Energy Recovery, Inc.

Greetings and welcome to the Energy Recovery First Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, James Sicardi, Vice President of Investor Relations. Thank you, Mr. Sicardi. You may begin.

Hello, everyone, and welcome to Energy Recovery's 2024 First Quarter Earnings Conference Call. My name is Jim Sicardi, Vice President of Investor Relations at Energy Recovery, and I'm here today with our President and Chief Executive Officer, David Moon, and our Chief Financial Officer, Joshua Ballard. During today's call, we may make projections and other forward-looking statements under the Safe Harbor provisions contained in the Private Securities Litigation Reform Act, 1995 regarding future events or the future financial performance of the company. These statements may discuss our business and economic and market outlooks, growth expectations, new products, and the performance, cost structure, and business strategy. Forward-looking statements are based on information currently available to us and on management's beliefs, assumptions, estimates, or 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 Form 10-K and 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 1, 2024, and the company expressly disclaims and the intent or obligation to update any forward-looking statements made during this call to reflect subsequent events or circumstances unless otherwise required by law. At this point, I will turn the call over to our President and Chief Executive Officer, David Minn.

Thank you, Jim, and thank you all for joining us today. The first quarter was a busy one for us and played out as anticipated. Revenue at $12.1 million was in line with our guidance for the quarter of $10 to $13 million. With regards to the CFO transition, we've been actively interviewing some promising candidates and are making real progress. We believe we will have our candidate in place prior to Josh's last date of June 30th. I stated on our last call that I, as well as the board, strongly believe energy recovery strategy of PX diversification to drive growth is the right strategy and is critical to our future. While continuing to recognize the importance of maintaining our foundational market leadership and desalination, it is critical that we also continue to look for ways to accelerate our penetration into the wastewater and the CO2 refrigeration markets, as this is from where the lion's share of potential revenue growth will originate. We anticipate our strategic future will build off this perspective. We have now formally kicked off work on our strategic planning cycle and have enlisted the assistance of industry experts to provide us additional guidance specifically in wastewater and refrigeration. These industry experts will play integral roles in providing intelligence and hard data while challenging us on our product development and market strategy and contributing to the development of our strategic playbook. This will add significant expense in the second quarter especially, but I believe it is critically important work to establish a strong strategic foundation from which to grow in the coming years. Now let's get into our update, starting with water. First, we are maintaining our revenue guidance of $140 to $150 million for the year. Our current 2024 contracted projects, including the revenue recognized in the first quarter, totals roughly $87 million. or 60% of the midpoint of our guided range for the year. This compares to $69 million or 50% of the guiding range at the same point in 2023. This reflects a 26% increase over year and underpins our confidence in our guidance for the year. In addition, We also just signed our first mega project deal in Brazil for shipment in 2025. In our second quarter call last August, we discussed in some detail the growing wastewater challenges in South America. This project is a clear example of how growing water challenges outside of the Middle East, these historic growth areas, are being reflected in our pipeline in new ways. The cadence of this year's revenue guidance is unchanged. We remain heavily weighted towards the second half of the year. We are seeing real strength in both our desale OEM and aftermarket sales as we start the year and have signed most of the mega project deals for the year. Our focus today in water is to close the handful of mega project deals remaining in the coming months as well as maintaining our momentum in our OEM and aftermarket channels to end the year as strongly as possible. Our wastewater business is also developing well this year, and we remain confident in our range of $12 to $15 million for the year. Our pipeline continues to grow, and we've increased our signed wastewater contracts by almost 40% as compared to last year at this time. We've also seen positive news here locally in the U.S. as it relates to the municipal wastewater market. The United States government on April 10th announced newly adopted rules to address PFAS contamination or forever chemicals in our drinking water. The Biden administration has allocated $9 billion to help communities with drinking water impacted by PFAS. Now, one valuable tool for filtering out existing PFAS from drinking water is reverse osmosis filtration. While it's not the only solution to this problem, we believe reverse osmosis can play a key role in the coming years as the world tackles this growing challenge And we will be exploring these opportunities and a timing of them in our playbook. The global attention on PFAS continues to underscore the growing focus on water quality and scarcity that is happening around the world today. Now let's move on to our CO2 business. The past few months, the most important activity I engaged in was to meet with major OEMs in the U.S. and Europe. I have a few key takeaways from these meetings, all of which support the approach we are taking this year. First and foremost, the interest in and the feedback on the PXG was positive. OEMs can see the potential value of the PXG in their systems and remain very interested in our success. Second, OEMs are looking for more quality uninterrupted runtime data during the summer months, which is the goal of our activities this year. This data will provide reliable performance data in the field, which is critical to OEMs and end customers to fully accept our product in the marketplace, to fine tune our value proposition, and to be a catalyst to allow energy recovery to take a substantial step forward to building commercial relationships with the OEMs. Third, once the OEMs have comfort in our data, it is clear that our best path forward will be to integrate the PXG directly into the rack architecture of OEMs CO2 systems. This will mean that OEMs will need to commit engineering resources to adjust their existing architectures to incorporate the PXG. This is a commitment of time and money and therefore another reason why field data is so key to creating broader acceptance for the PXG. At the last earnings call, we discussed two gates to better position ourselves for future market penetration and revenue growth. These gates directly support the feedback we received from the OEMs in the first quarter. The first gate is the successful completion of testing of our second generation PXG in our internal labs by the end of Q2 2024. I am pleased to announce that we've achieved this milestone. Lab performance has shown an order of magnitude increase in reliability and performance, which is critical to providing the uninterrupted runtime data we need this year. The second generation PXG has now been installed as part of a beta test in supermarkets in California and Belgium. Both installations have been operating successfully since the beginning of March. The second gate is the successful installation, operations, and third-party validation of 30 to 50 additional field validation sites by the end of this year. Our first steps is to install roughly 10 sites this summer, which are the most critical sites for this year and will provide the key performance data that we need. As of today, we currently have three sites running. We expect four additional sites to be commissioned by the end of June in Canada, Belgium, Hungary, and the U.S. The remaining three sites are scheduled for Europe and the U.S. by the end of August. I will continue to update you on our progress in August, but we're off to a strong start to the year. Outside of these critical activities, I have two other updates from the market. First, our PXG was awarded the refrigeration product of the year by ACR News London. This award is a recognition of excellence and innovation from across the air conditioning and refrigeration sector. The PXG was selected for its ability to improve year-round transcritical CO2 systems performance by reducing energy costs, which is perhaps the single biggest hurdle faced by supermarkets, and adjusting to stringent global requirements. This is the third award we've received since the start of 2023, as the PXG continues to gain attention across the globe and should serve as further proof that technology is catching up to the changing regulatory environment. Second, I have a quick update on the regulatory environment. The EU came out with new, more stringent regulations on the reduction in HFCs that became effective March 11th. Whereas previous regulations reduced HFC usage from 31% of the 2025 baseline in 2024, to 21% by 2030, the EU has now accelerated this reduction. As of March 11th, the EU must reduce usage to 24% of their baseline by 2025, 12% in 2027, to 5% in 2030. This is good news for CO2. So to sum up, The operational deliverables that I put in place for 2024 are as follows. Maintain and grow our dominant position in desalination. Grow our wastewater business to 12 to 15 million dollars in revenue. Install at least 30 to 50 sites in North America and Europe by the end of the year. And deliver our full revenue guidance for the year of 140 to 150 million dollars. The work we do over the next several months will position us to deliver on our future in water and CO2 growth. In the interim, we remain one of the purest means to invest in the global water scarcity story. With that, let me hand it over to call to Josh to update you on the financials.