Nov 7, 2013
Executives
Alexander J. Buehler – Chief Financial Officer Thomas S.
Rooney, Jr. – Chief Executive Officer
Analysts
Patrick S. Jobin – Credit Suisse Securities, LLC George J.
D’Angelo – Jefferies LLC Robert J. Smith – Center for Performance Investing John Rosenberg – Loughlin Water Partners, LP JinMing Liu – Ardour Capital Investments LLC
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the Energy Recovery Third Quarter Earnings Conference Call.
At this time, all participants are in a listen only mode. Following the presentation, we will conduct a question-and-answer session and instructions will be provided at that time.
(Operator Instructions) I would like to remind everyone that this conference call is being recorded today, November 7, 2013. I will now turn the conference over to Mr.
Alex Buehler, Chief Financial Officer. Please go ahead.
Alexander J. Buehler
Good morning everyone and welcome to Energy Recovery’s 2013 third quarter earnings conference call. My name is Alex Buehler, CFO of Energy Recovery and I’m 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 third quarter of 2013, as well as provide an update on the progress we are achieving in relation to our growth strategy. Consequently, some of our comments and responses to questions may contain forward-looking statements about market trends, future revenue, growth expectations, cost structure, gross profit margins, new products, and business strategy.
Such forward-looking statements are based on current expectations about future events, and are subject to the Safe Harbor provisions of the U.S. 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 U.S.
Securities and Exchange Commission. The company assumes no obligation to update any forward-looking statements made during this call, except as required by law.
Let start with the financial results for the third quarter of 2013; for the current quarter, we reported net revenue of $4.9 million and a net loss of $3.9 million, or $0.08 per share compared to net revenue of $10.5 million and a net loss of $1.8 million, or $0.04 per share in the third quarter of 2013. The decrease in revenue was largely attributable to the timing of mega-project shipments including one project that shipped during the first week of October.
We recognize no revenue for mega-project shipments in the current quarter whereas the third quarter of 2012 contained over $5 million of revenue associated with mega-project shipments. Based on the scheduled shipment dates for projects currently in backlog, we anticipate extremely strong revenue for the fourth quarter of 2013, which should generate full year revenue results that are roughly in line with 2012.
Beyond 2013, we expect revenue growth in 2014. Of the $4.9 million in net revenue reported for the third quarter of 2013, products and services related to PX devices comprised 73%, while products and services related to pumps and turbochargers represented 27%.
Comparatively, for the third quarter of 2012, PX devices comprised 83% of net revenue, while pumps and turbochargers represented the balance of 17%. We still manage to increase gross profit margin from 55% in the third quarter of 2012 to 60% in the current quarter despite lower revenue and a comparatively unfavorable product mix.
Importantly these results reflect the substantial cost reduction efforts over the last two years, including plant consolidation, vertical integration, targeted cost-out and value engineering exercises, and efficiency-enhancing initiatives to achieve lower unit costs and better production yields. In short, manufacturing efficiencies and strong pricing allowed us to demonstrate gross profit margin at the 60% level for the second consecutive quarter.
Operating expenses decreased 11% from $7.6 million in the third quarter of 2012 to $6.8 million in the current quarter and were little changed from $6.6 million in the second quarter of this year. We have maintained disciplined cost control even as we continue funding growth initiatives such as oil and gas.
Specifically, the current quarter benefited from lower R&D expenses, which spiked in the prior year period due to the purchase of components to fabricate our oil and gas devices for pilot projects. Research and development resources remain focused on technical validation and commercialization of three oil and gas devices with high-profile companies, all of which are on different continents.
Also benefiting operating expenses in the current quarter were decreased sales and marketing expenses caused by lower commissions in light of less MPD revenue. Our balance sheet and cash position remained healthy.
At September 30, 2013, we had unrestricted cash of $15.8 million, short-term investments of $6 million, and long term-investment of $13.1 million, all of which represent a combined total of $34.9 million, an increase from $27.6 million calculated on a same basis at June 30, 2013. Strong billing and collection activity, $1.2 million of net proceeds from the sale of our Michigan property and $3.1 million of federal income tax refunds generated cash flow from operations of $2.7 million over the nine-month period of 2013.
The quarter’s net loss of $3.9 million included approximately $2 million of non-cash items, the largest of which were $1 million of depreciation and amortization and $500,000 of stock-based compensation. We are very pleased by the company’s cash flow in 2013 and we expect this trend of improvement to persist into 2014 and beyond.
We have positioned the company with a far more efficient cost structure, allowing us to invest in growth opportunities for our energy recovery technologies in new end markets, such as oil and gas. Results in the third quarter continue to demonstrate a significant progress achieved toward these strategic initiatives.
