Greetings. Welcome to the Energy Recovery 3Q 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded.

I will now turn the conference over to your host Jim Siccardi, Vice President of Investor Relations. You may begin..

Hello, everyone, and welcome to Energy Recovery's 2023 Third Quarter Earnings Conference Call. My name is Jim Siccardi, Vice President of Investor Relations at Energy Recovery.

And I'm here today with our Chairperson of the Board, Pamela Tondreau; Interim President and Chief Executive Officer, David Moon; and our Chief Financial Officer, Joshua Ballard.

During today's call, we may make projections and other forward-looking statements under the Safe Harbor provisions contained in the Private Securities Litigation Reform Act of 1995 regarding future events or the future financial Performance of the Company.

These statements may discuss our business, economic and market outlook, growth expectations, new products and their performance, cost structure and business strategy. Forward-looking statements are based on information currently available to us and on management's beliefs, assumptions, estimates or projections.

Forward-looking statements are not guarantees of future performance and are subject to certain risks uncertainties and other factors. We refer you to documents the company files from time to time with the SEC, specifically the company's Form 10-K and Form 10-Q.

These documents identify important factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements.

All statements made during this call are made only as of today November 1, 2023 and the company expressly disclaims any intent or obligation to update any forward-looking statements made during this call to reflect subsequent events or circumstances unless otherwise required by law.

At this point, I will turn the call over to our Chairperson Pamela Tondreau..

Thank you, Jim, and thank you everyone for joining us today. Last Tuesday, October 24, my fellow directors and I appointed David Moon as interim Chief Executive Officer of Energy Recovery. Bob Mao will remain a member of the Board and I want to thank him for his many contributions advancing our business.

Over the last several years, we have introduced our PX G and created a tremendous opportunity in CO2, built an established and growing business in wastewater and launched a family of new products to grow that business.

We continued to innovate within the desalinization industry with our Q400, the highest efficiency energy recovery device in the world. The Board and I understand and clearly see the opportunity to not only accelerate growth in our existing three markets, but also to expand the PX beyond these markets in the coming years.

We're pleased that David agreed to join management as Interim President and CEO during this time.

David is a seasoned leader in both his previous experience as President of Carrier Commercial Refrigeration a division of Carrier Global Corporation as well as his history of developing and commercializing technological capabilities provide important insight and perspective while in this role.

Our goal is to ensure that this transition period is not only smooth and without operational disruption, but will also allow us to continue along our growth path. I want to be clear there are no underlying concerns about the business or its strategy.

As mentioned in the press release, we have begun the CEO search process and hope to fill the role permanently in the near term. The Search Committee includes two of Energy Recovery's newest members Colin Sabol and David Moon who both bring a key operational focus to the business and we are even now speaking with a number of qualified candidates.

With that, it is my pleasure to turn the call over to David Moon..

established strong relationships with major OEMs in Europe and the US; executed on installations with great OEM and grocery partners on both continents; and we’ve won two industry awards, the latest being the RAC Innovation of the Year award together with our good partner Epta Group in September of this year.

One key player in this industry recently said, you are everywhere, and everyone is talking about you. Now its important that we understand this market from different perspectives. The US and European markets are in very different phases of the transition from HFCs. In the US, we have a market that is just getting started.

The regulatory tailwinds are in place and only growing stronger, evidenced by the EPA’s final Technology Transitions ruling that was issued October 6th, just a few weeks ago. This new ruling adheres closer to California’s own tight HFC restrictions and expands these restrictions to many other refrigeration uses.

In short, while the CO2 refrigeration market is still fairly nascent in the US, the regulatory momentum is strong, which means that we should see considerable uptick in the US greenfield market in the coming years. Now the US market is also simpler than its European counterpart.

It is largely served by only a small number of large OEMs and contractors, which simplifies our distribution channels.

Because we are getting known early in the US’s evolution into alternative refrigerants, it means that as CO2 is further adopted, we should be well placed to be spec-ed into new greenfield projects from the ground up, which is an efficient way for us to enter the market.

