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WTR Insights Conference Takeaways: Energy Transition and Sustainable Investing · WTR Small-Cap Spotlight

• 0:00
  SPEAKER_01: Welcome to the WTR Small Cap Spotlight Podcast.
• 0:04
  SPEAKER_01: I'm your host, Tim Gerteman, Vice Chair and Co-Founder and Chief Marketing Officer of Water Tower Research.
• 0:11
  SPEAKER_01: Welcome to the WTR Analyst Perspectives Podcast.
• 0:14
  SPEAKER_01: I'm your host, Tim Gerteman, co-founder of Watertower Research.
• 0:18
  SPEAKER_01: In today's Analyst Perspectives episode, I'm joined by my colleague Peter Gastreich, Managing Director of Energy Transition and Sustainable Investing at Watertower Research.
• 0:28
  SPEAKER_01: We will discuss feedback from Peter's conversations with CEOs and management teams of the Energy Transition and Sustainable Investing Companies that presented at the WTR Insights Conference.
• 0:39
  SPEAKER_01: Good morning, Peter, and thank you for joining me.
• 0:42
  SPEAKER_01: Morning, Tim.
• 0:43
  SPEAKER_01: Looking forward to our chat today.
• 0:45
  SPEAKER_01: Likewise.
• 0:46
  SPEAKER_01: Peter, for listeners who could not attend, set the scene for us.
• 0:49
  SPEAKER_01: You hosted fireside chats with the leadership teams of eight companies under your coverage.
• 0:54
  SPEAKER_01: Who did we hear from?
• 0:55
  SPEAKER_01: Why is a conference like this so constructive for investors, et cetera?
• 0:59
  SPEAKER_00: Yeah, that's right, Tim.
• 1:00
  SPEAKER_00: So eight companies across the space, across energy transition and sustainable investing, and it's a pretty diverse group.
• 1:07
  SPEAKER_00: In renewable fuels and carbon management, we had Givo.
• 1:10
  SPEAKER_00: In Ways to Value, we had Aduro Clean Technologies and Comstock.
• 1:15
  SPEAKER_00: In Clean Tech, we had the CEOs of ClearSign Technologies and Nauticous Robotics and Environmental Solutions, ARC and Ingevity.
• 1:24
  SPEAKER_00: And finally, we have the metallurgical coal producer of Clinch Resources.
• 1:29
  SPEAKER_00: What makes the conference useful is the format.
• 1:32
  SPEAKER_00: You know, if you have a typical earnings call, management kind of walks you through the quarter.
• 1:38
  SPEAKER_00: In a fireside chat with WTR, you kind of step back and you can talk about strategy, the market, and really kind of what's changing.
• 1:45
  SPEAKER_00: And when you hear eight very different businesses and CEOs kind of back to back here, there's a few common threads that started to emerge, even though each of these companies is solving a very different problem.
• 1:56
  SPEAKER_00: So we'll summarize that and unpack those for you today, Tim.
• 2:00
  SPEAKER_01: That's great.
• 2:01
  SPEAKER_01: So if you had to boil down the conference to a couple big themes and takeaways, what would those be, Peter?
• 2:08
  SPEAKER_00: Probably the first would be that, you know, compliance, not necessarily carbon, is the demand engine for almost all these companies.
• 2:16
  SPEAKER_00: Much of the demand comes from enforceable rules and deadlines that customers cannot wait out.
• 2:22
  SPEAKER_00: The second one would be security of supply.
• 2:25
  SPEAKER_00: So critical minerals, defense, and domestically produced fuels came up again and again.
• 2:31
  SPEAKER_00: Energy independence was a talking point, I think, in almost every one of these sessions.
• 2:35
  SPEAKER_00: And third, uh, you know, tight markets reward whoever can deliver, uh, whether it's activated carbon, met coal, carbon removal, carbon removal credits, uh, solar panel recycling, um, all of these are short of the proven capacity.
• 2:50
  SPEAKER_00: Uh, and Europe's 2030 deadline is setting up the same sort of squeeze when we talk about recycled plastics.
• 2:56
  SPEAKER_00: Uh, fourth, you have promise to proof.
• 2:59
  SPEAKER_00: So almost every management team was talking about plants uh running, uh pilots getting longer, and first reference sites uh you know starting up.
• 3:08
  SPEAKER_00: And fifth, uh, capital light for customers and shareholders alike.