At the same time, we maintain a highly liquid unlevered financial position and operate with a capital light strategy. Consequently, we are confident in the earnings power, cash flow generating capabilities of this business over time.
I will now turn the call the over to Tom Rooney.
Thomas S. Rooney
Thank you Alex and good morning everyone. In the third quarter, Energy Recovery continued to make progress improving manufacturing efficiency, driving out costs and capitalizing on the operating leverage of our business.
Compared to a year ago, third quarter gross margins were up while operating expenses were down. Just as important, demand for our products remained strong and our share of the global desalination market remained high.
We have a large backlog of attractively priced contracts all scheduled to shift in the fourth quarter, which we will expect to be one of the best quarters in the company’s history. Reducing costs, increasing efficiencies and maintaining a dominant share of the desalination market, our key elements of our three-pronged strategy, over which we exercise the greatest control.
Consequently, the tremendous progress we have achieved over just the last two years has provided us with the resources to accelerate our diversification into new growth markets, which is the third prong of our strategy. For the quarter, due to delays in the shipments of certain projects, we did not generate any mega-project revenue.
As a result revenues were down and we experienced an $0.08 per share loss in the quarter. The timing of mega-project shipments continues to create variability in our quarterly results.
For instance, a contract originally scheduled to ship in the third quarter was actually shipped in the first week of October moving millions in revenues out of the third quarter and into the fourth quarter that having no bearing on our financial performance for the year. In fact the fourth quarter could be the best quarter in the company’s history.
The true strength of our organization can be seen in the proportion of major desalination project we’re winning around the world. In the third quarter, we signed a number of new desalination contracts, the majority of it in the Middle East region.
In Saudi Arabia, our PX technology is part of ACCIONA Agua’s first desalination contract in the City of Al Ghubrah. The plant will produce a 100,000 cubic meters per day of potable water for residents and industrial uses and our devices will yield over 116 million kilowatt hours in energy savings.
In Oman, Cadagua and its partners will use our devices to desalinate seawater in the City of Al Ghubrah. This technological first, a desalinations mega-project featuring 8 train each desalinating 30,000 cubic meters of seawater per day.
We’ll produce 50 million gallons of fresh water to supply 800,000 residents. In the United Arab Emirates, ACCIONA Agua again chose our PX devices for the Fujairah 1 expansion desalination project.
With PXQ technology, the plant will conserve a 140 million kilowatt hours of energy and over $14 million annually. While the Middle East has been a market rich in opportunity for us over the years further Eastern China earned to approximately 20% of the world’s population.
The government has formerly decreed desalination as an integral part of its long-term water management strategy. China is planning to triple its desalination capacity by 2016, using reverse osmosis technology for which our PX devices are ideally suited.
We’re also pleased to report that progress is being made in the U.S. desalination market most notably with the Carlsbad project which we announced last quarter.
We expect shipment of this project in Q4 as recently confirmed by our client. Just last week, I returned from an extended trip throughout China, where we participated in several important industry and thought-leadership events.
The International Desalination Association World Congress 2013 just wrapped its six day event in Tianjin. And it was a showcase of the latest desalination scientific research and technology trends and an arena for enterprises such as our display advanced technologies and products.
The theme of World Congress 2013 was a vital role of the desalination and water reuse play in helping the world to meet its water needs as we face increased challenges from urbanization, climate change and economic uncertainty. We spoke with many of our clients and learned that the growth of the desalination market requires further research and analysis and the combined effort by all technology leaders is critical to our industry’s success.
The demand for freshwater and innovative approaches to solve the water’s – the world’s water and energy issue remain strong. In fact, during the conference, there was a noticeable and compelling interest in renewable energy sources such as osmotic power using the latest water technologies for which Energy Recovery is a key player.
Nearby in Shanghai, I was invited to speak on a panel entitled Beyond Subsidies and Business Unusual in Asia at the Bloomberg Leadership Forum in Shanghai. This Forum brought together 60 of the sectors thought-leaders from a diverse mix of Asia’s leading firms including Chinese energy manufacturers diversified in international industrials and information and communication technology players.
We focused on key areas such as business models for an age of clean-energy consolidations and the role of international firms to support future large scale industry demands for water and technology. While in China, we also took the occasion to visit with the regional leadership and plant management of the Sinopec facility in the Chaoyang gas plant where we saw first time the progress being achieved in one of our oil and gas field trials.
We came away very impressed by the progress achieved and even more convinced of the opportunity this new market brings to us. As indicated by the client, lower power consumption is the number one initiatives for Sinopec overall.