However, this also means that true volume sales in the US is still a few years away, even as we begin to make real progress today. According to the North American Sustainable Refrigeration Council, the US has only roughly 1,500 CO2 based refrigeration systems as of 2023 and is expected to increase this number to over 5,000 by 2027.

Now, luckily, the European market provides us with a strong understanding of how the US market is likely to evolve.

Contrary to the US, the transition to natural refrigerants in the European market is more advanced, with over 60,000 CO2 installations already in place throughout the continent, and north of 10,000 installations occurring annually in recent years.

Thus, we have a large established potential brownfield market in Europe, and a strong annual base of greenfield installations that we can tackle. However, this is a more complicated market with a variety of regional players, some multi-national, with a variety of local norms to understand.

This means we need to determine the resources necessary to address this market, and the most efficient means to obtain them, to accelerate our growth in Europe. Ultimately, this should be a low hanging growth opportunity if correctly approached.

Underlying both markets is a mature, conservative industry that is typically cautious to adopt new technologies. The most critical element of a refrigeration system is that it must reliably deliver cold within the parameters it has been built.

Any deviation or shutdown in a refrigeration system can generate large losses for end users, like supermarkets and cold storage facilities, and the rest of the value chain.

Therefore, we are doing the necessary upfront work to ensure that when end users press the go button, the PX G will be a seamless introduction into new and existing CO2 refrigeration systems in the US and Europe. This is where we are at in our CO2 strategy.

Therefore, to unlock the potential in this market, our strategy is to begin with pilot installations in a given Food Retail chain or Cold Storage facility to build confidence in the operational and economic benefits of our PX G. Once that confidence has been built, we can then expand our footprint within that chain, by obtaining repeat orders.

This is how we confirm our addressable market and move towards the volumetric orders, we believe to be ultimately within our reach. We are already seeing this play out. In North America, we will soon be commissioning our second installation with Vallarta in California, and we are in discussions for multiple deployments with them in 2024.

We should commission our initial PX G with our first Canadian supermarket partner, a chain with over 1,000 locations, in the fourth quarter of this year. In addition, we are in advanced discussions with several well-known national chains in the United States for potential deployments in 2024.

This is the groundwork that is absolutely required for us to be successful. In Europe, our partner in the Benelux region, Fieuw Koeltechnik, is planning three more installations in Q4, including two at Delhaize, a large European and US chain with over 800 locations, as well as at a pancake factory in Belgium, which we had previously announced.

Fieuw is also in discussions with the large European chain, Carrefour, on our first repeat installation with them. And, finally, we are working actively on our second deployment with Epta Group, for a supermarket chain of over 2,000 locations. And, of course, we are in conversations with other large chains throughout the continent.

From my perspective, this is impressive progress for a new technology in this industry. As these chains continue to see the benefits of our PX G in their operations, we can then expand in greenfield and brownfield installations.

The greenfield market will take up to a couple years to show volumes simply due to the fact that it requires 12- to 24-month lead time in designing and installing new systems. Therefore, the greenfield market is our long-term potential, but not our substantial near-term volume opportunity.

The key to near term volume growth is the brownfield market, but it is also the most complicated. While our PX G will likely add only minimal costs to a greenfield operation, in the brownfield market there are extra costs and equipment to build and install.

To be successful in this market, we must be able to, first, deliver a standard product that is plug-and-play, meaning that the installation, commissioning, maintenance cost must be efficient and without risk, and we need to commit limited time to design and deliver. Second, we must deliver a PX G with meaningful payback to the end users.

And third, of course, our PX G must deliver the performance needed to generate that meaningful payback. These are the focus of our entire CO2 and engineering teams in 2024. In prior quarters, we spoke about our intentions to provide more explicit guidance for 2024.

During the short time I have been in this seat, I have gained belief that we can achieve a substantial first step along this path in 2024. We are targeting at least 50 locations for next year. Now I’m still in the early days of doing my deep dive into our CO2 strategy.

However, what I can say is 50 PX G locations for next year would create a substantial foundation, while growing a pipeline for future expansion. As our strategy unfolds, and we begin to penetrate the market in a more significant manner, we will provide a clearer sense of our CO2 revenue objectives.

