2/26/2025

speaker
David Moon
President and Chief Executive Officer

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 and 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 host 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.

speaker
Mike Mancini
Chief Financial Officer

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 the 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.

speaker
David Moon
President and Chief Executive Officer

Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. Confirmation tone will indicate your line is in the question queue. You may press star two to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment while we poll for questions. And our first question comes from Jeffrey Campbell with Seaport Reap Search Partners. Please proceed with your question.

speaker
Jeffrey Campbell
Analyst at Seaport Reap Search Partners

Good evening, and congratulations on the strong fourth quarter result. You didn't say I'm 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.

speaker
Collin
Energy Recovery Representative

So, potentially, four of our other verticals that we're focusing on are wastewater. So, one would be mine 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 solids streaming through the system, this product is applicable.

speaker
Jeffrey Campbell
Analyst at Seaport Reap Search Partners

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's also reduced water use. in the high pressure transcritical part.

speaker
David Moon
President and Chief Executive Officer

That's right.

speaker
Jeffrey Campbell
Analyst at Seaport Reap Search Partners

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

speaker
Collin
Energy Recovery Representative

Yeah. So I'm speaking more to cleaning up the stream of, you know, it's a mixture of solids And whatever stream that they're trying to clean up on site, on either manufacturing site or textile site 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.

speaker
Jeffrey Campbell
Analyst at Seaport Reap Search Partners

Okay. All right. Now, that's helpful. I was just wondering, in your guidance, you have talked, you guided for further growth 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 growth margin improvement that, you know, that you feel most confident in for 2025.

speaker
Mike Mancini
Chief Financial Officer

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. So 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.

speaker
Jeffrey Campbell
Analyst at Seaport Reap Search Partners

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?

speaker
Collin
Energy Recovery Representative

Yeah, so it's a good question. So there are two areas outside of Europe and the U.S. where we're 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're 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'll 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's a large supermarket chain in South Africa called Macro. And they learned of us as well through trade shows. We're working with a specific consultant that's based in South Africa that had talked to the supermarket about our technology. And so we're looking, we're 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, you know, could be really interesting for us as we progress through the year.

speaker
Jeffrey Campbell
Analyst at Seaport Reap Search Partners

Okay, great. That's great, Collin. Thank you very much. You're welcome.

speaker
David Moon
President and Chief Executive Officer

Thank you. As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. That's star 1. And our next question comes from Ryan Finkst with B. Reilly Securities. Please proceed with your question.

speaker
Ryan Finkst
Analyst at B. Reilly Securities

Hey, Ryan. Hey, guys. 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, you know, desal visibility for 2025 that made you comfortable repurchasing more shares here?

speaker
Mike Mancini
Chief Financial Officer

Yeah, Ryan, this is Mike. Yeah, I think visibility on our cash flow into the year coming out of Q4, we had a 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're 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.

speaker
Collin
Energy Recovery Representative

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

speaker
Ryan Finkst
Analyst at B. Reilly Securities

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

speaker
Mike Mancini
Chief Financial Officer

You know, we expect it to be actually relatively similar to 2024. You know, it is very project driven, so it can be hard to predict if things come in or out. But, you know, 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've seen some nice diversification away from the Middle East into North Africa, and there's still lots of projects in those North African countries and the Middle East. So I think actually a generally similar mix is what we expect.

speaker
Ryan Finkst
Analyst at B. Reilly Securities

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

speaker
Mike Mancini
Chief Financial Officer

Yeah, we gave that guidance in November. I know the election had just happened, but there wasn't a lot of clarity into exactly what it was. So I'd say that guidance was pre-known tariffs. And what we're 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's a lot of coulds and maybes in there. We don't see anything impacting it today. But we did want to highlight it that, you know, about half or more of our business in wastewater does come from China, and that is a true export. So if it gets caught up in the trade war, it may impact the ROI to customers.

speaker
Ryan Finkst
Analyst at B. Reilly Securities

Understood. Appreciate it, Gaz. I'll turn it back.

speaker
David Moon
President and Chief Executive Officer

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

speaker
Mike Mancini
Chief Financial Officer

Great.

speaker
David Moon
President and Chief Executive Officer

Thank you.

speaker
Mike Mancini
Chief Financial Officer

Well, thanks to all our stakeholders for their continued support of energy recovery, and we look forward to updating you on our next call. Enjoy the rest of the day.

speaker
David Moon
President and Chief Executive Officer

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.

Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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