At the plant level, we were told that our Energy Recovery devices lowered the power consumption of the total plant by more than 25%, which equates to a very compelling value proposition. If you are familiar with gas processing facilities, energy costs are a major portion of total costs.
We are confident that our potential to collaborate and our future oil and gas projects remain strong. The emphasis on gas exploration is high and the China is in that importer.
Sinopec is just one of our oil and gas pilot projects with major players on three continents. Just this week after a full year of testing the system in our facility, we’re happy to announce that as we speak, our first IsoGen Energy Recovery solution is pending shipments for the world’s largest oil and gas producer Aramco in Saudi Arabia.
And finally, in October, we announced an agreement with Seoul-based GS Engineering and Construction Corporation to explore the potential of osmotic power generation using our PX technology. A pilot program is already underway with a unit anticipated to be operational in 2014.
While still in the early stages, the best estimates of global osmotic power production potential exceeds 1600 terawatt hours or the equipment of half of Europe’s entire energy demand. In recognition of our unique technology, I’m pleased that we’ve been chosen as a finalist in two categories for an innovation award from The Institution of Engineering and Technology: one for energy power and the other for sustainability.
These innovation awards celebrate the very best innovations in science, engineering and technology. We continue to study the long-term growth prospects in the firming of the global desalination market and we’re excited about the commercial introduction of our new oil and gas products.
Oil and gas field trials are progressing providing us with confidence that we will generate meaningful revenue in a market where there are already 1,200 eligible facilities. The innovation, manufacturing efficiencies and disciplined cost control implemented throughout the organization over the past several years provide us with a strong foundation to capitalize on the growing demand for Energy Recovery equipment in the desalination and other emerging markets such as oil and gas to create for our shareholders.
Since Alex and I joined Energy Recovery, we have focused on strengthening and positioning the company to optimize the value of our proprietary technology and the strong market share enjoyed in the desalination market and significant improvement in gross profit margin are decisive evidence of success. As we move into 2014 and beyond, we envision that a seminal turning point for Energy Recovery.
Everything we’ve experienced in China confirms that we’re focused on the right objective, creating energy conservation solutions that are both clean and economical. Both the water market and the industrial manufacturers are clamoring for more green energy recovery devices that significantly reduced global energy consumption, lower operating costs and offset carbon dioxide emission.
These are exciting times and we’re anxious to continue to strengthen the energy recover franchise in the desalination market and to extend that franchise into many other growth markets that can benefit from our technology. Thank you very much.
And that concludes our prepared remarks and we’ll now open up the call for your questions.
Operator
Thank you. (Operator Instructions) And your first question comes from the line of Mr.
Patrick Jobin from Credit Suisse. Please go ahead.
Patrick S. Jobin – Credit Suisse Securities, LLC
Hey good morning. Thanks for taking the question.
Thomas S. Rooney
Good morning.
Patrick S. Jobin – Credit Suisse Securities, LLC
First just on your 2014 outlook, you mentioned some growth anyway to kind of Riverbank, what you’re expecting in 2014 maybe by region or growth percentage? Thanks.
Thomas S. Rooney
So Patrick, at this time of the year, it’s a great question because it’s one that we’re working on very hard. We just got back from the industry conference last week that happens once every two years, the desalination industry conference.
So we’re pouring over a lot of data and we’re putting – and we also putting our business plan together, our internal business plan. So I’m going to hold off on making any or giving any guidance or making any forecast for 2014 at this point.
We are doing it segment by segment in China, Middle East and so on. But at this stage, we’re not in position to give any kind of guidance or updates on 2014.
Patrick S. Jobin – Credit Suisse Securities, LLC
Okay that makes sense. We appreciate it.
Certainly can be a lumpy business. On the oil and gas opportunity, you mentioned meaningful revenue in 1200 eligible facilities.
I guess can you update us on the timing of when you expect kind of field trials to convert to commercial shipments and maybe what the revenue opportunity might be for an average facility.
Thomas S. Rooney
Sure, the revenue opportunity at an average facility is on the order of about $1 million if you think about the 1,200 plants that exist, so about $1 billion of one-time TAM. So that’s the first one.
But what we see happening right – be happening right now, is we are now starting to line up second and third clients to visit some of these plant facilities. And so we would expect that in 2014, we will start to ink contracts, commercial contracts for the next wave of projects, predicated on the field trials that are going on.
Of course revenue recognition requires is actually sign contracts, manufacture products and shift. So the big question for us would be as we – and we see the year 2014 as a year when we ink contracts with clients.