It is clear that we are growing at a slower pace than originally envisioned. However, we are encouraged by the achievements we have made thus far and our prospects for additional locations in 2024. More to come. Our planned performance in 2024 will create more clarity as to how fast we can grow from our initial installations this year.

We will update you on our 2026 targets as I gain comfort operationally on our status, and we will update you throughout the year on our 2024 forecast as needed. Now with that, let me hand over the call to Josh to talk in more detail about our Water business, and to update you on our financials..

Thanks, David, and good afternoon, everyone. Before I get started, I want to be clear – That my opinion we remain a fundamentally solid company with a clear growth strategy and a base cash-generating Water business that remains strong. As David described, we are achieving real progress in CO2.

Our secular story has not changed in desalination and we are seeing tremendous success in our Wastewater business. Therefore I remain as bullish as ever in Energy Recovery's prospects. We had a great third quarter, beating expectations across the board.

We achieved $37 million in revenue, exceeding the upper end of our guidance by almost 6% with a nearly 70% gross margin and over 32% adjusted EBITDA margin. Specifically, in desalination, sales increased over $15 million compared to the previous quarter, while our Wastewater sales more than doubled.

Moreover our emphasis on expanding our market presence in CO2 led to $100,000 in third quarter revenue with the rest of our Emerging Technologies segment revenues attributable to oil and gas sales for aftermarket parts. We are beginning to see our predicted uptick in revenue after our lighter first two quarters as previously communicated.

We successfully shipped one of the two projects that are at risk for the third quarter and we were able to recognize revenue from our existing pipeline to make up the difference. Our Water and Operation teams did a tremendous job executing.

For fiscal year 2023, we now expect to land in the mid-range of our $131 million to $138 million overall revenue guidance with roughly $7 million of that coming from Wastewater and the balance from Desalination. This means that we again anticipate record-breaking Desalination revenues and what will be nearly a decade of consecutive growth.

However, we do have a few specific risks in the fourth quarter, which I would like to address. First, $5 million of our 2023 backlog is shipping to Israel. As of today we are on track to ship in November, but we are closely monitoring the situation in the region.

Second, we have significant levels of revenue shipping to emerging markets in North Africa and Southeast Asia.

As smaller emerging market countries make up a larger portion of our sales such as those we have described in recent calls, our short-term execution risk within a given quarter also increases due to the complexity of managing and shipping to these countries.

In the fourth quarter, we have an $8 million shipment scheduled for India in the last few weeks of the year and $11 million to Algeria in November. While we have no reason to believe these will not go out of schedule due to the late timing of the shipments and the history of delays in these regions we are watching and managing them closely.

To be clear, any 2023 delays, if they were to occur, would simply increase our guidance for 2024 revenue, meaning it should have no real effect on our business. Therefore we will return to revenue guidance at our next call once this year's results are in. Now, let's pivot to gross margin.

Year-to-date we've beaten our guidance of 64% to 66% with the gross margin just shy of 67%. Our focus on cost reduction initiatives in 2023 is showing some success. We are currently expecting to finish the year somewhat higher than our previous guidance of 65% to 67% for the year.

It's important to note that our end of year gross margin is contingent upon our final product mix, which is heavily weighted to our PX and our ability to execute on our remaining sales as planned in Q4. We now expect OpEx to end the year at roughly $68 million to $69 million.

There are no real surprises here year-to-date and we remain focused on prudently managing our expenses as we grow. Our current cash and investment balance grew to $106 million, primarily owing to robust customer collections as we concentrate on enhancing our inventory turns and supporting business-critical capital investments.

We anticipate concluding the year with a cash and investment balance ranging between $110 million to $120 million. Where we land within this range largely hinges on the timing of customer receipts in the fourth quarter. Now that we've established that 2023 is going well and as planned, let's move to 2024 and beyond in our Water business.

As of today, we already have line of sight to roughly 80% of our $200 million desalination target for 2026.

In addition, our wastewater business, owing to our expanded product line and sales team, continues to surprise to the upside as our pipeline strengthens and evolves, the interest and participation in our webinars grow, and early-stage signs in regions outside of Asia, and in industries such as municipal wastewater, begin to show promise.

