pfau – Cantor Fitzgerald
Okay, and could you give us an indication of what is your current backlog and how does it stretch out over 12 months, 18 months?
Thomas Rooney
We’ve never really, in fact we’ve shied away from reporting on backlog from a reporting standpoint because of the clumpy nature of what we’ve got. So we are confident that we will meet the guidance that we have suggested or that we’ve given for this year.
And as we look at the five-year trajectory of the desalination industry, we remain confident that starting next year and proceeding out for five years we will enjoy a five-year cumulative growth. What we’re cautious about is that in any two, three, four, five-year period we fully expect to see flat years, possibly down years and massive growth years.
And so really all we’re comfortable doing at this stage is guiding revenue for this year and guiding revenue for a five-year cumulative growth. But as to specifics of backlog, the best you can do there is just watch the press releases that we give.
But we’ve intentionally not listed our backlog.
Dale Pfau – Cantor Fitzgerald
Thomas Rooney
That’s just desal. We would layer on top of that every other industry we would be again.
So 20% growth on top of this year would be purely a reflection on the desalination core industry and growth beyond that would come – or other industries would be growth layered on top of that. And as I’d mentioned in my earlier comment, we have expectations that within five years other industries will outstrip the growth and magnitude of the desalination business.
Dale Pfau – Cantor Fitzgerald
Okay and one quick follow up. I mean if that’s the case I would run all the math, the desal market will be larger than the massive buildup we saw what, almost four years ago now in the desal market.
Do we actually anticipate that?
Thomas Rooney
Yeah. We think the market say five years from now will be larger than 2008 which we calibrated to be the higher.
What we see is, this year in 2012, India and China are not represented at all in our MPD work. We anticipate that China will be a percentage of our MPD business next year and then within two to three years China and India might be as much as 40% of our MPD business.
So one of the growth avenues that we are going to see are China and India combined. We’re not holding our breath, but it could be that in two to three years the United States is also an interesting percentage of our share.
But having said that, the Middle East and North Africa will remain our largest share. So we still see and we still are calibrating specific projects even in the Middle East, North Africa that will propel significant growth.
And that’s not slugging growth off of former trajectories, it’s actually calibrated around named projects.
Dale Pfau – Cantor Fitzgerald
Okay, and based upon your strength in the Second Quarter while maintaining a year-over-year growth, is it possible that we could see either the third of the fourth Quarter actually be somewhat lower than your Second Quarter in terms of revenues?
Thomas Rooney
Yeah.
Dale Pfau – Cantor Fitzgerald
Okay, great. I’ll pass it off to someone else to get back to you.
Thanks.
Thomas Rooney
Great!
Operator
The next question comes from Patrick Jobin from Credit Suisse. Please go ahead.
Patrick Jobin – Credit Suisse
Good morning. It’s nice to be back in black.
Congratulations.
Thomas Rooney
Thanks. Good morning.
Patrick Jobin – Credit Suisse
So my first question, just going back to the oil and gas market, could you maybe provide us some milestones or not necessarily revenue projections, but milestones you’re looking at internally so we can gauge some of the progress there?
Thomas Rooney
Yeah. There are two issues there.
One is that we’ve talked about getting into the oil and gas industry all the way back in 2008. So we’re reluctant to promise more than we can deliver to be quite frank with you.
And the second issue is we’re intentionally running in stealth mode right now. So the specifics of who we’re working with, where we’re working and the side.
It was this exact call a year ago, the Second Quarter of 2011 call and I was asked when we would see the fruits of our investments in R&D and my answer then was within 24 months which is now 12 months from now and I would stick to that and say that we expect to see revenue in 2013 and we expect to see significant revenue in 2014 predicated on the technologies that we have already delivered this year and that we will be delivering at the second half of the year into the oil and gas industry. We have not and we will not break out oil and gas revenues this year and we’ve yet to decide whether we’ll break out oil and gas revenues next year.
But I think that the revenues and the profits derived from oil and gas will be measurable next year and unmistakable in 2014. But I would prefer not to be any more specific than that.
Patrick Jobin – Credit Suisse
I think we appreciate the conservatism and understand the competitive nature to keep it under wraps. Two quick housekeeping items if I can.
One previously you’ve disclosed some of the gross margins for both the PX devices and the Turbo Chargers. Any way you can clarify that?
