Energy Recovery, Inc. (NASDAQ:ERII) Q4 2024 Earnings Call Transcript

Energy Recovery, Inc. (NASDAQ:ERII) Q4 2024 Earnings Call Transcript February 26, 2025

Operator: Good day, ladies and gentlemen and welcome to Energy Recovery’s Fourth Quarter and Full Year 2024 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 and 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, February 26, 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. Mancini.

Mike Mancini: Thank you and good afternoon. Beginning today, Energy Recovery is making a change to the format of our earnings conference calls. In advance of the call, we will now release a detailed letter to shareholders to review business and financial performance and provide any company updates. We will then use live conference call to focus on Q&A. This changes in response to stakeholder feedback and we believe it will be a more efficient way for management to provide a thorough update on the business. Earlier today, we released our first letter to shareholders on the Investor Relations portion of our website. I encourage you all to read it in full. With that, we will now move to the question-and-answer portion of our conference call. Operator, please open the line for questions.

Operator: Thank you. [Operator Instructions] And our first question comes from Jeffrey Campbell with Seaport Research Partners. Please proceed with your question.

Q&A Session

Jeffrey Campbell: Good evening and congratulations on the strong fourth quarter result.

David Moon: Hi, Jeff. Thanks.

Jeffrey Campbell: You didn’t say I am restricted to two questions, so I’ll be a little hoggy and I’ll ask three. You mentioned a case study and how the PX reduced cost at a nanofiltration-based lithium extraction facility in China. I was curious what other commercial applications this result might validate?

David Moon: So, potentially, four of our other verticals that we are focusing on: wastewater. So, one would be mining applications, where water reuse or water use there is important. Second would be heavy manufacturing. Third would be chemical manufacturing. And fourth would be textile manufacturing. So, anywhere there are large solid streaming through the system, this product is applicable.

Jeffrey Campbell: Okay. Well, you just mentioned, just to follow that up, an interesting point. I mean, typically when I think about the benefits of the pressure exchange, the first order of business is saving energy. And then with regard to the CO2 systems, there is also reduced water use in the high pressure transcritical part.

David Moon: That’s right.

Jeffrey Campbell: You mentioned water here too. So how is water use or more efficient use of water coming up in the mining application and heavy manufacturing?

David Moon: Yes. So I am speaking more to cleaning up the stream of – it’s a mixture of solids. And whatever stream that they are trying to clean up onsite, on either manufacturing side or textile side or whatsoever, water could be a part of that stream, maybe not, it just depends on what’s making up the fluid. So, I was speaking in terms of water as making part of the fluid that needs to be treated on these sites.

Jeffrey Campbell: Okay. Alright. Now, that’s helpful. I was just wondering, in your guidance, you have talked, you guided for further gross margin improvement in 2025. And I think there was some mention of OpEx and also the manufacturing transformation going better than expected. I just wanted to ask you if you could just sort of elaborate the specific drivers of that gross margin improvement that you feel most confident in for 2025?

Mike Mancini: This is Mike. Thanks for the question. I think the key drivers of the manufacturing transformation that we’ve seen already start to flow through the factory and we expect in 2025 is a lot of just efficiency. I think the way that this company has scaled manufacturing in the past has been to take the process we did when we were a smaller company and start to stack it. And so we’re seeing a lot of opportunities for optimization along every step of the process, how the kiln is stacked, what the cycle time is, how many billets we can press with our ISO presses, sort of every step along the way has an opportunity for some efficiency. And so our manufacturing transformation plan is really just laying out all of those steps of the process and going and attacking each one. And so we see a continuous improvement throughout the year of costs for the Q400 and Q300s as well as others.

Jeffrey Campbell: Okay. And the last one, I’ll ask a CO2 question, you mentioned in the shareholder remarks seeing increased activity from customers outside of the core focus areas. First, are these areas with hotter climates that would benefit from the PXG and not meaning in any way to be pejorative, why were they previously not targeted and how did they learn about the PXG?

David Moon: Yes. So, it’s a good question. So, there are two areas outside of Europe and the U.S. where we are seeing some interest in the PXG. One is Japan, so a very established CO2 market. And they learned about us through trade shows. This specific company, this specific OEM learned about us through trade shows, continued to follow-up with us. We did a test site with them last year. We are doing a second site with them now. And actually, I think today we just got our first order from them for additional sites. And so our first official order. So, that’s Japan. And so we like, so we will be doing more test sites over the course of the summer. They want to get another summer under their belts. And we like the way this is headed.

And then the second area is South Africa. It’s just now starting to sort of distill. And there is a large supermarket chain in South Africa called Makro. And they learned of us as well through trade shows. We are working with a specific consultant that’s based in South Africa that had talked to the supermarket about our technology. And so we are looking, we are working with them now on setting, finding a site, a test site for this year, for this summer. So, those are the two other areas that could be really interesting for us as we progress through the year.

Jeffrey Campbell: Okay. Great. That’s great color. Thank you very much.

David Moon: You’re welcome.

Operator: [Operator Instructions] And our next question comes from Ryan Pfingst with B. Riley Securities. Please proceed with your question.

David Moon: Hey Ryan.

Ryan Pfingst: Hey guys. Hey David. Thanks for taking my questions and for posting the shareholder letter. I guess just to start, for the additional buyback of $30 million, was it just a combination of the early progress on costs in combination with desal visibility for 2025 that made you comfortable repurchasing more shares here?

Mike Mancini: Yes. Ryan, this is Mike. Yes. I think visibility on our cash flow into the year coming out of Q4, with that large AR balance, and really understanding the revenue, profits, and then the cash flow for the year, and the fact that we pretty quickly went through our first $50 million gave us a lot of comfort in adding on. I said at the webinar that we are going to be quick to return excess cash, and so dipped our toe in the water with $50 million once our cash flow forecast sort of firmed up and we saw what we would be, felt comfortable increasing it. And so hopefully, I think this one will be outstanding for a little bit longer, and so kind of aligned with our capital allocation strategy.

David Moon: It’s also just another indication of how strongly we believe in our playbook. And I know, we have got, this is the first full year of execution for the playbook. We have got a lot of work to do, but we feel really good about, we feel really good about the playbook.

Ryan Pfingst: Well, appreciate that color. And then sticking with desal, could you remind us or give us a sense of what your expectations are for the geographic breakdown of desal revenue in 2025?

Mike Mancini: We expect it to be actually relatively similar to 2024. It is very project driven, so it can be hard to predict if things come in or out. But in 2024, I think we had a little over 60% of our business coming from Middle East and North Africa, and that would split 60-40 between Middle East and North Africa. So, we have seen some nice diversification away from the Middle East into North Africa, and there are lots of projects in those North African countries and the Middle East. So, I think actually a generally similar mix is what we expect.

Ryan Pfingst: Got it. Thanks for that, Mike. And then just one more, you mentioned in your shareholder letter, the potential impact of tariffs on the wastewater business. It looks like revenue guidance takes current policies into account. I am just trying to determine, is there upside without trade issues or is it really just a risk to that guide for wastewater of 13 million to 16 million in 2025?

Mike Mancini: Yes. We gave that guidance in November sort of I know the election had just happened, but there wasn’t a lot of clarity into exactly what it was. So, I would say that guidance was pre-known tariffs. And what we are really alluding to there is because we export into China, if there is any sort of major issue change to the effective price of our PX products in the wastewater business in China, you could see a degradation of the ROI to our customers, which could impact sales. There is a lot of coulds and maybes in there. We don’t see anything impacting it today. But we did want to highlight it that, about half or more of our business in wastewater does come from China, and that is the true export. So, if it gets caught up in the trade war, it may impact the ROI to customers.

Ryan Pfingst: Understood. Appreciate it guys. I will turn it back.

Operator: Thank you. It does look like there are no further questions at this time. I would like to pass it back to Mr. Mancini for any closing remarks.

Mike Mancini: Great. Thank you. Well, thanks to all our stakeholders for their continued support to Energy Recovery, and we look forward to updating you on our next call. Enjoy the rest of the day.

Operator: Thank you. And with that, this does conclude today’s teleconference. We thank you for your participation. You may disconnect your lines at this time.