This gives us confidence that we can achieve at least the lower end of our $30-70 million target for 2026.

Clearly, a pipeline three years out has inherent risk but, as we have discussed in prior earnings calls, our visibility into our mega project space, as well as the overall water scarcity story, is what drives our long-term confidence in this business despite short-term fluctuations due to the day-to-day challenges of operating in emerging markets, or the nearer-term trends in the macro-economic environment.

The inflationary pressures of the past couple of years, coupled with a relatively strong dollar, and higher interest rates, are beginning to increase the cost of producing water. We are seeing cost increases per cubic meter of water as high as 40%, and interest rates have increased from 1% to 2% in 2020 to 4-6% today for a high-quality developer.

If we look back, costs to desalinate water have fallen dramatically in the past decade or so, from a few dollars per cubic meter to under $0.50 in some regions of the world, such as in the Middle East.

The mindset of the industry has been to continually drive down costs, construct larger and larger desalination plants, making desalination more affordable each year. As you well know, this is one reason why our pressure exchanger solution is so strong in this market. However, this shift in costs has created a new dynamic in the industry.

We are now seeing some projects being delayed due to the rising costs to produce water, as well as the challenges of end users reaching financial closure in a higher interest rate environment. In today’s macro environment, water tariff expectations between large scale developers, EPCs, and end users are misaligned.

While we do not believe these dynamics will permanently alter the trajectory of the desalination market, they will likely slow our rate of growth in the near term, especially in more susceptible emerging markets.

For 2024, we now expect modest revenue growth for desalination in the range of $128 to $135 million, implying flat desalination revenue to 5% for next year based on this year’s expectations.

This slowdown is entirely due to our mega project space, which we now expect will flatten next year, and possibly even fall by a few percentage points, compared to 2023.

While we see shifts every year in projects, we are now seeing significant projects shifting out from 2024 to 2025 or beyond in countries such as Egypt and India, which have been hard hit by inflation, growing interest rates and weakened currencies. We are also seeing delays in the release of tenders of over $7 million in Saudi Arabia.

These shifts alone account for more than 15% growth in 2024. One very positive development in desalination comes from our new PX Q400, which is the highest performing energy recovery device available on the market. The Q400 could exceed 20%, or more in 2024.

The Q400’s increased efficiency and capacity is resonating with customers, and we believe it could make up the majority of our mega project desalination sales by 2025, essentially supplanting the PX Q300 in large-scale desalination projects. This adoption further strengthens our position in the market vis-à-vis our competitors.

Where we sit today, we believe the market has the potential to regain its double-digit growth trajectory in 2025, where we could return to growth in the low to mid-teens, with further accelerated growth by 2026 to the high teens or even up to 20%. As 2024 progresses, we will get more clarity on where 2025 could head and will update you accordingly.

Our wastewater business continues to show real strength and we are guiding $12 million to $15 million in revenue in 2024, which will mean we have the potential to once again roughly double our revenue in this segment from this year.

Our greatest opportunity, and risk, next year are two mega-sized municipal wastewater projects that total roughly $4 million. These two projects show that our strategy to diversify into the broader water treatment space is working, but any delays could have an outsized effect on next year’s wastewater performance.

If we can achieve this growth next year, we will be well on our path to achieving our targeted range for 2026. So, you can see, regardless of the short-term headwinds we see in desalination, our Water business remains robust. Overall, we expect to achieve $140 million to $150 million in Water revenue next year.

Although we have short-term challenges in our desalination mega project channel, we believe we remain on the path to achieve at least the lower end of our $230 million to $270 million targets for our Water business by end of 2026.

We are looking at how we can invest in wastewater to potentially accelerate areas of the world outside of China and India. In addition, we are examining our desalination OEM and aftermarket channels for opportunities to increase sales and reduce our reliance on mega projects to achieve these growth targets.

Where we sit today, we believe our Water gross margin for 2024 should fall within the range of 64%, 67%. We will tighten this up early next year.

Our CO2 gross margin will largely depend on how we achieve sales, meaning whether by direct PX G1300 sales or by a skid solution, and could show losses in 2024, as we grow into the profitability of our brownfield market product. I will have to advise you on this further as our sales mix becomes clearer.