And then just lastly, a question I typically ask is, can you just walk us through the backlog, what’s been contracted, which projects have financing? Just so we have comfort in that number.
I’d assume by now everything is already progressing.
Thomas Rooney
Right. So on breaking our gross margins on product types, we’ve intentionally made the decision not to do that.
We tend to have our public comments used against us in the negotiating table with our clients. So hopefully you realize why we don’t want to do that.
Suffice it to say pumps and turbos don’t garner anywhere near the margin that pressure exchangers do. For good reason is the technological difference and competitive advantages there.
I would say this though, we have a healthy effort underway now and to the balance of this year to make significant increases in our gross margins on pumps and turbos. We have a very clear game plan and we’re actually executing that game plan right now.
That would create significant lift in the gross margins more or less effective January 1st of this coming year. Unfortunately, I won’t be able to show you that because the first part of my statement was we’re not going to break out the difference between the two.
I hope you understand why. It is for competitive reasons.
We just aren’t going to describe our specific gross margins.
Patrick Jobin – Credit Suisse
Sure. No, that makes sense.
Thomas Rooney
I’m trying to be more granular as to our backlog and whatnot. Elaborate on your question so I can see if I can try to answer that for you.
Patrick Jobin – Credit Suisse
Suffice it to say that the projects you’re essentially assuming for the next two quarters and they’re narrowly into ’13 when you referred to backlog of those projects received, financial closing, are they under construction already or how should we gauge the probability with the type of risk in the backlog?
Thomas Rooney
So for 2012, us achieving our 40% year-over-year growth from 2011 to 2012, a very low risk. Essentially all the projects are under construction.
I can only think of one project that has an imminent financial close but it’s not even an enormous part of what we would need for our revenue this year. The only part of our – so I guess I would say that our ability to hit the 40% growth for this year is extremely high.
Now having said that, our OEM or small-scale business is always at the whim of political winds. Fukushima last year slowed some stuff down and the Arab Spring slowed some stuff down.
So if something happens tomorrow somewhere in the world, we could be impacted a million or two in terms of slowing down of revenues. But as to the MPD large-scale projects, to my knowledge all of the projects are under full-scale construction and I can only think of one where any day now we’re going to see financial close.
So we see very low risk on the MPD stuff. And in fact, we see modestly to no risk on the OEM as long as we don’t have a major global crisis.
Patrick Jobin – Credit Suisse
And one more questions if I may then I’ll hop off. But I think in the past you had indicated you think you can use ceramic materials for the oil and gas industry.
Obviously that’s a big strength of ERI and a big competitive advantage in kind of IP around the ceramic technology. Is that still the case?
Thomas Rooney
Yes. We will be – one of the devices we will be delivering to one of the world’s leading oil and gas companies has at its core a significant piece of ceramics.
Patrick Jobin – Credit Suisse
Okay. Thank you.
Operator
The next question comes from Michael Legg from ROTH Capital. Please go ahead.
Michael Legg – ROTH Capital Partners
Good morning. Previously I believe you indicated that megaproject revenues are estimated at $16 million to $18 million based on a 6-day project.
Is there any update to that or your bidding pipeline on megaprojects?
Thomas Rooney
That’s still true for this year. I think 15 to 18 that I had referred in a previous call is still accurate.
We have given no indications as to next year. I would say that we have a very robust pipeline looking out over the next three and four years, which frankly is about as far ahead as we can see, calibrating dozens and dozens of projects.
The only thing that we would be reluctant to do here on August 2nd would be to try to calibrate timing precision for 2013 and 2014. But as to the pipeline of megaprojects it’s a very robust pipeline.
Michael Legg – ROTH Capital Partners
Okay. So compared to a year or two ago where there was basically no megaproject bidding activity we now see a robust pipeline.
Thomas Rooney
We do, although we see projects moving forward and backwards a year at a time. As an example Libya, this time – or say 15 months ago we expected that everything that was happening in Libya was zeroed out with the political turmoil.
Today we are measuring a number of very significant projects yet to be done in Libya. But to be frank with you, we have to use a crystal ball to try to figure out how those big ones are coming.
It is 2013? Is it 2014?
Is it 2015? So big, big pipeline.
Same thing is true with China. I’ve heard as many as 100 desalination projects in the pipeline China.
