Energy Recovery, Inc. Q2 FY2025 Earnings Call

Good day, ladies and gentlemen, and welcome to Energy Recovery's Second 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, August 6, 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 now like to 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. Prior to opening the line for questions and answers, I'd like to highlight a few important takeaways from that letter. First, we are reiterating our 2025 guidance on all metrics and reinstating our wastewater guidance. Our core desalination business is proving resilient to the macro environment. We signed multiple large deals in the period, and we have line of sight to full year revenue based on our contracts and pipeline. In wastewater, the tariff impacts are expected to be better than we initially indicated in Q1, and we are comfortable issuing guidance despite remaining tariff uncertainty. Second, today, we announced an additional share repurchase program. In the past 10 months, we've announced 3 share repurchase authorizations totaling $105 million. We believe these programs will enable us to repurchase over 10% of our outstanding shares in aggregate while still executing our playbook and reinvesting for growth. And lastly, our conviction in the long-term trends driving our business is increasing. Contracted desalination capacity, water reuse capacity, and CO2 refrigeration installations are all growing at high rates. We are poised to capture the upside of these trends as we march toward our 2029 goals. I'd also like to say thank you to our employees here at Energy Recovery. The team was creative and decisive this quarter in executing during an environment of high volatility. With that, we will 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.

Congrats on the strong update here. Appreciate the color around annual desalination contracted capacity in the shareholder letter just now, David. Does that kind of expected capacity growth in addition to your recent awards give you confidence perhaps in achieving the higher end of the longer-term ranges you set in November for desal revenue, particularly if we're thinking about 2026?

Yes, that's a good question. I think it's too early to tell. Just a reminder that contracted capacity refers to projects we expect to be tendered during that time, but actual water production may be 2 to 3 years away in terms of project readiness. We are still gaining clarity on the details of the $550 million pipeline. However, given the awards we've seen this quarter and what we're observing for early 2026, we feel confident about that year. We will be able to provide guidance for 2026 as we approach the third quarter earnings call.

Yes. And Ryan, just to add there, I think it's more indicative of the increasing pace of desalination that the water scarcity trends are driving action, and that is really good for our long-term growth. It's hard to pinpoint that and make that any specific annual growth, but it is just a coming wave.

And I think that's a coming wave for desal, and I also think it bodes well for wastewater as well.

Great. Yes. Makes sense. I appreciate all that. And then for the next-gen PX, it sounds like you expect some meaningful improvement compared to the Q400, which already appears to be performing extremely well. Do you expect this new product to carry a higher selling price? Or is the key here to maintain or even increase market share to the extent you're able to?

Yes. Ryan, this is Mike. So yes, I'd say the general trend here and what we saw from going from Q300 to Q400 and then Q400 to something greater than 500 is that we typically price on a capacity basis, so cubic meters per day basis. So you can have an increasing price per unit as we try to price per capacity. So that is a trend that we have seen in the past and I think we'll continue to see. Exactly how much is still TBD. But in general, yes, you'll need fewer units to fill a plant, but we will charge based on capacity, not unit, if that makes sense.

Yes, that does. Appreciate that, Mike. And then on CO2, do you have a broader update on your work with Hillphoenix or some of the other OEMs that you're working with today?

So Hillphoenix, the discussions around the commercial agreement are ongoing. So I'd say we continue to make progress there. We're in the middle of our summer testing season, and we continue to add new sites. We added 7 new sites in the quarter, in the second quarter. We will add new sites in the third quarter as well. So I'd say the summer testing season is going as expected, and engagement with OEMs remains high as we move through this testing season.

Got it. Great. And then last one for me. It might still be early days, but you talked about potentially developing a business case for data center markets. Curious if that has progressed at all.

Yes. So we've been working on a business case for data centers and for heat pumps both. I'd say the early read on data centers is that CO2 is still a very nascent, sort of very small part of that market. So unless that is going to grow at some sort of increased pace, then it's looking like data centers is not going to be an opportunity for us. We'll finalize that view here over the next few months, but that's the early read on data centers. Now heat pumps is looking promising, but more to come over the next couple of months.

Your next question comes from Jeffrey Campbell with Seaport Research Partners.

Congratulations on a pretty strong quarter, all things considered. David, the letter described a much better result in China than the worst-case scenario that was provided last quarter. Is this because the tariffs have touched your work less than anticipated? Or has it emerged that there's more commitment to your product at a higher price than you anticipated or some combination of the 2?

Yes, I believe that the pause in tariffs back in May really allowed us to move forward with projects that had been on hold during the period of over 100% tariffs on products heading to China. Our team kept working on these projects, and once the tariff rates were reduced, we were able to execute them, resulting in over $2 million in shipments for the quarter. We are still shipping now, and I attribute this success to a dedicated sales team in China who kept advocating for our products, as the pause in tariffs greatly benefited us. Mike, do you have anything to add?

No, I'd say at 125% tariffs, it's difficult to do business in China. And so I think the reduction of 10% was a big deal.

Okay. It seems like that you've broadened your wastewater footprint meaningfully in the last quarter when I look at some of the other countries that you cited. Did that meet your expectations? Or did it exceed them?

No, I think we set ourselves a goal. There are five key areas in wastewater that we're focused on: municipal, chemical, textile, manufacturing, and mining. Among the approximately 20 wastewater sectors we could target, these five represent the largest market share where we believe we can succeed. Over the past 18 months, we have concentrated our efforts on these five sectors. The increase in our reference case list during the first and second quarters reflects the hard work of our sales team in pursuing these areas. While we anticipated the reference cases might not come as quickly, our dedication to these five sectors has been strong, and we expect further progress. We set a goal back in November to secure two reference cases in each of these five areas by the end of the year, and we are on track to achieve that.

Okay. You mentioned that reliability is a key issue for the PX G related to current testing. I just wondered how much time on task do you think is likely required to convince testers to become dedicated users.

Yes. So last season was about demonstrating the value proposition, which we detailed in the white paper published in September of last year. We received positive feedback from OEMs, who agreed to move forward to another testing season. This season, our focus is on reliability, and that's currently underway. We have the rest of August and September allocated for testing, and so far, everything seems positive. Once we complete this summer testing season, OEMs and select end users will evaluate whether the results have been sufficient or if they will require a larger sample size for the next summer. That remains to be determined, and we expect to have more clarity by the end of September and the beginning of October.

And my last question, I'll go back to wastewater. In the shareholder letter, it said increasing water reuse across industries and geographies, which is a trend you called out. Do you see this as more of a push for industrial reuse of their water or trying to treat it all the way to being potable water? I just ask because potables presumably would require more treatment than industrial effluent. Just sort of trying to get an idea of what's going on. And also, is the motivation here more economic or is it environmental regulations or environmental stewardship?

Yes, this is Mike, Jeff. I would say it's a combination of several factors. Particularly with our new products, such as the low-pressure PX, in the municipal end market, we are focusing on tertiary treatment for potable water reuse. This approach is likely to expand geographically as we work with more municipalities, allowing case studies to apply to other regions. Our wastewater solutions offer a wide range of products that connect with many needs, with regulatory requirements typically being the main driver. However, the underlying reason for these regulations is the urgent issue of water scarcity. Hence, while regulatory aspects play a role, the motivations are also rooted in economic growth and the need to address water scarcity. We are optimistic about the long-term trends and opportunities in this area.

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

Thank you to all of our stakeholders for joining us today on the call. We appreciate your participation and look forward to updating you on our next call after Q3. Thank you.

This concludes today's call. Thank you for attending, and have a wonderful rest of your day.