Q4 2024 Energy Recovery Inc Earnings Call

Speaker Change: Good day, ladies and gentlemen, and welcome to Energy Recovery's fourth quarter and full year 2024 earnings call.

Speaker Change: During today's call, Energy Recovery may make projections and other forward-looking statements on their safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995 regarding future events or the future financial performance of the company.

Speaker Change: These statements may discuss our business, economic, and market outlook growth and expectations, new products and their performance, cost structure, and business strategy.

Speaker Change: Forward-looking statements are based on information currently available to the company and on management's beliefs, assumptions, estimates, and projections. Forward-looking statements are not guarantees of future performance and are subject to certain risk, uncertainties, and other factors.

Speaker Change: We refer you to documents and company files from time to time with the SEC, specifically the company's annual Form 10-K and quarterly Form 10-Q.

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

Speaker Change: All statements made during this call are made only as of today, February 26, 2025, 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.

Speaker Change: Our hosts for today's call are David Moon, President and Chief Executive Officer of Energy Recovery, and Mike Mancini, Chief Financial Officer. I would now like to turn the call over to Mr. Mancini.

Speaker Change: Thank you and good afternoon. Beginning today, Energy Recovery is making a change to the format of our earnings conference calls.

Speaker Change: In advance of the call, we will now release a detailed letter to shareholders to review business and financial performance and provide any company updates.

Speaker Change: We will then use the live conference call to focus on Q&A. This change is in response to stakeholder feedback and we believe it will be a more efficient way for management to provide a thorough update on the business.

Speaker Change: Earlier today we released our first letter to shareholders on the investor relations portion of our website. I encourage you all to read it in full.

Speaker Change: With that, we will now move to the question and answer portion of our conference call. Operator, please open the line for questions.

Speaker Change: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. Confirmation tone will indicate your line is in the question queue. You may press star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment while we poll for questions.

Speaker Change: And our first question comes from Jeffrey Campbell with Seaport Reap Search Partners. Please proceed with your question.

Good evening and congratulations on the strong fourth quarter result.

Great job. Thanks.

Thank you.

Speaker Change: You didn't say I'm restricted to two questions, so I'll be a little hoggy and I'll ask three.

Speaker Change: You mentioned a case study and how the PX reduced cost at a nanofiltration based liquid extraction facility in China. I was curious what other commercial applications this result might validate?

So, so...

Speaker Change: Potentially four of our other verticals that we're focusing on in wastewater. So one would be mining applications where water reuse or water use there is important. Second would be heavy manufacturing.

Third would be chemical manufacturing.

Speaker Change: and hopefully would be textile manufacturing. So anywhere there are large solids or solids streaming through the system, this product is applicable.

Thank you.

Speaker Change: Well, you just mentioned, just to follow that up, an interesting point. I mean, typically when we...

Speaker Change: When I think about the benefits of the pressure exchange, the first order of business is saving energy. And then with regard to the CO2 systems, there's also reduced water use in the high pressure.

Speaker Change: Transcritical part. That's right. You mentioned water here too, so how is water use or more efficient use of water coming up in the mining application and heavy manufacturing? Yeah, so

So I'm speaking more to cleaning up the

Speaker Change: The stream of, you know, it's a mixture of solids and whatever stream that they're trying to clean up on site.

and what's making up the...

the fluid. So I was speaking in terms of water

Speaker Change: as making part of the fluid that needs to be treated on these sides. Okay, that's helpful. I was just wondering in your guidance you have talked, your guided for further growth margin improvement in 2025?

Speaker Change: I think there was some mention of OPEX and also the manufacturing transformation going better than expected. I just wanted to ask you if you could just sort of

Speaker Change: elaborate the specific drivers of that growth margin improvement that, you know, that you feel most confident in for 2025.

This is Mike, thanks for the question.

Speaker Change: Hey look, I think the key drivers of the manufacturing transformation that we've seen already start to flow through the factory and we expect in 2025 is a lot of the deficiency. I think we, you know, the way that this company has scaled manufacturing in the past.

Speaker Change: has been to take the process we did when we were a smaller company and start to stack it. And so we're seeing a lot of opportunities for optimization along every step of the process, how the kiln is stacked.

what the cycle time is.

Speaker Change: how many billets we can press with our ISO presses. Sort of every step along the way has an opportunity for some efficiency.

Speaker Change: And so our manufacturing transformation plan is really just laying out all of those steps in the process and going and talking to each one. And so we see a continuous improvement throughout the year of costs for the Q400 and Q300s as well as others.

Okay, and the last one, I'll ask a CO2 question.

Speaker Change: You mentioned in the shareholder remarks seeing increased activity from customers outside of the core focus areas.

Speaker Change: First, are these areas with hotter climates that would benefit from the PXG, and not meaning in any way to be pejorative, why were they previously not targeted and how did they learn about the PXG?

