ENERGY RECOVERY: PROFITING FROM SUSTAINABILITY
Energy Recovery, Inc. (NASDAQ: ERII) recently announced a collection of contracts totaling over $8 million to supply PX® Pressure Exchanger® energy recovery devices and accessories to desalination facilities in Chile.
Rodney Clemente, Energy Recovery Senior Vice President of Water, commented,
“Chile continues to be a leader in the Latin American desalination market, with mining being one of the key drivers for the region. The country is home to valuable natural resources that the world requires to manufacture and power vital products and technologies, yet the country has faced historic droughts in recent times.”
The PX can reduce energy consumption in seawater reverse osmosis desalination facilities by as much as 60%. The PX provides the lowest life cycle cost of any energy recovery device available on the market, providing significant savings to plant operators and bringing down the cost of clean water.
Energy Recovery, Inc. (NASDAQ: ERII)
Market Cap: $1.24B; Current Share Price: $22.10
Data by YCharts
Energy Recovery, Inc. and its Products
Energy Recovery, Inc. designs and manufactures solutions that make industrial processes more efficient and sustainable. Leveraging its pressure exchanger technology, which generates little to no emissions when operating, the Company’s solutions lower costs, save energy, reduce waste, and minimize emissions for companies across various industrial processes.
As the world coalesces around the urgent need to address climate change and its impacts, Energy Recovery aims to help companies reduce their energy consumption in their industrial and commercial processes, reducing their carbon footprint.
The original product application of the Company’s technology, the PX® Pressure Exchanger® energy recovery device, significantly contributed to the advancement of the seawater reverse osmosis desalination (SWRO) process lowering the energy intensity and cost of water production globally from the application of SWRO. The PX is up to 98% efficient, operates with minimal maintenance, and outlasts most other components of the system in which it is incorporated.
The Company has since introduced its technology to the fast-growing industrial wastewater market, such as battery manufacturers, mining operations, manufacturing plants that discharge wastewater with significant levels of metals and pollutants, and the commercial and industrial refrigeration market.
We’ll discuss a few key factors that make Energy Recovery an interesting watch.
- Impending Global Water Supply Gap
As of today, worldwide water demand continues to outstrip supply. The United Nations estimates a 40% gap in freshwater supplies by 2030 – equivalent to 75% of the Mediterranean Sea.
Through desalination and industrial wastewater recycling processes, PX technology addresses the global water supply gap.
In 2021, worldwide seawater desalination plants using Energy Recovery’s products produced over 28 million cubic meters of water per day (“m3/day”), enough to provide for more than 14% of the United States of America population’s daily water needs.
- Disruption in the Global Refrigeration Industry
The refrigeration industry is the fastest-growing source of greenhouse gas emissions, growing at approximately 10% to 15%. More than 130 countries have signed on to the Kigali Amendment, establishing a timeline for the mandated phase-down of hydrofluorocarbon in both developed and developing countries. In October 2022, the U.S. The Environmental Protection Agency (the “EPA”) ratified its intention to phase down the production and import of hydrofluorocarbon emissions by 85% by 2036, following the Kigali Amendment. In addition, the European Union is moving to limit hydrofluorocarbons with supplemental regulations such as the F-Gas phase-down.
All of these regulations are driving the refrigeration industry, as well as supermarket chains looking for a safer source of refrigerants, to shift to CO2, which is one of the most sustainable and safe natural refrigerants due to its low toxicity and flammability, as compared to alternative refrigerants, such as ammonia and propane. As the markets catch up to comply, sales of CO2 refrigeration systems should increase – this represents approximately $1 billion annual potential Total Addressable market for Energy Recovery by 2030.
- Sustainable Growth Strategy
The Energy Recovery growth strategy rests on three main pillars:
- Leadership in SWRO: The Company’s PX platform currently dominates large-scale SWRO desalination. Energy Recovery aims to protect its position in SWRO by improving products and operations in a fast-growing market so that it can serve as the foundation for the Company’s growth strategy.
- Innovation in New Industries: Energy Recovery also focuses on driving high-margin growth by capitalizing on commercial opportunities in new and divergent industries. For this purpose, it aims to diversify from desalination. As discussed earlier, the disruption in the global refrigeration industry provides a significant opportunity for growth. Energy Recovery has taken several steps to create a footing in this market by easing the transition to CO2 refrigeration.
- ESG Integration: The Company aims to accelerate environmental sustainability for customers via reduced energy consumption. The idea is to practice long-term discipline to manage Environmental, Social, and Governance risk while maximizing opportunities related to sustainable product aspirations. Energy Recovery has already made significant strides in this area, as shown below.
- Dependable Financial Performance
For FY22, the Company reported total revenue of $125.6 million, compared to $103.9 million the previous year, representing an increase of 21%. Gross margin for FY22 was 69.6%, up 100 basis points compared to the prior year due to increased pricing and product mix.
Net income for FY22 was $24.0 million, a growth of 69% over the prior year, and adjusted EBITDA of $36.8 million, up 50% over the prior year. Profitability increased based on increased gross margin and a reduction of operating expenditures as a percentage of revenue, which drove earnings per share up nearly 75% to $0.42.
Over the years, the Company has displayed strong fundamentals – from 2015 to 2021, its average product revenue growth stood at 20%. As of December 31, 2022, it had a strong balance sheet with about $92.9 million in cash, investments, and no debt.
Until 2026, Energy Recovery targets 25% – 40% average revenue growth.
As discussed, the Company has established a strong foothold in its core desalination business. Energy Recovery is demonstrating rapid growth in the industrial wastewater segment – for FY22 alone, it exceeded guidance by nearly 30%. In the CO2 refrigeration segment, Energy Recovery continues to invest additional resources, and it seems that the Company will also derive great benefits from this high-quality and opportunity-rich market.
Thus, it can be said that Energy Recovery is poised to benefit from various upcoming opportunities. The Company’s proprietary PX technology is extremely efficient and functional, giving it an edge over its competitors. Due to its leading ESG performance, Energy Recovery has won several awards in the field.
All this shows that the Company has all the necessary elements to enable it to perform well in the future. Hence Energy Recovery remains an interesting stock to track over the upcoming years.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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