I am currently forecasting OPEX to remain at 50% to 54% of revenue in 2024, excluding any one-time effects of the CEO transition. Most investments will occur in sales and marketing, and any other growth to G&A and R&D would be largely inflation related.

I will be in a better position to detail our OPEX at our year-end call in February after David has had a chance to dig in. Note that, due to slowing growth in revenue, somewhat weaker water gross margin and growing sales and marketing spend, we could see a softening of operating margin next year.

We are currently anticipating an acceleration of growth again in 2025, and therefore believe this softening will be temporary. Our goal to fall below 40% of revenue by 2026 remains achievable. To summarize, I believe, despite what our share price may be saying, the sky is not falling at Energy Recovery.

We see some headwinds in desalination in the short-term, but nothing we haven’t seen before, and our overall water business remains robust.

While our acceleration in CO2 has started slower than we would like, we are making real and tangible progress, which should put us on our growth curve by 2025, if we successfully deliver on next year’s installations. Now with that, let’s move to Q&A..

Thank you. At this time, we will be conducting a question-and-answer session [Operator Instructions] Our first question comes from the line of Pavel Molchanov with Raymond James. Please proceed with your question..

All right. Thanks for taking my questions. You threw out a lot of guidance numbers. So I want to make sure we get them accurately.

For total water revenue in 2024, you said between $140 million and $150 million with wastewater being a bit more than $10 million, is that right?.

Correct. Yeah. $140 million to $150 million total water and hey Pavel, this is Josh and wastewater between $12 million and $15 million..

Got it.

And because CO2 is so nascent, you're not giving any explicit target for next year?.

Yeah. In 50 locations, while it's a considerable step forward in building that foundation for growth. From an actual revenue perspective we're not talking about huge dollars, right? So, that would certainly be in the single-digit millions, so it's not going to be super weighted in our P&L. We'll have more visibility next quarter.

Every quarter we're going to update you kind of on where we're headed with that, because it's going to be changing all year right as we progress..

Right. And the sequencing of revenue recognition in past years you sometimes had a barbell shape.

Sometimes it's more back-end loaded or even front-end loaded what should 2024 look like?.

Yeah. Thank you for asking, because I realized after recorded that I haven't put that in there for you guys. It's going to be very much like this year actually, Pavel. So it's going to be heavily weighted to the second half of the year. And the first half is going to look a lot like this year from an absolute revenue perspective.

So I would roughly add $10 million to $15 million in the first quarter, $20 million to $25 million for the second quarter and then we'll update you on the second half of the year, but it's going to be heavily weighted. And of course CO2 will be the wildcard for the year, but that will be also weighted more to the second half of the year, I'm sure..

Okay. You mentioned, over $100 million of cash on the balance sheet. Needless to say, the stock has been cut in half from its highs.

How are you thinking about maybe this is a question for the new CEO? But how is the Board thinking about share buyback at these prices?.

Yeah. I can start. I mean we certainly talk about this every quarter and so this is something that we review every time we meet with the Board. So it is at the top of our mind.

We need to make some decisions about first of all where is CO2 going next year? How fast we're getting on that curve? And then, how we want to invest, before we make any decisions on any major buybacks, but it's certainly something we discuss regularly with the Board..

Okay.

Last question from my end is there a timetable for a permanent CEO to be named?.

Hi. This is Pam Tondreau. We hope to have the new CEO in place, by the first of the year or so, perhaps first quarter we are interviewing candidates right now..

All right. We will look forward to that. Thanks very much..

Thanks, Pavel..

Thanks, Pavel..

Our next question comes from the line of Ryan Pfingst with B. Riley. Please proceed with your question..

Yes. Hey, good afternoon guys..

Hey, Ryan..

Josh you were just talking about how next year you expect revenue to be heavily weighted to the second half once again.

Is that something you expect to continue to be the typical seasonality going forward as it's now going to be a few years where we see the second half comprised most of the revenue here?.

I don't think so. We do tend to have slightly higher Q4, I guess, on average probably but these two years are a little unique at least in my five-plus years here and as I look in past. So, I wouldn't call out seasonality yet. If it happens again in 2025 I might change my mind Ryan. But for now I would expect this to be just 2024..