Thank you.

Speaker Change: Yeah, so it's so it's a good question. So there are two areas.

Speaker Change: outside of Europe and the U.S. where we're seeing some interest in the PXG. One is Japan.

Speaker Change: So, a very established CO2 market, and they learned about us through trade shows.

Speaker Change: Company. This specific OEM learned about us through trade shows, continue to follow up with us.

Speaker Change: We did a test site with them last year, we're doing a second site with them now, and actually I think today we just got our first order from them.

Speaker Change: for additional sites and so our first official order. So that's Japan and so we'd like so we'll be doing more tests

Speaker Change: test sites over the course of the summer. They want to get another summer under their belts and we like the way this is headed. And then the second area is South Africa.

It's just now starting, sort of, to see a picture.

Speaker Change: and there's a large there's a large supermarket chain in South Africa called Macro.

Speaker Change: And they learned of us as well through trade shows. We're working with a specific consultant that's based in...

Speaker Change: South Africa that had talked to the supermarket about our technology.

Speaker Change: And so we're looking, we're working with them now on setting, finding a site, a test site for this year, for this summer, for Southampton. So those are the two other areas that, you know, could be really interesting for us as we progress through the year.

Okay, great. That's great, Collard. Thank you very much.

You're welcome.

Speaker Change: Thank you. As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. That's star 1.

Ryan Finkst: And our next question comes from Ryan Finkst with BeRightly Securities. Please proceed with your question.

Hey guys, thanks for taking my questions and for posting.

The shareholder letter.

Ryan Finkst: I guess just to start, for the additional buyback of $30 million, was it just a combination of the early progress on costs in combination with

Ryan Finkst: you know, de-sell visibility for 2025. That made you comfortable repurchasing more shares here.

Hey Ryan, this is Mike.

Ryan Finkst: Yeah, I think visibility on our cash flow into the year coming out of Q4 with our large AR balance.

Ryan Finkst: and really understanding the revenue, profits, and then the cashflow for the year. And the fact that we pretty quickly went through our first $50 million.

Ryan Finkst: gave us a lot of comfort in adding on. You know, I said at the webinar that...

Ryan Finkst: We're going to be quick to return excess cash, and so dipped our toe in the water with $50 million.

feel comfortable increasing it.

Ryan Finkst: And so hopefully, I think this one will be outstanding for a little bit longer and so kind of align with our capital allocation strategy. It's also just another indication of how strongly we believe in our playbook.

Ryan Finkst: And I know, you know, we've got, you know, this is the first full year of execution for the playbook. We've got a lot of work to do, but we feel really good about the playbook.

Speaker Change: Oh, appreciate that color. And then sticking with DeSAL, could you remind us or give us a sense of what your expectations are for the geographic breakdown of DeSAL revenue in 2025?

Thank you.

Speaker Change: We expect it to be actually relatively similar to 2024. It is very project-driven, so it can be hard to predict if things come in or out.

Speaker Change: But, you know, in 2024, I think we had a little over 60% of our business coming from Middle East and North Africa, and that was split 60-40 between Middle East and North Africa. So we've seen some nice diversification away from the Middle East.

Speaker Change: in North Africa, and there's still lots of projects in those North African countries and the Middle East. So I think actually a generally similar mix is what we expect.

Speaker Change: Got it. Thanks for that, Mike. And then just one more. You mentioned in the shareholder letter the potential impact of tariffs on the wastewater business. It looks like Revenue Guidance

Speaker Change: takes current policies into account. I'm just trying to determine, is there upside without trade issues or is it really just a risk to that guide for wastewater of 13 to 16 million in 2025?

Speaker Change: We gave that guidance in November. I know the election had just happened, but there wasn't a lot of clarity into exactly what it was. So I'd say that guidance was pre-known tariffs.

Speaker Change: and what we're really alluding to there is because we export into China if there is any sort of major change to the effective price of our PX products

Speaker Change: in the waste water business in China, you could see a degradation of the ROI to our customers, which could impact sales. There's a lot of coulds and maybes in there. We don't see anything impacting it today.

Speaker Change: But we did want to highlight it that, you know, about half or more of our business waste water does come from China, and that is a true export. So if it gets caught up in the trade war, it may impact the ROI to customers.

Understood. Appreciate it, guys. I'll turn it back.

Speaker Change: Thank you. It does look like there are no further questions at this time. I'd like to pass it back to Mr. Mancini for any closing remarks.

Mr. Mancini: Great, thank you. Well, thanks to all our stakeholders for their continued support of energy recovery and we look forward to updating you on our next call. Enjoy the rest of the day.

Thank you.

Speaker Change: Thank you. And with that, this does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.

Speaker Change: Total Joy is our it with zero it with zero it with zero

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