Q1 2025 Energy Recovery Inc Earnings Call

Speaker Change: Good day, ladies and gentlemen, and welcome to Energy Recovery's first quarter, 2025 earnings call. During today's call, Energy Recovery may make projections and other forward looking statements under the safe harbor provisions contained in the private security's 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 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.

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

Speaker Change: These documents identify important factors that could cause actual results to different 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, May 7, 2025.

Speaker Change: 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

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

David Moon: Thank you, Operator, and good afternoon, everyone. Earlier today, we released the letter to shareholders on the Investor Relations section of our website.

that reviews business and financial performance during the quarter.

David Moon: I encourage all of you to read the letter in full. In addition, and in response to investor feedback, I'll make a few opening comments to highlight important takeaways from that letter.

First.

David Moon: The first highlight is that Q1 was in line with our expectations regarding revenue and profitability and consistent with another heavily-backed and weighted year.

David Moon: Our desalination business remains strong and on track for the year.

David Moon: Turning the tariffs. As we noted during our Q4 earnings call, we are directly affected by tariffs.

David Moon: As tariffs have increased in scope in magnitude during the last two months, so too have our initiatives to accept them.

David Moon: We believe we'll be able to offset the majority of the net tariff impact with manageable impact to our financial results for 2025.

David Moon: Our CO2 business remains on track and we're making clear programs towards full commercialization.

David Moon: We now have 3 OEMs working to integrate the PX into their rack designs and expect all these OEMs to have at least one pilot test, side running for the summer season.

David Moon: We're also excited to be able to speak publicly about our work with Hill Phoenix for the first time as noted in our shareholder letter.

David Moon: I'd also like to take this time to reiterate my appreciation for the team here at Energy Recovery.

David Moon: We have experienced a lot of chains in the past few quarters, and I'm proud of the resiliency and dedication they've shown.

David Moon: With that, we'll now move to a consistent question and answer portion of our conference call.

Operator, please open the line for questions.

David Moon: If you would like to ask a question at this time, please press star then the number one on your telephone keypad. Please be prepared to state your question when prompted. Once again, please press star then the number one on your telephone keypad to ask a question at this time.

Speaker Change: Your first question comes from Ryan Pfingst with B. Riley. Your line is open.

Hey, Rhonda, guys. Thanks for a tip.

Ryan Finks: David, thanks for taking my questions. Could you start with some broad color on the DSL market, which geography is your enthusiastic about, and any impacts you've seen from a potentially tougher macro backdrop?

Ryan Finks: So I think as it relates to you, a tougher macro backdrop, nothing, nothing changes [inaudible]

Ryan Finks: We're still seeing the pipeline very strong, quoting remain strong, the contracts that we're following remain very active.

Ryan Finks: So, we continue to be very bullish on the diesel market and we continue to be very bullish on the Middle East and North Africa.

Thank you.

Speaker Change: And for the mega project order that was shipped but not recognized as revenue in one queue, curious what the revenue impact was there to get a sense of how the first quarter might have looked for revenue and for gross margin as well.

Speaker Change: Yeah, Ryan, it was a relatively small order. It was about $2 million.

Speaker Change: Okay, I appreciate that Mike. And then turning to your international folk strategy, will you look in a partner with someone in a contract manufacturing capacity or establish your own capacity, curious, your thoughts there?

Speaker Change: Yeah, you know, our first preference is to go it on our own.

Speaker Change: Right, and so the staff was to 100% out and operated Energy Recovery Facility.

Speaker Change: and so that's what we're looking now in the short term.

Could there be an opportunity to partner with someone?

in order to help get product into China.

Speaker Change: and around the tariffs possibly. Those are all on the table at the moment, but I would tell you that you have references to do it on your own.

Speaker Change: I appreciate that. And then along those lines for wastewater, there's already opportunity to offset some of the lost China revenue this year with sales and other geographies.

Speaker Change: Yeah, we're working on that. So the answer is we think the answer is yes.

Speaker Change: Where it's all going to come from to be determined, but I think there's an opportunity to ask that some of that nine million dollars.

Speaker Change: Great, then I'll just ask one more on CO2. Could you talk a little bit about your progress with Gulf Phoenix and what some of the milestones are that we should be looking for ahead of potential broad deployment of the PXG as a feature in their refrigeration systems?

Speaker Change: Yeah, so we're really happy with, so we spent a lot of time working with Hill Phoenix last summer with field sites, right, testing during the summer, the summer, the summer

Speaker Change: in the summer heat period, with several locations in North America, with several health

America.

Speaker Change: And so because we had such good, we made such good progress and had such good results on those test sites, we're now have moved into a phase with Hill Phoenix where we're talking about integrating the PXG into their CO2 rack design.

Speaker Change: And so, I'd say there are two important milestones between now and sort of, you know, Q3 with

Speaker Change: One is getting the commercial agreement done, which we're working on now with Delphinix.

Speaker Change: And number two is getting a test site for the summer with a PXG integrated into a Helfeneic System. Those would be the next two milestones.

Speaker Change: Great, appreciate that color. I'll hop back in the queue.

Speaker Change: Once again, if you would like to ask a question at this time, please press star then the number one on your telephone keypad.

Speaker Change: Your next call comes from Jeffrey Campbell with Seaport Research. Your line is open.

Good afternoon and thanks for taking my questions.

Sure.

Speaker Change: With regard to the alternative sourcing for the PX, you've always emphasized this strange and manufacturing quality of the PX as a barrier to entry for confeders.

Speaker Change: and you said you would prefer to 100 percent yourself. I was just wondering where do you think you could move manufacturing and ensure the quality of your maestro bus while providing the tariff production protection from the current production that it's not provided.

[inaudible]

Speaker Change: Hey Jeff, this is Mike. Yeah, I think you gotta think about the PX in two parts. One is the ceramics and one is the pressure vessel. So we would not in the short term move the ceramic manufacturing anywhere.

Speaker Change: We will do that here, and that is really the key of the quality of the ceramics [inaudible]

So no, no thinking about short-term moving of

Speaker Change: of these ceramics. And that goes to some of the quality points you made in the letter. We will not sacrifice that quality.

Speaker Change: But where we assemble and where we do some of the testing and other things that bring the vessels and screws and other pipes together is on the table.

David Moon: And longer term, that also goes to why David mentioned that was wanting to do it stand alone on our self, ourselves because of our process and I know how on the ceramic side.

and sort of thinking in an opposite way.

Speaker Change: Are there any long-term advantages to developing an international production presence at the current situation this term pushing you to work?

Speaker Change: I think what it does is we have the opportunity to get closer to some of our customers.

Speaker Change: And so, you know, for the foreseeable future, our, the Middle East and North Africa are going to be both important regions for us.

Speaker Change: for sure. Contour today will continue to be in the near future. We think about that $550 million The majority of that pipeline is in North Africa and the Middle East.

So, potentially having a location nearer.

Speaker Change: Closer on the ground for those decal facilities and those decal projects. Conservates well, they conservates their customers much better as well.

well.

Speaker Change: Yeah, I was sort of thinking along the same lines. I thought the deployment of wastewater sales resources also might be a long-term positive in disguise. Can you give us any color on alternative markets besides China that could potentially be positive for ERI solutions?

Speaker Change: Yeah, so I think, I think as we think about...

So we have a small presence in India today.

Speaker Change: Which is we've been really successful with we've got two people on the ground in India. We're looking to double that this year. And so we've had early success there. So that's certainly a market and there's some regulatory. [inaudible]

Speaker Change: Driven opportunity there as well and so we like our chances in India both this year and into the long term. I think the other market where we have a lot of upside is North America.

Speaker Change: America, especially in the U.S. And special the municipality movement around moving to to rewater reuse, especially in state like California.

And so we like, and so we're, we just hired a sales leader for them.

Speaker Change: for the U.S. business. We're looking to add additional resources on the ground in the U.S. And so I think the U.S. is the other market where we lack our chances going forward.

Speaker Change: Okay, and you made a clear in the shareholder letter you wanted to.

Speaker Change: All the wastewater guidance for now which makes perfect sense and it seems as though you, I think you did reaffirmed guidance for the other two divisions. I just want to, what should we think about gross margins for the year with all these moving parts?

Speaker Change: Yeah, we're comfortable with the Gross Margie guidance that we've given.

Speaker Change: I think some of the key takeaways for this letter should be that we are very, very focused on margins, both gross and EBITDA net.

Speaker Change: and so we think we can reaffirmed gross margin guidance as well, so we think we'll fall right in there.

Speaker Change: Okay, and my last question, I agree with the earlier remark that...

Speaker Change: The Helphonics Collaboration is really positive, especially considering that you know, working with these guys off and on since the early days of...

Speaker Change: The CO2 effort. When I read the shareholder letters sounded like there were a number of pockets of potential activity with ill-photics.

Speaker Change: Maybe I didn't understand that correctly, based on the answer you gave earlier, but I was just wondering. Maybe not thinking so much about revenue, but just collaborations or points of...

Speaker Change: You know, touch points of view, well, is it possible that there could be some upside by the end of 2025 from what was expected coming into the air?

Speaker Change: I think the Healthy Enix's idea is a very diverse customer and so they're not only participating in the retail space.

But they also participated in the Industrial Spring.

Speaker Change: those types of applications. And so I think there's, you know, Helping can become a multi-fascist customer for us.

Speaker Change: Okay, great. I appreciate the color. Thanks for taking my questions.

You're welcome, Jeffrey.

Speaker Change: At this time there are no further questions in queue. I'd love to turn the call back to David Moon for any further remarks.

David Moon: Thank you, operator. So just a few closing remarks. I think number one is, look, we're confident in our decal and CO2 revenue guidance.

For diesel, our contracted projects plus high probability pipeline.

David Moon: gives us visibility into more than 80% of the expected 2025 revenue.

Plus the desal market remains strong.

David Moon: As it relates to tariffs, we've mitigated most of the tariff impact and are still working on additional options to mitigate the risk.

David Moon: And then finally as it relates to costs, we've been executing on right side in our cost structure and also working towards margin expansion for 2025.

So thank you all for joining today.

That's it, Operator.

David Moon: This concludes the call. You may now disconnect. Have a wonderful rest of your day.

Goodbye.

["Stairway Down from the Mountain Top"]

David Moon: James Siccardi, Jason Bandel, Ryan Pfingst, James Siccardi, Jason Bandel, Ryan Pfingst