• 3:12
  SPEAKER_00: The winning solutions tend to drop into equipment the customers already own.
• 3:17
  SPEAKER_00: And the companies themselves are leaning on licensing, uh partners, and customer funding whenever they can.
• 3:24
  SPEAKER_01: Great.
• 3:25
  SPEAKER_01: Thanks for that overview, Peter.
• 3:26
  SPEAKER_01: Uh, what do you think would surprise investors most about these conversations and what might they be missing?
• 3:33
  SPEAKER_00: Um, I think uh a lot of investors would be surprised by just how you know varied and diverse these conversations were, uh, even though they're all kind of within the same sector.
• 3:42
  SPEAKER_00: Uh, you know, we covered clean air, clean water, steel, uh, defense, uh, energy security, and domestic supply.
• 3:49
  SPEAKER_00: We also talked about recycling, uh, critical minerals, uh, road building, aviation fuel, underwater robotics, uh, and even uh data centers.
• 3:59
  SPEAKER_00: What investors should really get a sense for is what really moves these businesses, isn't a customer's problem, uh, not always necessarily the macro theme.
• 4:08
  SPEAKER_00: So think about who's on the other side of the table as customers for these companies.
• 4:12
  SPEAKER_00: You have water utilities, refiners, solar farm owners, automakers, uh, steelmakers, airlines, chemical companies, and defense customers.
• 4:23
  SPEAKER_00: Each of these has a specific problem and a budget to solve it, and that's what drives demand for these companies.
• 4:29
  SPEAKER_00: So that diversity really matters.
• 4:31
  SPEAKER_00: It means these stories are not necessarily all tied to the same policy debate.
• 4:36
  SPEAKER_00: They're not centered on carbon policy, they're all not centered on the same market cycle.
• 4:41
  SPEAKER_00: Uh, the diversity here really matters.
• 4:44
  SPEAKER_01: Yeah, that's a huge array of the end markets you just mentioned, which I love.
• 4:48
  SPEAKER_01: So, Peter, I know you pulled a few memorable lines from the sessions.
• 4:51
  SPEAKER_01: Which one stuck with you?
• 4:54
  SPEAKER_00: Uh, that's right.
• 4:54
  SPEAKER_00: So I went back uh you know through our management series reports and the transcripts from the conference, and quite a few lines kind of stood out.
• 5:02
  SPEAKER_00: Uh, they also pair up nicely.
• 5:04
  SPEAKER_00: Um, so let me reference a few of those for you here, Tim.
• 5:07
  SPEAKER_00: So uh two of these were about meeting the rules uh without a big capital bill.
• 5:11
  SPEAKER_00: Um, as Bob Rasmus at Arc put it, uh these this the business is not GAC, the business is PFAS Remediation.
• 5:19
  SPEAKER_00: And Jim Deller at ClearSign used a kitchen analogy.
• 5:23
  SPEAKER_00: It'd be much easier if you didn't make the mess in the first place.
• 5:26
  SPEAKER_00: Uh both are saying that there's a smarter way to comply than building expensive new treatment or cleanup systems, and that's good news for the company uh and its customers alike.
• 5:36
  SPEAKER_00: Uh, two were about strategic importance.
• 5:39
  SPEAKER_00: In uh Bobby Geller's words at Clinch, he said we've gone from being targeted to being protected.
• 5:46
  SPEAKER_00: And John Gibson at Nauticus said, uh, we don't want to serve the Middle East from Houston, we want to serve the Middle East from the Middle East.
• 5:54
  SPEAKER_00: So these are very different businesses, but the same idea.
• 5:57
  SPEAKER_00: Uh governments now see these capabilities as strategic, whether it's met coal on the critical minerals list or sub-sea robotics in the Middle East, and they're willing to back the companies that uh provide them.
• 6:09
  SPEAKER_00: Uh two more were about uh technology edge.
• 6:12
  SPEAKER_00: So as Ofer Vicus at Eduro put it, uh hydrocarbon processing is basically addicted to hydrogen.
• 6:19
  SPEAKER_00: Uh, and David Lee at Ingevity said of its first PFAS contract, we're winning because of technology, not because we were the lowest price bidder.
• 6:27
  SPEAKER_00: In both cases, the advantage is a process or product that performs better, you know, not a lower price.
• 6:33
  SPEAKER_00: Uh and two, we're about delivering.