But if I had to sit down and map out which year they were coming in – because that’s where the challenge comes in. So the pipeline is robust but what we wrestle with is which year will they land in.
Michael Legg – ROTH Capital Partners
Okay. Obviously you’ve had a very impressive win rate, your market share is a great number.
Clearly given your component of a desalination plan isn’t, the largest cost in energy savings is more important. What is the competitive response to your win rate?
Are they dropping out? How are they going to respond to your win rate?
Thomas Rooney
Well our win rate, I mean our value proposition is in essence the total value proposition to a client which can be composed of the first cost, it can be composed of the energy savings benefit, it is composed of the cost to maintain a device. But now clients are also starting to look at their total plants uptime.
In other words, if a 2% piece of my $1 billion plant causes the whole plant to come down, that’s a very expensive failure on the part of that 2% part. And that is in fact representative of energy-recovery devices in our industry.
So very quickly clients are starting to realize they need to calibrate the total value proposition for a device inside their plant. It’s not just the first cost.
It’s not the cost plus maintenance and energy. It’s cost plus maintenance and energy and plant downtime.
So we are starting to see some of our competitors try to assimilate the plant uptime that our devices can generate, which is a losing battle because nothing, literally nothing can create plant uptime like our devices. So we have some incredibly shrewd competent competitors.
They will react. They’re trying to react.
We don’t anticipate holding 100% market share. We’re extremely happy that we have it now.
It’s been a great endorsement from our clients. What’s our sustainable long-range market share?
Well, we’ll decide, we’ll see. We still have a few tricks left up our sleeves.
But we’re not naïve enough to think we’re going to hold 100% market share. I think our seven-year average magazine calibrated as something like 70% market share, for a five-year average, 70% market share.
We think we can beat 70% market share consistently and maybe in certain years hit 100% like we are now. But competitive forces are what they are and we’re up against some really stout competitors.
We just have to sharpen our game every single day.
Michael Legg – ROTH Capital Partners
Okay, and as relates to the gross margin clearly 54% was a great number this quarter. Historically it’s been over 60% and you’ve mentioned that you believe margins can still go up from where they were this quarter.
And that’s after factoring in the pumps and Turbo Chargers in there. So how much upside do we have in the pricing then from your perspective and therefore gross margins?
Thomas Rooney
Well the pricing, I don’t know if we have a lot of upside on pricing. I think we have a lot of upside as relates to operating leverage and cogs.
And so I’ve seen obviously our historic highs on gross margins and I’m very confident that we will meet or exceed those historic highs.
Michael Legg – ROTH Capital Partners
And the oil and gas products that you’re building on, what type of margin structure will they have? Will it be similar to the PX device margins or how do you envision that?
Thomas Rooney
Yeah, much more similar to the PXs than say pumps and turbos.
Michael Legg – ROTH Capital Partners
Okay. And on the line D funding, is that all internally funded or are three of these permanent clients any of them contributing to that?
Thomas Rooney
We have all kinds of deals across the board and some cases paying commercial terms for devices in some cases because we were trying some disruptive new technologies. We’re contributing 100% in some cases.
We’re capitalizing the device and renting it. So the answer to your question is sort of all the above.
Michael Legg – ROTH Capital Partners
Okay. Nice quarter, great job over the past year and a half since you guys have been really getting get the company back in shape.
Nice job.
Operator
The next question comes from JinMing Liu from Ardour Capital. Please go ahead with your questions.
JinMing Liu – Ardour Capital Investments
Good morning. A very nice quarter.
Thomas Rooney
Great. Thank you.
JinMing Liu – Ardour Capital Investments
Just clarify the three devices you ship this year for the oil and gas industry. So because based on your previous answer, I assume you will not recognize any revenue for those three devices, but in the future once you start commercial operation you will start recognizing revenue on the future units for the oil and gas industry.
Thomas Rooney
We may in fact, I mean it’s possible that we’ll recognize revenue on oil and gas this year, but it would not be material. And that whole business line would not warrant separate reporting.
And to be frank with you, we’re going to keep it from being separately reported as long as we can so that we don’t disclose any more competitively than we need. Obviously we follow GAAP rules to the tee.
So we could have a modicum of revenue come from oil and gas this year. By the way that is not baked into 40% revenue growth.
We will definitely see revenue next year arguably in excess of $1 million of revenue next year. And then 2014 we will probably be challenged with materiality of that as a separate reporting line.
We would anticipate it being of such a magnitude that we might have to break it out. And if that gives you any kind of sense as to how the revenue levels will progress.
JinMing Liu – Ardour Capital Investments
That’s very helpful. And just for the record, how much was the OEM sales in the second quarter for your PX devices?
Thomas Rooney
Give us a second. And by the way I’ll say this, the MPD level we have no pumps and turbos.
So the only pumps and turbos revenue that we have comes through our OEM line. And what was the breakdown on that?
Alex Buehler
So total OEM revenue in the second quarter was about $5.1 million, but that includes both PX devices and pumps and turbos.
JinMing Liu – Ardour Capital Investments
Okay. So if I back out the 1.9 for the pumps and turbos then the rest is PX.
Okay, I got that.
Thomas Rooney
Yeah, and you’ll note our mix was about 85% towards PX devices in the second quarter, 15% pumps and turbos.
JinMing Liu – Ardour Capital Investments
Got that. Thirdly, regarding future projects in developing markets like China and India, I know a big portion of future projects in China are for power plants and those power plants owners are looking at some desalination technology other than reverse osmosis.
I just want to get your opinion, what do you see over there?
Thomas Rooney
Yeah, you’re absolutely right that much of the work in China will be pertaining to desalinating water for power plants. We actually have sold a large number of our devices for exactly those applications in China right now and have been.
It’s very hard to predict technology adoption in China and I think you’re referring to the thermal desalination associated with power plants versus reverse osmosis desalination. We fully expect to see both.
We see, by the way though, that most of the revenue and the big take-up in China for desalination is actually going to come from desalination plants that use reverse osmosis. A lot of our current clients, the EPCs are designing Reverse Osmosis Desalination plants.
So you’re absolutely right, there may be a handful of power plants that do thermal desalination that wouldn’t need us. So far that has been only partially the case.
But we see, particularly if you look two and three years out, we see a big pickup in reverse osmosis desalination in China.
JinMing Liu – Ardour Capital Investments
Okay, thanks. Very nice quarter.
Operator
The next question comes from Robert Smith from Center for Performance Investing. Thank you.
Robert Smith – Center for Performance Investing
Thank you for taking my call.
Thomas Rooney
Good morning.
Robert Smith – Center for Performance Investing
Yes. The current drought situation across the country.
Does this in your mind present any possible opportunities for you guys?
Thomas Rooney
Two things: One, it never hurts to bring awareness to a very high level. The droughts that are occurring on the East and West Coast and in Texas are far more relevant to the business that we have.
So as an example, there are 19 desalination plants in some stage of planning on the West Coast alone. But it has been years and in fact, in one case more than a decade getting past sort of obstructionists in the no-growth community and the environmental community.
So when we see powerful droughts in the Midwest, which is what you’re referring to, it heightens awareness and breaks down resistance, the ultimate resistance to desalination being a long range solution. Having said that, we’re not going to see a desalination plant in Iowa.
It’s just simply not the case. But the drought, if you will, in the Midwest elevates the issue and enables grassroots support for desalination on both coasts.
That’s the first part of the answer I’d give you. The second part of the answer that I’d give you is that there is a technology and set of solutions that would be apropos the West and that would be brackish which is where you take salty, not seawater, but salty ground water and in effect use reverse osmosis.
It’s an area that we’ve been looking at in developing, but it’s much less energy-intense because the amount of material which you have to take out is lower. So the upside potential for a company like ours is not – it’s interesting but it’s not significant and it wouldn’t move the needle in terms of revenues for us.
But I hate to say it, we do benefit from the press that comes with large-scale drought. An example would be we saw that in Australia, seven, eight year drought caused a massive uptake in revenues for coastal desalination.
Robert Smith – Center for Performance Investing
But if the drought would continue, would it not present an opportunity for say kind of massive infrastructure projects which would also help the economy?
Thomas Rooney
Sure, yes. No doubt about it.
Certain countries have thought about using large-scale pipelines to move water.
Robert Smith – Center for Performance Investing
Yeah that’s what I was thinking of.
Thomas Rooney
Yeah. So a good example of that is that China is contemplating a $60 billion – not contemplating, they’re in progress on a $60 billion water transfer.
They call it the South to North Water Transfer Project. So yeah, you can’t go very long having the level of droughts that we’re seeing.
Robert Smith – Center for Performance Investing
Okay, thanks much.
Operator
(Operator instructions). The next question comes from Steve Shaw from Sidoti & Company.
Please go ahead.
Steve Shaw – Sidoti & Company
Hey guys. Most of my questions were poached.
Just a reminder of how much is left on the buy-back and what are the plans for cash beyond that buy-back?
Alex Buehler
Technically speaking, nothing’s left on the buy-back. We had board authorization to buy a buy back as much as 5 million shares.
But that had a 12-month expiration to it which ended in June I believe. So in the month of July we did not buy back any shares.
The board is currently contemplating a new buy-back program, but no decisions have been made and our cash position remains extremely strong, obviously the degree to which we can run cash-positive even with buy-back. So we’re taking it into consideration right now.
Essentially our whole strategy around share buy-back is we have a robust balance sheet and we see incredible value creation over the next two to three years. And two, the degree that we feel, that the board feels that the share price doesn’t reflect the given on-range value we would use, in effect our excess cash to support the share price.
But we would be, if we do something, we may have an announcement in the next 30 to 60 days if we re-engage a new plan.
Steve Shaw – Sidoti & Company
And then beyond a buy-back are there any plans for using any cash?
Alex Buehler
No. You’re thinking in terms of what?
CapEx or?
Steve Shaw – Sidoti & Company
CapEx, acquisition, dividend, anything like that.
Alex Buehler
No contemplation of a dividend and we’ve aggressively looked into acquisitions and nothing to report there.
Steve Shaw – Sidoti & Company
Okay. Thank you.
Operator
The next questions come from John Rosenberg from Geneve Capital Group.
John Rosenberg – Geneve Capital Group
Good morning guys. Great quarter.
It’s really nice to see. I’m glad you guys are executing on your plan.
Thomas Rooney
Great, thank you.
John Rosenberg – Geneve Capital Group
A lot of my questions were covered in the queue, but I do have a question pertaining to kind of a market adjacency and that is produced water in shell. Do you guys have any exposure to that right now?
Thomas Rooney
No.
John Rosenberg – Geneve Capital Group
No?
Thomas Rooney
I should take that back. Some of the OEMs that we sell are Energy Recovery devices.
But some of those clients are apparently selling into produced water and fracing application. But I would think that that’s a fairly de minimis.
For us to enter that would require us to configure, develop and design and deploy entire skid application that manage the water from (inaudible). So some of the OEMs that we’re working with are in fact doing that, but the effort for us to build standalone skids into those environments we’ve not done.
We are doing something similar to that in the gas processing arena of the oil and gas. But those tend to be big efforts.
John Rosenberg – Geneve Capital Group
I see. So in other words what you’re focused on right now with the mean gas is more on larger standalone facilities that will remain there?
In other words pipelines I imagine or processing plants?
Thomas Rooney
Processing plants.
John Rosenberg – Geneve Capital Group
But not – you don’t foresee any significant need for your Turbo Chargers or your PX devices to get into the shale plays or treat the water – the produced water from those?
Thomas Rooney
We do see that, as I say, the OEMs – there are OEMs out there that are aggressively attacking those markets as you described and they are talking to us about providing them with our devices which would become components into their application. So I think we’re going to enjoy the run-up in that without having to design and develop our own standalone applications.
John Rosenberg – Geneve Capital Group
That’s great. Would those be PX devices or the Turbo Chargers?
Thomas Rooney
PXs, Turbo Chargers and pumps.
John Rosenberg – Geneve Capital Group
I see, okay. Well, thanks very much and great quarter.
Thanks again.
Operator
(Operator instructions).
Thomas Rooney
Okay, so it appears that we’ve run through the questions. And again I wanted to say – thank everybody for being involved in the call.
The future of Energy Recovery is very exciting for us right now. Particular pleasure to us is that we finally have the ability to show tangible and unmistakable proof of the execution that is going on behind the scenes against the strategy that we’ve been articulating for 15, 16 months now.
So we know we have the right strategy. We know we have the right management team.
We are executing diligently against that and we believe that in the ensuing quarters we will be able to deliver more and more absolute evidence that the execution against the strategy is going. And so we look forward to our future calls.
Thanks again everybody.
Operator
This concludes the ERI second quarter 2012 earnings call Thank you for participating. You may now disconnect.