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 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 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 risks, uncertainties, and other factors. We refer you to documents the company files from time to time with the SEC, specifically the company's annual Form 10-K and quarterly 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, May 7, 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. 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 like to now turn the call over to Mr. Moon.

Thank you, operator, and good afternoon, everyone. Earlier today, we released a letter to shareholders on the Investor Relations section of our website that reviews business and financial performance during the quarter. 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, the first highlight is that Q1 was in line with our expectations regarding revenue and profitability and consistent with another heavily back-end-weighted year. Our desalination business remains strong and on track for the year. Turning to tariffs. As we noted during our Q4 earnings call, we are directly affected by tariffs. As tariffs have increased in scope and magnitude during the last two months, so too have our initiatives to offset them. We believe we'll be able to offset the majority of the net tariff impact with manageable impact to our financial results for 2025. Our CO2 business remains on track and we're making clear progress towards full commercialization. We now have three OEMs working to integrate the PX into their rack designs and expect all these OEMs to have at least one pilot test site running for the summer season. We're also excited to be able to speak publicly about our work with Hillphoenix for the first time as noted in our shareholder letter. I'd also like to take this time to reiterate my appreciation for the team here at Energy Recovery. We've experienced a lot of change in the past few quarters and I'm proud of the resiliency and dedication they've shown. With that, we'll now move to the question-and-answer portion of our conference call. Operator, please open the line for questions.

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

Could you start with some broad color on the desal market? What geographies you're enthusiastic about and any impacts you've seen from a potentially tougher macro backdrop?

I think as it relates to a tougher macro backdrop, nothing is changing. We're still seeing the pipeline very strong. Quoting remains strong. The contracts and the projects that we're following remain very active. And so, we continue to be very bullish on the desal market. And we continue to be very bullish on the Middle East and North Africa.

And for the megaproject order that was shipped but not recognized as revenue in Q1, 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?

Yeah, Ryan. It was a relatively small order. It was about $2 million.

And then, turning to your international footprint strategy, will you be looking to partner with someone in a contract manufacturing capacity or establish your own capacity? Curious your thoughts there.

Yeah. Our first preference is to go in on our own, right? And so, establish 100% owned and operated energy recovery facility. And so, that's what we're looking at now. In the short term, could there be an opportunity to partner with someone in order to help get product into China and around the tariffs? Possibly. Those are all on the table at the moment. But I would tell you our preference is to do it on our own.

And then, along those lines for wastewater, is there any opportunity to offset some of the lost China revenue this year with sales in other geographies?

Yeah. We're working on that. So, the answer is we think the answer is yes. Where it's all going to come from, that's to be determined. But I think there's an opportunity to offset some of that $9 million.

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

Yeah. So, we're really happy with... So, we spent a lot of time working with Hillphoenix last summer with field sites, right? Testing during the summer heat period with several Hillphoenix locations in North America. And so, because we made such good progress and had such good results on those test sites, we now have moved into a phase with Hillphoenix where we're talking about integrating the PXG into their CO2 rack design. And so, I'd say there are two important milestones between now and sort of Q3 with Hillphoenix. One is getting the commercial agreement done, which we're working on now with Hillphoenix. And number two is getting a test site for the summer with a PXG integrated into a Hillphoenix system. Those would be the next two milestones.

Your next question comes from Jeffrey Campbell with Seaport Research. Your line is open.

With regard to the alternative sourcing for the PX, you've always emphasized the stringent manufacturing quality of the PX as a barrier to entry for competitors. And you said you would prefer to do 100% yourself. I was just wondering, where do you think you could move manufacturing and ensure the quality remains robust while providing the tariff production protection from the current production that it's not provided?

Hey, Jeff. This is Mike. Yeah, I think you got to think about a 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. We will do that here. And that is really the key to the quality in the ceramics. So, no thinking about short-term moving of the ceramics. And that goes to some of the quality points you made in the letter. We will not sacrifice that quality. But where we assemble and where we do some of the testing and other things and bringing the vessels and screws and other pipes together is on the table. And longer term, that also goes to why David mentioned us wanting to do it standalone by ourselves, because of our process and our know-how on the ceramic side.

And sort of thinking of it in an opposite way, are there any long-term advantages to developing an international production presence if the current situation is pushing it to work?

Yeah, I think what it does is we have the opportunity to get closer to some of our customers. And so, for the foreseeable future, the Middle East and North Africa are going to be both important regions for us, for sure. They are today and will continue to be in the near future. We think about that $550 million pipeline. The majority of that pipeline is in North Africa and the Middle East. So, potentially having a location there closer on the ground to those desal facilities and those desal projects could serve us well and could serve our customers much better as well.

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?

We currently have a small presence in India, which has been quite successful. We have two team members there and plan to double that number this year. We've seen early success and believe there are regulatory opportunities as well, giving us confidence in the Indian market both this year and in the future. Additionally, North America, particularly the U.S., presents significant upside, especially with the movement towards water reuse in municipalities, notably in states like California. We have recently hired a sales leader for our U.S. operations and are looking to expand our resources there. Overall, we are optimistic about our prospects in the U.S. moving forward.

You indicated in the shareholder letter that you wanted to temporarily remove the wastewater guidance, which is understandable. It appears that you confirmed guidance for the other two divisions. I am curious about what we should expect regarding gross margins for the year, considering all these changes.

We are confident in the gross margin guidance we have provided. It's important to note that we are highly focused on margins, including both gross and EBITDA net. We have reaffirmed our gross margin guidance and believe we will meet our expectations.

And my last question, I agree with the earlier remark that the Hillphoenix collaboration is really positive, especially considering that you've been working with these guys off and on since the early days of the CO2 effort. When I read the shareholder letter, it sounded like there were a number of pockets of potential activity with Hillphoenix. Maybe I didn't understand that correctly based on the answer you gave earlier. But I'm just wondering, maybe not thinking so much about revenue, but just collaborations or points of touchpoints, if you will. Is it possible that there could be some upside by the end of 2025 from what was expected coming into the year?

I believe Hillphoenix represents a very diverse customer. They are active not only in retail but also in the industrial sector. As we strengthen our relationship and achieve successes in the retail arena, we will have the opportunity to collaborate more closely with them in industrial areas such as large warehouses and food processing applications. I believe Hillphoenix has the potential to become a multifaceted customer for us.

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

Thank you, operator. So, just a few closing remarks. I think number one is, look, we're confident in our desal and CO2 revenue guidance. For desal, our contracted projects plus high probability pipeline gives us visibility into more than 80% of the expected 2025 revenue. Plus, the desal market remains strong. As it relates to tariffs, we've mitigated most of the tariff impact and are still working on additional options to mitigate the rest. And then finally, as it relates to costs, we've been executing on right-sizing our cost structure and also working towards margin expansion for 2025. So, thank you all for joining today. That's it, operator.

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