Okay. That's helpful.

And then for desalination, can you just help us reconcile the 80% line of sight that you have to the 2026 target with the delays you're seeing in the near term maybe just provide a little bit more color about the delays and how or when you'd expect those to abate to give you confidence in that 80% number for 2026?.

Yes. Yes. Most of the delays are pushing and I've got -- I'm staring at a list in front of me it's over $30 million of delays that we saw for 2024. Now we always see shifts in projects. So I wouldn't say all of these are abnormal by any means. But they are mostly shifting to 2025 and 2026.

We have a couple projects shifting to 2027, but the vast bulk of them are moving to 2025 and 2026. And as you review really in the industry data is saying the same they're really expecting these upticks back in 2025 and 2026 barring any major macroeconomic headwinds.

So if you go from where we're at in desal and assume that teens and high teens up to 20% kind of range it's going to get you up to that $180 million $190 million-ish range of revenue by 2020 -- at the end of 2026.

And frankly, we can see that 80% I talked about in the script is really based on what we see in our mega project space and within the pipeline as you know that we see quite far out with -- so -- and then assumptions on our smaller project space and aftermarket. So we have -- where we sit today some real comfort in that.

Now granted the macro economy can play with us the time like we're seeing next year. But if things revert back to normal and start to normalize I think we should see that uptick..

Got it. Thanks for that. And then I'll just sneak one more in and stick with water. For the geographical breakdown in Middle East and North Africa obviously have comprised the majority of revenue in recent years.

Could you just talk about going forward how much of the overall revenue or maybe just how much of the growth is expected to be driven by markets outside the Middle East?.

Yes. When you look out to 2024, it's actually not the Middle East. We're seeing a slowdown in the Middle East in 2024 and we're seeing other areas especially Asia and South America make up that difference.

As we look further out though the Middle East is going to be -- it's a little lumpy, because we have some large projects for example like Neom, in Saudi that we're going to see fall into these upcoming years and some other countries as well.

So it's a little lumpy but we still see some strong demand in the Middle East and also importantly because we're still going through this transition from thermal desalination plants to reverse osmosis desal plants and we still have a pretty big pipeline of that to come forward in the coming years and we expect that to occur as well.

So it's going to be a little bit lumpy but we are seeing a shift to other regions of the world most certainly next year although I think the Middle East will still pop back up pretty strong in '25 or '26.

Is that helpful?.

Yes, super helpful. Thanks for the answers. I’ll turn it back..

[Operator Instructions] Our next question comes from the line of Pavel Oliva [ph] who is a Private Investor. Please proceed with your questions..

Hi, good afternoon. First of all, thank you very much for a lot more clarity and transparency that you have provided on this call. My question is more on the CO2 market and the other adjacent verticals that you guys have.

Can you kind of give us a better sense of what the regulations are and how required? Is it to for the refrigeration and potentially HVAC to switch to CO2? And maybe if you can also comment, given the price increases in energy how have the economics changed? Just to so we can compare how economic it is for the industry to switch into these new technologies given how economical it was for the water to switch into reverse osmosis and using our PX exchangers? And then I have a second question and that's your cash has increased and you have purchased stock repurchase stock higher than this and if there is a specific reason why you wouldn't do it now.

Thank you..

Paul, I'll start with the easier one and then I'll hand it over to David for the other question. On the buyback again it's something we're certainly discussing. So I'm not saying it's off the table Pavel, but it's -- we need to make some decisions for next year. There's been a lot of changes here recently.

And we'll certainly be returning to those discussions with the Board. But clearly if we have extra cash we're not going to use then we ought to give it back right? So that's something we'll be reviewing regularly. We're always looking for the best returns for investments and for our shareholders and that's when we look at as well.

And for the CO2 question I'll hand it over to David..

Yes. This is David Moon. Just on the regulatory environment. So as you would know in Europe F-gas regulation, which was passed by the EU has been in place now for a number of years. And so the ultimate goal for F-gas is to reduce traditional refrigerant HFCs reduced them by 80% from their 2014 base levels. And that transition is well underway.