• 6:35
  SPEAKER_00: Uh, Corrado D.
• 6:36
  SPEAKER_00: Gasparos at Comstock Incorporated uh talked about moving from uh quote, moving from uh guiding or promising to delivering.
• 6:45
  SPEAKER_00: Uh and in Paul Bloom's words at Gibo, uh he said, we're building a platform that monetizes the carbon and maximizes the incentives.
• 6:53
  SPEAKER_00: Uh one has its first industrial plant running around the clock, uh, and the other is already turning uh capture carbon into earnings and wants to replicate and grow that model.
• 7:02
  SPEAKER_00: So if I wanted to pull all these together in a nutshell, what you have is really solve a mandated problem, do it with less capital, and prove that it works.
• 7:11
  SPEAKER_01: Let's balance that out, Peter.
• 7:12
  SPEAKER_01: What should investors keep in mind as these stories play out?
• 7:17
  SPEAKER_00: Uh I'd say that's uh mostly centered around uh timing while the direction itself holds.
• 7:22
  SPEAKER_00: Uh, I'd also say this is generally true of small caps in the space and not exclusive to this uh you know set of companies.
• 7:29
  SPEAKER_00: Uh new technology typically takes longer to scale than people expect.
• 7:34
  SPEAKER_00: And it's not just a mechanical consideration.
• 7:37
  SPEAKER_00: Why is that?
• 7:38
  SPEAKER_00: Well, first, industrial customers are sometimes cautious.
• 7:41
  SPEAKER_00: They want to see proof.
• 7:42
  SPEAKER_00: So going from trial to a big order takes time.
• 7:45
  SPEAKER_00: Uh, second, smaller companies depend more on the capital market, so funding conditions really matter.
• 7:51
  SPEAKER_00: And third, regulation rarely moves in a straight line.
• 7:54
  SPEAKER_00: Uh, rules get delayed, uh, revised, or challenged in court, even when that direction seems to be rather clear.
• 8:01
  SPEAKER_00: So I'd say again, the direction is clear.
• 8:04
  SPEAKER_00: The themes are durable.
• 8:05
  SPEAKER_00: Uh, these companies are solving critical problems for the customers, but investors should really expect that this path is not, it can be lumpy.
• 8:14
  SPEAKER_01: So finally, between now and the next time we catch up, Peter, what are you monitoring to confirm or challenge these themes or theses?
• 8:22
  SPEAKER_00: Uh well, there's three things.
• 8:24
  SPEAKER_00: Uh, first, new projects uh turning into repeat business.
• 8:28
  SPEAKER_00: Um, a lot of what we heard about is moving from first installations to follow-on orders.
• 8:33
  SPEAKER_00: And that's the first step I'll be watching uh closely.
• 8:36
  SPEAKER_00: Uh second is whether the rules and deadlines hold the schedule because so much about the demand depends on them.
• 8:42
  SPEAKER_00: Uh, and third, you know, customers, governments putting real money behind these solutions, whether that's contracts, off-take agreements, or funding programs.
• 8:51
  SPEAKER_00: Uh, if these are moving in the right direction, the themes we talked about today will uh accelerate.
• 8:56
  SPEAKER_01: So as we wrap up, is there anything we missed today or any final thoughts you'd like to leave with our listeners?
• 9:03
  SPEAKER_00: Yeah, thanks, Tim.
• 9:04
  SPEAKER_00: So I just conclude by saying that these are smaller companies that have solutions for some of the world's biggest challenges.
• 9:13
  SPEAKER_00: So the potential can be enormous for them.
• 9:16
  SPEAKER_00: Um, I'd encourage investors to check out what management had to say at the conference, and all eight sessions are available on demand.
• 9:23
  SPEAKER_01: Thank you for joining us today, Peter, as always.
• 9:25
  SPEAKER_01: And for our listeners, be sure to check out Peter's management series from the WTR Insights Conference at watertowerresearch.com.
• 9:33
  SPEAKER_01: Thank you for listening, and don't forget to subscribe, as well as visiting www.watertowerresearch.com to stay up to speed on the company's small cap written research reports, podcasts, fireside chats, industry specific symposiums, and conference schedules.
• 9:49
  SPEAKER_01: We will see you next time for another edition of the WTR Small Cap Spotlight Podcast.
• 9:54
  SPEAKER_01: Finally, a special thanks to the producer and editor of the podcast, Krista Fitzpatrick.