So contracts that are inked in the first three or four months of the year can be turned into revenue in the first year. So we have to be a bit cautious.
The one thing that we’ve learned about the oil and gas industry is that it has its own pace and we’ve been working through things at the oil and gas industry pace, but we are convinced that we’re going to be moving now to contracts. We are lining up a series of clients that we’ll start to visit the other plants and subsequently negotiate contracts with its commercial contracts and that all of that will take place in 2014.
Patrick S. Jobin – Credit Suisse Securities, LLC
Great, and then last question for me I was just looking at the inventory balance and I guess there is a question for Alex kind of a housekeeping item, but I was surprised to not see such a – not see a larger build of inventory given in Q4 shipments and the multi-million projects push out to Q4?
Alexander J. Buehler
Well, it was a predictable inventory build. It was large from my vantage point.
And we are building up finished goods inventory, which should facilitate all of the MPD shipments that are scheduled to go out in the fourth quarter.
Patrick S. Jobin – Credit Suisse Securities, LLC
Right, okay. So just from a manufacturing time standpoint, there is nothing to be concerned with them?
Alexander J. Buehler
No, I mean we do level out our production for manufacturing efficiency purposes and because our MPD revenue was so uneven this year, we’ve been building finished goods inventory for the first three quarters and that’s going to come down dramatically in Q4 with shipments.
Patrick S. Jobin – Credit Suisse Securities, LLC
Okay, thanks very much.
Thomas S. Rooney
Keep in mind, you could go back 10 months, we’ve known that the fourth quarter was going to be a substantial revenue quarter. So we actually started building inventory even in January in expectation of the shipments in the fourth quarter.
So our inventory buildup has been going on all year in expectation of this. We’ve known that this fourth quarter was going to be at or near record levels for the company.
So our inventory buildup has been done pragmatically over a long period of time.
Patrick S. Jobin – Credit Suisse Securities, LLC
Great, thank you.
Thomas S. Rooney
Sure.
Operator
Your next question will come from the line of Laurence Alexander from Jefferies. Please go ahead.
George J. D’Angelo – Jefferies LLC
Hi, good morning. This is actually George D’Angelo on for Laurence.
Thomas S. Rooney
Good morning.
George J. D’Angelo – Jefferies LLC
Good morning. I have a question on M&A, what kind of M&A would you consider and what financial hurdles would guys apply?
Thomas S. Rooney
We have an aggressive corporate development program underway and have for the last two to three months. The focus of those acquisitions targeting is strategic acquisitions that would enable speed to market in some of our new diversification areas.
So obviously oil and gas fits into that, but some of the other areas where we’re focused in future generations and areas like chemical processing. We’re not particularly focused on doing any acquisitions in the direct water or desalination market because in fact the primary strategy for us in terms of acquisitions is to speed our entry into other markets.
You may recall from previous conversations, we’ve mapped out a long series of addressable markets in chemical process and testing, mining and a number of other areas. To date organically we’ve been focused on penetrating the oil and gas industry and very specifically penetrating the gas processing part of the oil and gas industry.
We’re 115 person firm, so we are limited as to the number of markets that we can organically attack, but the opportunity to make acquisitions to penetrate some of the those others will help to accelerate what is otherwise a 12-year roadmap to address several billion dollars worth of addressable markets. So to simplify it our entire focus for acquisition is around entry into markets that will get us faster entry where we would otherwise have to take several years to get to.
The size of those acquisitions would depend on the level of strategic value that the company would give to us, but what’s obviously as we have a very strong balance sheet, no debt and as the company now transitions to profitability and to cash flow positive, we feel far more confident in terms of using our balance sheet to make a handful of very smart acquisition.
George J. D’Angelo – Jefferies LLC
Okay, thanks. And just one more kind of following up on the last question on the inventory balance, could you guys give a little more color on risks of order being into Q1 and Q2 of next year from Q4?
Thomas S. Rooney
Sure, well I think we have five MPD projects and each one being $2 million to $4 million of they’re about and one of the five has already shipped. In fact, we got release to shift the project in the last hours of Q3, which was disappointing to us.
Nonetheless, one of the five has already shipped and we’ve gotten confirmations in the last two weeks from three of the other four that they want shipments by the middle of December. So I would tell you that I feel confident, but having watched 2.5 years of revenue move out the door, this is a business where you don’t count your chickens and so in this case until they move off the loading dock.
So we are and we’ll always be vulnerable to last minute casual delays by our clients, but we’ve actually proactively called all of our clients and I’ll give you an example, there has been a lot of written concern that we called that project clearly doesn’t need or want our projects this quarter. We have in fact confirmed with the clients that they fully expect to have us skip that product and project in the middle of December.
And they’ve confirmed that in writing to us in the last two weeks. So with all of the data that we’ve in front of us, we feel good, we feel confident, but history has shown that these large MPD projects have an ability to surprise at anytime.
And so until we get to December 31, I can’t give a 100% certainty, but I can tell you that we’ve communicated with those clients and we feel strong and we feel good about it.
George J. D’Angelo – Jefferies LLC
Okay thanks guys. Thanks for taking the question.
Thomas S. Rooney
Thank you.
Operator
And your next question will come from the line of Robert Smith from Center for Performance Investing. Please go ahead.
Robert J. Smith – Center for Performance Investing
Yes, good morning.
Thomas S. Rooney
.
Robert J. Smith – Center for Performance Investing
The 1200 unit addressable market in oil and gas – gas processing, the three field tests that you are running with those organizations, how much of the – how many of the 1200 are accounted by those three?
Thomas S. Rooney
In other words, if I pick those three clients and asked how many locations they have.
Robert J. Smith – Center for Performance Investing
No.
Thomas S. Rooney
It’d be a very small portion of the 1200, that we not having said that one of the largest oil and gas producers in China is the largest oil and gas producer in the world. And one of the more prolific oil and gas producers in North America, so we are not – our pilots are not being done for second or third tier players, we are fortunate enough then and intended to get out of the starting block with big name players, so that we would be able to address them, their individual needs, but also, so that the reputational effects would be stronger for our followers.
But in terms of a number kind of get, first of all there are 1800 gas processing plants in the world. We believe the 1200 of the 1800 are large enough for us to be able to easily bring a return on in those clients.
There are therefore about 600 gas processing plants around the world that are small and interesting, but maybe too small for our devices. By the way gas, shale gas is being found all over the world now, it’s one of the great phenomena that’s going on.
And so the 1,200 that we mentioned does not even contemplate the new plants that are going to be and are being built over the next two to three years, so who knows where 1,200 goes to?
Robert J. Smith – Center for Performance Investing
Yeah, do you have an ideas for the growth rate in the area and what it might be?
Thomas S. Rooney
Well, that’s the great news. The growth rate for that industry, gas processing, and I will not claim to be an expert on that, but then there is the growth rate for us into that industry.
And I think for the next two or three years or maybe the next five to 10 years, we have a mountain to claim if you will in terms of addressing just the 1,200 plants that currently exist around the world. And so, our growth rate into the existing 1,200 is very enticing to us, extremely enticing that’s why we targeted that.
How much that grows and how much the 1,200 grows is I guess that I call it icing on the cake to be frank with you.
Robert J. Smith – Center for Performance Investing
All right, and the field test that you’re running now that’s going to be expanded by welcoming others near-term. Is that – what made that move?
I mean how many more might you put in place in the near-term?
Thomas S. Rooney
Well, in many cases because of the location where we’ve done field tests and the names of our clients for whom we’re doing field test. In a number of cases, in many cases other national oil companies have said if I see what you’re doing is successful there than I would be ready to go to commercial deployment at my location.
And then I think the reason for that is that these gas processing plants are very, very similar using very similar technologies around the world. And it’s proven yourself successful with Aramco in one of the world’s largest gas processing plant.
In many cases, not all, but in many cases that is sufficient in terms of piloting for a gas processor in South America as an example, or certainly in other regions in the Middle East. There will be other clients that that want to pilot devices inside of their own plants and to be frank we will do some of those, but we will pick the low hanging fruit first, which is clients that readily accept proof points at other gas processing plants.
Robert J. Smith – Center for Performance Investing
So, would these three companies permit or prospective of the companies from seeing their installation, I mean is that how it works?
Thomas S. Rooney
It does. And so 10 days ago or so I was physically at the plant in China with Sinopec and they are and we’re effusive in their price, sharing with us their economics, specifically named individual at the plant level and at the corporate level that stand ready to give references.
And also open the door to plant visits from friendly countries, but open the door to plant visits with open arms and including by the way to other oil and gas players inside of China. So we feel very, very good about that and we expect the same thing.
I could say that just first half having physically been at the plants and dealt with my counterpart at Sinopec and also at the plant level management. The relationship is very, very high.
The feedback is very, very strong and the willingness to collaborate with us and to allow others to see what’s going on at their plant is absolute at this stage. So we feel very good about opening the plug 8 now and bringing in sort of second and third round clients to see and witness what’s going on.
Robert J. Smith – Center for Performance Investing
At the time of the next conference call, would you say you had a pretty clear indication about how much business might come in, if you mentioned the first three or four months in the year?
