Energy Recovery, Inc. Q1 FY2026 Earnings Call

Good day, ladies and gentlemen, and welcome to Energy Recovery's First Quarter 2026 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 6, 2026, 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 Aidan Ryan, Interim Chief Financial Officer. I would now like to turn the call over to Mr. Moon.

Thank you, operator, 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 is our new product, the PX Q650. We launched the product in March, have already received our first commercial order and are working with multiple large customers to design it into large desalination plants. It's off to a strong start, and we're excited about the commercial momentum that we've achieved in such a short time. Second, two leadership updates. I've informed the Board of my intention to retire and a search for my successor is underway. Until that person is named, I'm fully engaged in my role. Behind me is a strong bench of talent here at ERI that will ensure a smooth transition. We're also announcing that Mike Mancini has resigned as CFO. Aidan Ryan, who joined in 2024, will take over as interim CFO and ensure business as usual from a finance and shareholder standpoint. Third is the war in Iran. As we talked about in our letter, we have meaningful exposure to the Middle East, and we know the conflict will impact us. As such, our original financial guidance for 2026 is no longer reliable, and we're temporarily withdrawing guidance until we have better visibility on the evolving conflict. We've seen these situations in the past. And while timing is a key factor, we know the demand is there, and we are building inventory to serve customers when they are ready. Our strategic direction will not change during this uncertain time. We remain focused on product innovation, cost discipline, manufacturing transformation and the growth of our wastewater business. With that, we will now move to the question-and-answer portion of our conference call. Operator, please open the line for questions.

Operator Instructions. Our first question comes from the line of Ryan Connors with Northcoast.

David, congratulations on the retirement decision. And Aidan, congratulations on the elevation. Actually, a quick question on that. Will the search lean internal or external? Or is that just sort of everything is on the table in terms of your replacement, David?

Ryan, everything is on the table.

Okay. And then in terms of just unpacking the Middle East situation a little bit. I think we got two different types of issues, right? One is a short-term delay, a project gets pushed out six, nine months. That's not a big deal even from a modeling standpoint. But there's this concern that the nature of this conflict and some of the images that were out there that people are seeing and potential investors in the region are seeing could deflate confidence in the region for a longer period and take away some of the economic growth and tourism that underpins some of the project activity. I know you don't have a crystal ball either, but what's your take on that issue and whether the delays are likely to be the first type or more of the second, which would be more concerning?

Yes. I think, Ryan, it's still early days. What we're hearing internally and externally from others in the industry is that the project delays will be just that. There are likely to be some delays as we move from 2026 into 2027. But the fundamentals that are driving desalination and wastewater, primarily desalination in the Middle East, are water scarcity and water security. Populations continue to grow. Those drivers are not going away. So while we may see some projects delayed, we still feel good about the long-term fundamentals of desalination.

Yes. I have to keep track of it as it plays out.

And Ryan, we're not hearing anything that would tell us otherwise at this point.

Sure. One of my questions you answered to some extent, which is how you're managing inventory and production schedules given that uncertainty. You mentioned you're building inventory to be ready to serve customers. My question is twofold. One, what gives you confidence to be building inventory when things could push further out? Two, given the good news on the Q650 gaining traction, how do you know which inventory to build? If some projects are delayed a year or so, might you have the opportunity to specify Q650s in place of what was supposed to go in? Or is that not feasible?

I think the answer to that is yes, but we already know projects on the board over the next 12 to 24 months that are Q400 spec and are so far along in the design phase that it's unlikely those projects will change product. We have a pretty good view of the Q650 transition timing. We saw the Q300 to Q400 transition take more than two years to play out to make the Q400 our primary product today. Given the early momentum around the Q650, we expect it will take a couple of years for the Q650 to become our primary product. That could be around 2028 before we see that. So we feel confident about how many Q400s we need to build over the next couple of years and how many Q650s to build as well.

Yes. Okay. And then my last one, and then I'll pass it on, is that the delays are focused on the Middle East, but the conflict has led energy prices higher. Desalination is energy intensive. The PX device will lower that energy footprint, but projects will still look more expensive versus a few months ago. Is there any sign of delays outside the Middle East because of higher energy costs?

That's a really good question. The answer is no, not to this point. We have seen a few delays in some wastewater projects because of higher input material costs, but those were small projects at a small scale. So nothing so far indicates that desal projects globally are being impacted by the war, even given higher energy prices at this point. If the conflict continues, that could change, but so far the answer is no.

Our next question comes from the line of Ryan Pfingst with B. Riley Securities.

Maybe just a follow-up to the last one. On the flip side with the Middle East uncertainty, are there other geographic regions where you're particularly enthusiastic about project development on the mega project side?

Yes. If you think about the next two years, we're excited about China and some of the desal activity that looks to be ramping up there. South America is another area where we see activity starting to pick up. A third is the wildcard, Texas. There's been a lot of talk about desal projects there for the last couple of years. If some of those projects start to prove out, that could be meaningful business for us. Those are the three areas we're watching closely.

Got it. Has there been any change or update to how you're thinking about your manufacturing footprint expansion globally, given recent geopolitical events?

No. The strategic reasons for looking at the Middle East remain the same regardless of conflicts. First, it's our biggest base of business and looks like it will be over the next five to ten years. Second, customers there are asking for local content to build PXs on the ground. That demand is not going away in the near term. Third, there are low-cost benefits from moving a manufacturing facility to the Middle East. We continue to push full speed ahead in our planning. It's still our target by Q1 to start manufacturing and assembling Q400s overseas, and we continue down that path.

Appreciate that. Maybe one more on wastewater. The prior 2026 outlook was $10 million to $15 million in revenue. Is that still how you're thinking about wastewater revenue for this year, or should we consider that on hold as well?

So, we are pausing our guidance on both desalination and wastewater. We're not going to comment specifically, but there are a lot of good things going on in wastewater. We also have some challenges, as David mentioned, and we look to update that when we update our overall guidance, hopefully in Q2 or Q3.

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

It's Pete Lucas on for Larry. Given the short-term uncertainty, how do you think about cost cutting as a lever to maintain free cash flow? How should we consider that as an option for you?

Some of those measures are definitely part of existing plans. As highlighted in the shareholder letter, our focus is on maintaining cost discipline. We've talked about reducing manufacturing costs domestically with lean and Kaizen programs. David mentioned the manufacturing footprint strategy. That is part of our plans to reduce cost, and we're always focused on cost reduction.

I would say we did a major reduction in force last year and another reduction earlier this year. As we think about further cost cutting in SG&A beyond belt tightening and continued improvements around the edges, there are not many large one-time opportunities left. We've already done a good job reducing where possible. Going forward, we see opportunities in productivity gains at the factory and continuing to get smarter in SG&A where there are opportunities. But there are no large one-time opportunities remaining.

And we have reached the end of the question-and-answer session. I would like to turn the floor back over to CEO David Moon for closing remarks.

Thank you, operator. Just to reiterate what I said in my opening remarks, our strategic direction will not change during this uncertain time. We will remain focused on product innovation — we proved that with the Q650 and have more products on the drawing board — cost discipline, our manufacturing transformation efforts both here and overseas, and the growth of our wastewater business. Those are all things we'll remain focused on as we move through the year. Thank you, operator.

Thank you. This concludes today's conference, and you may disconnect your line at this time. We thank you for your participation.