Good day, ladies and gentlemen, and welcome to Energy Recovery's Third 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 other 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, November 5, 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, and good day, 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 had a strong quarter of sales execution. Mega-project shipments improved during the quarter and wastewater revenue continued to rebound such that we are reiterating our full year revenue guidance. Second, the team has done a nice job this year controlling costs, and we are reducing our full year OpEx guidance even further. We have made a number of decisions to drive efficiency and lower costs while still investing in our growing wastewater business. We expect growth in Q4 and next year to be achievable with only modest increases in operating expenses. And finally, our CO2 business had a nice summer season of testing. While OEM engagement is strong, we remain in the very early days for commercialization. We are focused on gaining traction in 2026 and plan to provide clear updates on our progress. As always, I want to thank our employees here at Energy Recovery. Our sales execution and cost control were strong this quarter, and this could not have been done without a lot of great teamwork. With that, we'll now move to the question-and-answer portion of our conference call. Operator, please open the line for questions.

And our first question comes from the line of Ryan Pfingst with B. Riley Securities.

I'll start where you left off there on CO2. Just curious, what were some of the main takeaways from the recent white paper that you think customers and investors should most be aware of?

Yes. So I think there are three. So the first, similar to the white paper from last year, we just validated the fact that we save energy and up to 15% at peak times. So strong energy savings performance. So that's number one. Second is, to the extent that a store is located in a part of the country or in Europe, in Southern Europe where adiabatic coolers are required, we can save tremendous amounts of water. So that's number two. And we validated that as part of our summer season of testing here in California. And then I think the third and a really important part of our value proposition that we didn't talk about, we should have talked about more last year was the fact that we provide increased performance during high heat load days. So when the system is working its hardest, the PX G allows for additional capacity during those high heat load days. And so those are the three critical parts of the value proposition that we proved out over the course of this summer.

Appreciate that. And then you touched on this and maybe you want to save it for your next update. But I was wondering if you could tell us about your progress with OEMs and your confidence in signing a commercial agreement with an OEM partner over the next few months.

Yes. This summer's testing focused on collaborating with OEMs to demonstrate our value in real-world conditions, and I believe we accomplished that goal. So what's the next step? Currently, OEMs are starting discussions with some of their biggest end users regarding the PX G, if they haven't already. I anticipate that these customers will want to test the PX G themselves during next summer. Therefore, we are likely facing another summer of testing ahead. Given this, it seems we are about a year away from finalizing a commercial agreement with a major OEM. The larger companies will probably wait to see a successful testing season with some of their significant customers before signing an agreement. Meanwhile, we have already signed a Memorandum of Understanding with Hillphoenix and are on track to sign a commercial agreement with them, likely in 2026.

Got it. Appreciate that. And then turning to the water side. We've seen the U.S. administration kickstart efforts across different industries, such as nuclear energy or critical minerals. Do you think there's a possibility that we could see something like that on the water front maybe for desalination?

Ryan, this is Mike. Look, I think that all of the AI and the energy that's going to serve it only goes to improve our long-term water trends, right? There's a long-term desalination trend already, and I think it does help the long-term trends. I think what we're really cautious about is translating that to near-term results for us as this infrastructure takes a long time to build. So I think we're highly encouraged with the long-term trends and some additive stuff there. We want to be cautious about near-term expectations on it.

Appreciate that, Mike. And then I'll just sneak in one more, somewhat related to your comments there. On the data center opportunity, curious if there's anything new to report there, either on the wastewater front or refrigeration.

No. We continue to monitor it closely. As we mentioned on the last call, CO2 currently represents a very small part of the refrigeration component in data centers, which suggests that there might not be any near-term opportunities for us. However, if CO2 becomes a priority in refrigeration, that could change. Therefore, regarding refrigeration, we do not see any near-term prospects. On the other hand, we're beginning to better understand water reuse and treatment for data centers, and we expect to gain clearer insights on that in the coming quarters.

The next question comes from the line of Larry Solow with CJS.

I would like to follow up on the CO2 question. It seems that the key points from the white paper and the data met your expectations, which is positive. Your confidence in the adoption may not have changed or might even have improved, but the timing appears to be less certain. I'm curious about your shift in strategy towards a top-down approach from OEM to customer. Do larger customers typically make the decisions themselves, or do they collaborate with the OEM? Considering the reputational stakes for OEMs in making such a significant change, could the decision-making process be taking longer because they want their customers to be aligned as well? Is there anything specific that is delaying the adoption or extending the timeline?