Thomas S. Rooney
Yes. Well, I think what you’ll probably see in the first and second quarter of next year is press release is around contracts and new deals and so on.
Our Q4 earnings call I think takes place in the middle of March, so it would be more or less at that point in time that we would expect it to be doing deals with clients. It takes what – the one thing that I’m learning about the oil and gas industry is that at point in time, they move with incredible speed and then there are aspects of the prospects that take a long time.
With one of the three clients that – yes, we were two years into the relationship and took us almost a year to finalize the written contract documentation. So and we do not issues press releases about new projects until we have finally or formally inked and signed the finalized deals.
We don’t typically make press releases about tentative hand shake agreements. And so I’m a little bit cautious about whether or not I’ll be able to say, we will have the press releases issued around formal finalized contracts in January, February, March, but that process I’m convinced will be going on in the first and second quarter after people have visited plants and lined up deal.
Robert J. Smith – Center for Performance Investing
On site, I mean, you are recovering [indiscernible] prices.
Thomas S. Rooney
We have what’s called a commissioning period, which might be three weeks, it might be nine weeks depending on the complexity and so we have entire teams on site during those commissioning periods. We then assign individuals in close proximity, so in the case of the Sinopec plants, we have a full time energy recovery technician who lives and works in Beijing, who supports the Sinopec plant on an as needed basis, can get there in eight or 10 hours.
And the same thing is true in the Middle East and certainly in North America. So the answer to your question is, it is very earlier stages, we have a full time onsite people, and then that transitions over to normal service and after-market.
Robert J. Smith – Center for Performance Investing
Thanks very much and good luck going forward.
Unidentified Company Representative
Thank you.
Operator
(Operator Instructions) And your next question comes from the line of Mr. John Rosenberg from Loughlin Water Partners.
Please go ahead.
John Rosenberg –
Yes, good morning. Thanks for taking my question.
Loughlin Water Partners, LP
Yes, good morning. Thanks for taking my question.
Thomas S. Rooney
Good morning.
John Rosenberg –
Couple of things, Tom and Alex, you mentioned that next quarter will be the best in the company’s history amongst the best and then you’ve – and then to one of the other question is went on and talked about some of the projects mega-project for revenue that you may well book. Could you be a bit more specific in terms of margin profile, when you say best?
I think I can get an idea of the revenue, but you are also talking about more revenue end margin or – end gross margin, operating margin what, more precisely?
Loughlin Water Partners, LP
Couple of things, Tom and Alex, you mentioned that next quarter will be the best in the company’s history amongst the best and then you’ve – and then to one of the other question is went on and talked about some of the projects mega-project for revenue that you may well book. Could you be a bit more specific in terms of margin profile, when you say best?
I think I can get an idea of the revenue, but you are also talking about more revenue end margin or – end gross margin, operating margin what, more precisely?
Thomas S. Rooney
We are talking precisely about revenue.
John Rosenberg –
Okay.
Loughlin Water Partners, LP
Okay.
Thomas S. Rooney
And to put that in context, the company’s best revenue historically was in the fourth quarter of 2008.
John Rosenberg –
2008, yes.
Loughlin Water Partners, LP
2008, yes.
Thomas S. Rooney
And it was about $20 million.
John Rosenberg –
Okay, great. Thanks.
That – I mean, I thought we are going there. But we can expect kind of with puts and takes similar gross margins to what we’ve seen now?
Loughlin Water Partners, LP
Okay, great. Thanks.
That – I mean, I thought we are going there. But we can expect kind of with puts and takes similar gross margins to what we’ve seen now?
Thomas S. Rooney
What we – it’s very clear that our gross margins have moved up dramatically in the last two or three years. I think we were at – what we Alex, for gross margins in 2011.
Alexander J. Buehler
We were at – it was 28%.
Thomas S. Rooney
28% margin to 47% margin. Last quarter, I believe we were at 62%, this year we’re at 60%.
So what we have been describing and guiding to is the fact that certainly last quarter we had 62% and this quarter we had 60%, but those are not aberration. And on a go forward – and we predicted a year or two ago that we would re-obtain the historic high levels of gross margins.
I think that the highest gross margins ever achieved were on the order of 63% or 64%. And so we continue that trajectory.
So we are guiding if you will, to one of the highest levels of revenue the company has ever seen, and we’ll just leave it there. The gross margins will continue to improve exactly what our gross margins will be in the fourth quarter is probably not something we want to guide to at this point, but 60% and 62% are not aberration.
We continue to see a firming up of the profit potential of the company, but there are aberrations on any one quarter.
John Rosenberg –
Yes, of course it’s a lumpy business. Understood.
Thank you. Also so again, early in the game, but for – your two next initiatives, the oil and gas and then the osmotic power.
Oil and gas, you are not going to be producing hopefully as you get started early next year or middle of next year to actually produce and shift. You are not going to be producing the same volume as PX devices, you guys have a sense of where your margin is going to be on those products?
Loughlin Water Partners, LP
Yes, of course it’s a lumpy business. Understood.
Thank you. Also so again, early in the game, but for – your two next initiatives, the oil and gas and then the osmotic power.
Oil and gas, you are not going to be producing hopefully as you get started early next year or middle of next year to actually produce and shift. You are not going to be producing the same volume as PX devices, you guys have a sense of where your margin is going to be on those products?
Thomas S. Rooney
For oil and gas, and for osmotic power?
John Rosenberg –
Yes, osmotic is merely very early. But for oil and gas, you guys have some sense of where your margins might be in that product line?
Loughlin Water Partners, LP
Yes, osmotic is merely very early. But for oil and gas, you guys have some sense of where your margins might be in that product line?
Thomas S. Rooney
But we are targeting 50% gross margins. So it’s a – to give you a two step answer to that.
We think when we get to steady state, we think that the gross margins in oil and gas will be similar to possibly higher than desalination. Reason for that is, we are disruptive, we are to some extend without any competition, we have a strong value proportion.
So you might ask why do we target 50%. Well, where we sit right now, moving quickly and capturing the market, first move advantage is all important to us.
And so we are not as aggressive on pricing and won’t be for the next 18 months or so until we get a real foothold into that market.
So Osmotic Power or our technology advantages are so profound that and it’s a nascent industry. We will probably start out of the blocks with strong gross margins in Osmotic Power.
By the way I should say that Osmotic Power two, three, four years ago was a long-term concept or dream if you will. It is much more than that today.
We have inked a collaboration agreement with very large Korean conglomerate funded by Korean money to move that forward. We are in close negotiations with a European enterprise to do just the same.
And we also have been approached recently by a large Japanese player and a large Spanish player. All of them want to move forward in Osmotic Power.
And the orders of magnitude here are very interesting, just a pilot plant regarding Osmotic Power could and would generate $5 million plus worth of revenue for us. And these pilot plants could hit us from a revenue standpoint as early as 2016.
So this is no longer a long-range factoring, largely predicated on the fact that membrane technology for Osmotic Power has really leaped forward in terms of the watt per meter production capability that they have. And so that’s a core enabling technology and that has seen tremendous advancement in the last two years and we are also an enabling technology.
So Osmotic Power I believe in the next two years will go from expansible concept to something of real revenue for us and that’s very exciting. And so the first wave of growth for us is its oil and gas that you likely to see 30% to 60% gross margins in the next two years and then Osmotic Power shortly thereafter.
John Rosenberg –
Well, great. Thanks very much.
I appreciate the color. Best of luck and Tom I suggest that I mean you could always go back to Chicago they are at the forefront of the pricing strategy that I believe these days.
Loughlin Water Partners, LP
Well, great. Thanks very much.
I appreciate the color. Best of luck and Tom I suggest that I mean you could always go back to Chicago they are at the forefront of the pricing strategy that I believe these days.
Thomas S. Rooney
Okay.
John Rosenberg –
Thanks.
Loughlin Water Partners, LP
Thanks.
Thomas S. Rooney
Thank you.
Operator
And your next question will come from the line of JinMing Liu from Ardour Capital. Please go ahead.
JinMing Liu – Ardour Capital Investments LLC
Good morning. Thanks for taking my question.
Thomas S. Rooney
Good morning.
JinMing Liu – Ardour Capital Investments LLC
Yes, first in terms of potential acquisitions, can you give us more color say what type of companies you guys are interested, whether you are just interested in some sales channels in newer applications like chemical processing or you still need some technology to complement which are wealthy complementary to your existing technology?
Thomas S. Rooney
Can you ask me that again, you’re saying that the technologies that we’ve developed...
JinMing Liu – Ardour Capital Investments LLC
No, no, what I’m trying to ask is the potential future acquisition targets regarding the potential future target. Are you simply going after those companies for their channels into the new market like a chemical processing or do you still need some complimentary technology from those acquisition targets, potential?
Thomas S. Rooney
It’s primarily – JinMing, it’s primarily about penetrating markets, as we step into the oil and gas industry or when we step into the oil and gas industry a year and half, two years ago, our brand was a complete unknown to that industry. We’re not much further ahead in terms of that brand other than with the three clients that we’re working with.
So entering and planning big in the oil and gas industry to some extent requires having unknown brand name. But also, there are certain methodologies used in the oil and gas industry.
So as an example, our core technology is a pressure exchanger device or a turbocharger. But to sell those core technologies to the oil and gas industry, as we embedded in a skid in entire assembly.
And so we’re – and potentially acquiring a company that can do that lesser technology of skid design and development. That would – that would speed up the market, it’s not so much that we can’t manufacture it, but it would make us faster into the market to be able to do that that sort of rudimentary thing.
The analogy might be of Intel, while trying to sell a microprocessor has the package and with the balance of what makes up with computer in order to sell their devices. So part of our acquisition strategy is to enhance our brand in the oil and gas industry by acquiring a brand if you will and part of it is to look at the companion skills and technologies that would enable us to sell our core devices.
Then there are other areas inside of oil and gas that are interest to us because our energy efficiency proposition to clients is so significant, that in some cases it downgrades the pump that exist there to an extend where the client is asking us, can we include a small API pump on our skid? And the answer is of course we can.
So what we are actually looking at is whether we would organically design and develop our own API pump or acquire a small API pump manufacture, so that we would have the benefit of having our own branded API pump on our skid to capture more of the revenue, capture more of the margins and profit potential. That’s primarily what we are looking at.
There really isn’t or aren’t enabling technologies, I think we are fully enabled to do what we want to do. It’s more about speeding market entry and so on in these markets.
And when we think about chemical processing by the way, it would be very much the same story. Probably, the most interesting chemical process that we want to enter in terms of pure chemical processing is ammonia production.
Ammonia production uses and almost identical absorption fluid process as does with our gas. It’s almost identical.
It looks like the same process, Matt. Therefore, the note that we would implement ourselves in are nearly identical.
So our technology would apply almost immediately that which we’ve proven at that Sinopec could apply in Ammonia processing facility. So technologically, we wouldn’t need anything, but there again we would be entering an industry that would know who we are.
And if there was an opportunity to acquire a company to speed up the market, that would be very enticing to us. So we’ve some very highly refined strategic competitors around our acquisitions, but I don’t think technology enabling is really one of our core concepts.
JinMing Liu – Ardour Capital Investments LLC
Okay, that’s helpful. My second question is as you get into different markets and the different application at different markets, are you going to make changes from their corporate level, like you are setting up different orbits in different region or realigning our corporate structure to support your goal in the future?
Thomas S. Rooney
Well, clearly, we’ll continue to make adjustments in the corporate structure as the emphasis of the company. I think it’s fair to say that five years from now and we look back, we won’t think of ourselves primarily the water company with all of our assets deployed primarily at water.
So we were more if you will over time, it does not at this stage look like we have to make a major shift. Having said that, our manufacturing capabilities are primarily aimed at the manufacturer of pressure exchangers.
So as was mentioned earlier, the entire assembly that we refer to as a skid requires other manufacturing capabilities and competencies. So, if in fact we make an acquisition in that area, it would change the way we operate manufacturing, it could well put us overseas for a portion of our manufacturing.
So some of those things will drive change along with the incremental revenue shift from pure water to water plus industrial.
JinMing Liu – Ardour Capital Investments LLC
Okay got that. Thanks a lot.
Thomas S. Rooney
Thank you.
Operator
Gentlemen there are no further questions at this time, I would like to hand the call back over to Mr. Tom Rooney for closing remarks.
Thomas S. Rooney
Great, well thank you very much. As Alex had mentioned, we feel very, very good about where the company is in terms of efficient operations, strong balance sheet.
Notably, our gross margins are performing exceptionally well. Our manufacturing efficiencies are way up.
We’ve maintained operation, our OpEx control. We’re running the company right now in a CapEx light mode and not have thing to compromise to do so.
All of which, puts us in a fantastic position to continue to press ahead with our growth initiatives. The work and the progress made in oil and gas has put us in a very nice position for 2014.
The notion that osmotic power is coming alive is very enticing to us. And we’re even working on other products that could have exciting opportunities for us in other industries.
All of which positions us nicely. Like everyone else, I never like the shift of revenue that takes place but that’s a historic norm for this industry and for this company.
So we continue ahead looking at long-term growth drivers for the company and that’s where the value is in this company. We’re very, very excited about what’s happening right now in the fourth quarter.
The activity level inside the company in terms of having and producing one of our largest revenue quarters in history is fun, it’s exciting and we look forward to our fourth quarter earnings results and to 2014. So thank you everybody for being involved today.
Operator
Ladies and gentlemen, this concludes the conference call for today. Thank you for participating and please disconnect your lines.