And so in Europe, we've got roughly 60,000 CO2, installations already adding 10,000 every year. And so as you would know not only is CO2, a much more ozone-friendly, much more environmentally friendly refrigerant that's also a much more efficient refrigerant. And so we're getting help by regulation in the EU. We have been getting help in the EU.

And now that it's an established technology it's -- we're no longer having to push. There's a lot of pull already. And so where we come in as energy prices rise in Europe and as heat continues to get hotter this is where our PX G comes in, because we are best when refrigeration systems are working their hardest.

And they work their hardest when it's hot outside. And so what the PX G does is it improves energy efficiency heat transfer. And so this is a perfect application at the right time for our PX G and it's a minimal cost. And the payback is a very good story.

And so the brownfield market in Europe is what we -- that's our near-term opportunity and that's what we're really working hard on. In the US, it's a bit of a different story. So the transition from HFC to CO2 has really just started. And so the EPA just passed some final rulemaking last month.

And the target in the US will be a 70% reduction in HFCs by 2029. So the curve is steeper getting started later but the curve is steeper. And so what -- there's roughly 1,500 CO2 installations in the US today and that's going to increase dramatically by 2029. And so the opportunity for us is going to be greenfield.

And by the way, it continues to get hotter in the US more days that are above a certain ambient temperature where again PX G is perfectly suited for. So the timing of regulatory action the fact that the planet gets hotter it plays right into our PX G story and a really, really good payback story.

And so more to comment, I get a chance to deep dive into the CO2 story in our strategy, but we've got a very, very good start..

So to summarize it sounds like this is not a luxury type of a thing for these companies.

This is an absolute necessity because there will be some kind of penalties if they do not decrease their emissions?.

Yeah. The bottom line is HFCs will just will not be available over the course of the next six to seven years. And where they are available the price will be astronomical. That's what's happened in the European market.

And so it forces large supermarkets, large cold storage facilities food processors to completely rethink their refrigeration infrastructure. And that's what's already happened in the US, in Europe. And so it's going to play out the same in Europe.

And so for Europe it's our opportunity that there's a brownfield market already and it continues to get hotter. In the US, it's going to be the greenfield opportunity. And by the way it continues to get hotter. And this plays into the strength of the PX. And we're early days in our margin into the CO2 refrigeration market.

But we are already winning industry awards. We're getting a lot of talk and we'll have a solid 50 -- at least 50 installations next year with the premier retailers in Europe and US and it's just a jumping off point into 2025 and 2026..

Right. So if I may one more. In terms of reliability that’s huge consideration when you have a freezer full of goods, right? You have been testing of the PX Exchanger in the CO2 market for a while now.

When do you think the industry and the individual players feel comfortable with the data that they can pull the trigger for a, sort of, a general application across the whole chain and also use it sort of for their competitive advantage in marketing?.

So that's a good question. So just to be mindful that this is a very conservative industry. It's an industry that had billions of dollars of assets tied up in traditional refrigerants. And so it's a very cautious industry.

You have to do your work upfront and testing which leads to another round of even increased sites before you get to a point where retailers are satisfied and ready to go and feel comfortable moving from one technology to the other. The fact is that we're already -- we've completed Step 1.

And so Step 2 is 50 locations across Europe at least 50 locations across Europe and the US next year. And from there given who we're targeting and who we've got commitments from for new locations for next year this is a next really good jumping point to get into what will be more rapid commercialization in 2025 and 2026.

And just remember that the opportunity in the US is further down the road it's Greenfield, the opportunity in Europe is going to be brownfield or retrofit. So we provided guidance. We provided guidance on CO2 in the range of $100 million to $300 million by 2026.

And so from the work that we've done thus far and detail that I've been able to do, I can see a path for us getting to $100 million by 2026. I think we have the opportunity and the potential to do that as long as we continue to deliver the step-by-step process for this industry.

I believe that the $200 million to $300 million sort of top end of the range is going to exist. The question is going to be what is it going to take for us to be able to get there and how fast that we can do it. And the answer is at this point is I don't know. I've been in the seat for a couple of weeks.