No, it's a good question. Large retailers in the U.S. and Europe depend on OEMs not only for equipment design but also for installation and sometimes service afterwards. They really want to collaborate closely with their OEMs, especially regarding new technology. We anticipated this and are seeing it play out. Our approach to a large retailer like Walmart is going to involve a significant OEM like Hillphoenix. Both parties will need to work together closely. We expect that now, after successfully testing over the summer, Hillphoenix will begin introducing us to Walmart, leading to test stores in the first half of the year. We will start the process of confirming the technology with several large retailers throughout next year, but it will require these large retailers to work in tandem with the OEMs. That's simply how it will proceed.

It seems like your confidence hasn't changed at all, right? The return on investment might decrease slightly since it's been pushed out by a year, but that seems to be the only change. I understand you're not ready to make major decisions today, but it looks like you won’t achieve that four or five customer adoption next year. However, that doesn't necessarily indicate a shift in your overall confidence in the program. Is that a fair assumption?

No, I think we had a good summer season of testing. That's what we know. OEMs are now starting to engage with some of their larger customers, which is a positive development. We expect to have another season of testing in 2026, and real commercialization is likely to occur in 2027. Our perspective is that OEMs remain very interested in the product and are showing demand. The main factor now is just the pace of progress.

Okay, that's fair. I appreciate that. Regarding the desalination, while I understand the long-term fundamentals remain stable, I'm curious about the visibility as we look ahead. Since we are relatively new to the company, I’m wondering if your outlook becomes clearer on a 12-month rolling basis as you approach 2026, even though quarters may vary slightly.

Yes. We should begin to see some backlog building for 2026. It will be relatively small since, if you consider our previous patterns, we've typically had a slow start to the year followed by a much busier second half. This trend will continue for 2026 as well. We anticipate entering the year with some backlog, although it probably won't be substantial. The significant activity is expected to occur in the second half, which has been our approach for the past three years.

The next question comes from the line of Jeffrey Campbell with Seaport Research Partners.

Congratulations on the solid results. David, I was wondering if the impressive reduction in operating costs that you mentioned benefited from your efforts to establish an international presence, or if it was independent of those changes, or if they were simply unrelated?

Yes, they're unrelated to each other. Jeff, we were able to reduce costs, and we've been very mindful of costs since starting last year. And so we've been able to really, really watch our costs over the course of the year, especially when tariffs hit us so hard in the first quarter. So we took action very quickly. That's why we've been able to be so successful this year to be able to drive OpEx down. But it hasn't stopped us from investing in growing wastewater, nor did it stop us from investing in this manufacturing option to be able to forgo the tariffs from China. So we've been able to do both.

Okay. The announced lithium project is an application of PX that I was excited to see progressing from a pilot to a project. I'm just wondering, is there enough potential work in this area to make it a meaningful niche in wastewater treatment?

Yes, we recently secured a lithium extraction project in Argentina worth $350,000, which should benefit us this quarter. This is the first of its kind for us, and we have already won several lithium extraction projects in China. We believe there are more opportunities ahead in this area.

Okay. I was just curious, you've talked intermittently about hiring new people for the wastewater effort as your confidence in this growth has increased. I just wonder what do you look for in these kind of hires? Are you looking for existing relationships or industrial knowledge or something else?

Yes. We are seeking individuals with a proven background in the wastewater sector. Additionally, we want candidates with experience in at least one or two of the five key areas we are focusing on. This ensures they bring valuable experience and connections with OEMs and end users. These are the two main qualities we prioritize when hiring new sales and technical support personnel.

And the last question, regarding these retailer tests for next year that you kind of laid out for us in CO2, are these likely to be skid installations as you've done in the past?

Yes, more than likely, the majority will be skid. Existing CO2 locations with the skid install.

There are no further questions at this time. I'd now like to turn the call back to David Moon for closing remarks.

So thank you, operator. So thank you to all of our stakeholders for your continued support, and we look forward to updating you on our next call. Enjoy the rest of your day.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.