And so I need time to work with this excellent management team to further explore the strategy as it sits and how we work to get from point A to point B by 2026..

Our next question comes from the line of Larry McCullough who's a private investor. Please proceed with your question..

Thank you very much for taking my question. And I have two questions actually. One in reference to the buybacks, I know it's been discussed already. But Josh, you said something in reference to you're not sure how much money you're going to be spending on the CO2 thereafter.

And just wondering if you can take that much cash flow, you have $106 million in the bank right now or cash equivalents.

Do you foresee that you're going to really have to hold on to that much cash, maybe just buying back a few million shares wouldn't make that huge of the dent in the cash holdings?.

Yeah. Well, we'll see. I mean, we're talking about inventory builds which takes a lot of cash. We're talking about building new capacity which takes a lot of cash.

And more importantly, as David was describing the European market and as we kind of vet out what it will take to truly conquer that market, those are the questions that are at least top of my mind in terms of how we use cash.

I'm not suggesting this will take us a year to figure out but it's something that I think together with the Board we're in budgeting season. These are things that we need to dive into and make to move on before we start making decisions around our cash for next year..

Okay. My second question is as you mentioned you had great numbers for the quarter. Congratulations on that. So glad to hear that. And you also acknowledged that the stock being down so much. It seems that the stock's reaction was due to a lack of communication by management especially with the CEO transition.

I'm sure maybe that's been brought to your attention.

But what do you have to do in the future, what do you plan to do in the future maybe to communicate on such major events going forward?.

Hi. This is Pam Tondreau. So we apologize for any worry that's caused everybody. The topic of CEO succession had been on the Board's mind for a year. We had already engaged the head hunter but this is not the type of thing that gets discussed until it happens unfortunately. We feel good about where we are the company.

We feel good about having David Moon able to step in as interim CEO and we ask you to stick with us. And let us show you that we know what we're doing here..

I appreciate that, but also other companies when they start to go into CEO transitions, they do bring that up on calls or maybe if you could have just brought it up in today's call, but it's just this lack of communication. People were just thinking the worse obviously because their stock is down over 50%. So I appreciate your response..

Thank you..

[Operator Instructions] And our next question comes from the line of Wally Walker with Hana Road Capital. Please proceed with your question..

Yes. Good afternoon. Thanks for taking my questions. First of all Pam and David, thanks for your expressing your confidence in the underlying business and a follow-up on the previous question or comments. Stating that in last week's release, would have gone a long way to new rate the uncertainty that was created and evisceration of stock price.

So I also appreciate the apology and perhaps lesson learned.

Josh, a question for you on the guidance more near term the Q4, so I'm trying to make sure, I correctly understand what you said about the deliveries risk and potential for delay, if the ones that you detailed, the potential delayed deliveries actually all get delayed, my math still shows a record quarter for the company of all time.

And the guidance on the margins you prescribed, would be a very profitable quarter also even with that delay and also add to your cash balance. So long question.

but am I thinking about that or hearing that correctly?.

Yes. No, I appreciate that, Wally. You're exactly, right actually because I cited about $19 million. If you do the math, we're at $60 million plus that's remaining for Q4.

And you're right, we would still -- we should still -- even with that if those were to move out have a record quarter a record quarter, if I remember right about $42 million last year, we should still beat that regardless. So yes, it would still be an outstanding quarter. Absolutely, from a profit and a revenue perspective, no doubt..

And within the scope of your margin profile as well, even with the potential delays?.

Yes. But we fall back into -- we wouldn't exceed that guidance, which is what I'm citing now if everything goes out that 65% to 67%, we'd fall back within that guidance. We still within the guidance though. We wouldn't exceed it if -- because all -- those shipments were all very pressure exchanger heavy, which are higher margin.

So we would naturally see it, come down a little bit, but we would still -- we should still be within guidance regardless..

Yeah. Okay. All right. Thank you. Good luck.

You bet. Thanks, Wally..

And this concludes this -- We've reached the end of the question-and-answer session. I'll now turn the call back over to Jim Siccardi for closing remarks..

Thank you everyone, for joining us this evening. We look forward to talking to you in the near future. Have a great evening..

Good bye..

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation..