Energy Recovery, Inc.

Good day, ladies and gentlemen, and welcome to Energy Recovery's fourth quarter and full year 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 Security 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 the 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 25, 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 Mike Mancini, Chief Financial Officer. I would now like to turn the call over to Mr. Moon.

Thank you, operator. 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, our outlook for 2026, and other important updates. Prior to opening the line for questions and answers, I'd like to highlight a few important takeaways from the letter. First, I'm now excited to be fully focused on our water business. As you will have seen in the letter, this is a large, growing, and profitable end market where we have the best pressure exchanger technology and continue to maintain our strong market position. As you can see from our results and guidance, we have hit an air pocket in 2025 and 2026, due to delays at several large desalination projects. Now this is a great business, but one that remains lumpy. We know investors find this frustrating and so do we. The good news is that we are confident in our growth for 2027 based on our pipeline and underlying demand trends. Second, As we've highlighted, we're winding down our CO2 retail grocery business. As conversations with customers involved over the last few months, it was clear this business couldn't achieve scaled adoption without significant continued time, investment, and risk. It's a disappointing outcome, and I'm genuinely grateful for the hard work our team members put into this effort over the past several years. Ultimately, we believe that the $7 million of annual savings was the optimal path for shareholder value creation. Now, against this backdrop, we as a management team will continue to focus on optimizing performance and controlling what we can control. keeping a high bar for capital allocation, investing in innovation, growing our wastewater business, cutting operating expenses, and buying back stock. As always, I want to thank our employees here at Energy Recovery. Our progress in 2025 and continued transformation in 2026 cannot be done without the great team that we have. With that, we'll now move to questions and answer portion of our conference call. Operator, please open the line for questions.

Thank you. And at this time, we'll conduct a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Your first question comes from Larry Solo with CJS. Please state your question.

Hi, Larry. Great. Hey, good afternoon. Just to quickly summarize, so essentially the Q4 shortfall, two contracts, two projects, excuse me. Yes. pushed into 26, and then for 26, essentially, you're saying $45 million if I take kind of the midpoint, plus or minus, I realize it's not an exact science, but three particular projects are shifting into 27, and then you're adding kind of another, I'll call it wiggle room, but I don't know how you want to term it, but $15 to $20 million to sort of what you call completely de-risking the revenue outlook. Is that a good way to summarize it?

That's right. The only clarification I'd say is that the three projects kind of get us to the high end of guidance, things we are highly confident will slip. And then the additional buffer is as we scrub the pipeline to really look at things that we think could also slip throughout the course of the year. That sort of sets the low end of our guidance. Gotcha. Gotcha.

Okay. So the – But you're assuming those three projects don't occur, right?

The guidance assumes those three projects slip, correct. And that is on the order of $25 to $30 million of projects.

And then you slip another $15 to $25 million in other things. That kind of creates that.

Other things that we think are at risk of slipping throughout the course of the year, yes.

Yes. As we look at the course over the last 30 days, sort of those are the projects that sort of come up on our radar.

And is there any, so you mentioned a bunch of like a whole things, construction delays. I mean, that's kind of usual stuff is, but these are these, you know, these delays are seem a little bit as a percentage of your total business, uh, maybe larger than normal. Is that fair to say? And is that, you know, is there any common theme that they're being all being pushed out? It sounds like a bunch of things, right?

It did happen kind of surprisingly fast and more widespread. It is only three projects. So there's two things going on. One is that products are getting bigger, right? So, you know, five years ago, we didn't have many projects that were of this size. And now we do. So we will feel the pain if a large project slips. And secondly, with those large projects, they're more susceptible to slipping, right? They're just bigger. A lot of them are in non-Gulf. countries that are sort of newer to desalination. So I think we're seeing that. One is this very project-specific land issue. And then generally, if there's a trend, I'd say we see some fewer EPCs bidding on desalination projects given broad-based construction demand. And that can sometimes extend the tendering process for our products in our pipeline because there's fewer EPCs bidding. That's kind of the only... major trend we've seen, but importantly, no disruption in demand, right? So this isn't that people don't need water. All those underlying demand trends are still in place. It's really just about timing and project complexity and timelines.

I know, it's all fair. And the cost savings you spoke about, irrespective of the CO2 stuff, you said your op-ex, I guess, went from 67 from 77 to 64, and I assume, again, to get into CO2, I have one question on that, but your OPEX 64 core or whatever that is, like CO2, is that you plan further cuts in 26?

Yeah, so it's the CO2 cuts. So CO2 comes out of that number. So you take the base of 64, adjust for CO2, And then I'd say there's some other room for additional cost savings. We're getting toward the bottom of the curve there of getting quite efficient, but there's still ways for us to improve margins and op-ex.

And I guess the big thing eventually, the magnitude where it might grow, when you get a little bigger or lower-hanging fruit, is when you relocate some of your manufacturing, I guess.

There is still a few steps beyond that. there's margin benefit there from lower-cost manufacturing for sure. And so we're incurring some of the costs of that this year. Right. Yeah, and we'll get it next year.

Do you realize a full seven this year or maybe not quite from the CO2 exit?

Not quite. Not quite. But not too far off, but not quite. That is an annualized number. Gotcha.

Yeah. Okay. Great. Thanks for the call. I appreciate it.

Your next question comes from Sondarya Iyer with B. Riley. Please state your question.

Hi, Tim. Thanks for taking my question. Hi. I'm asking on behalf of Ryan Sings from B. Riley Securities. Yeah. So just on this PXQ650, your new product, it represents a meaningful step function improvement over your existing product. Can you maybe help us understand, you know, how is it priced relative to the existing product? And is it a premium product with ASP uplift? Or what's the strategy, you know, bringing costs down or, you know, improving the revenue? How do we look at that?

Yeah, sure. This is Mike. So the way that we think about it is that any given desalination plans we price more on a sort of a cubic meter per day, the total CapEx for the plant. So when we introduce a product that has a higher flow rate, we're assuming we get similar dollars per plant, but then we deliver fewer units. And so we end up with a higher effective ASP per product. And that effective ASP typically grows more than the cost of the product the increase in cost of the product. So we see some gross margin expansion. In the past, we have also priced at a premium because these products deliver a better specific energy consumption. And the specific energy consumption or the amount of energy that the plant uses over its lifetime is a massive factor in the profitability of a plant. And so when we can deliver better SEC, we can typically eke out some pricing increases as well by sharing some of that savings with the customer and us.

Got it. Got it. Uh, and, um, and one more on the manufacturing expansion outside of us. So what's the expected timeline, you know, on this selection and selection of the new site and what's the total capital commitment beyond what was given for 2026. Yeah.

So we're, we're working on the site selection now. Um, And that should be, we should be able to finalize that by the end of the first half. But the thought that we'd be in, we'd start phasing production by the first quarter of 2027. So we'll take this year to plan, to start executing, to start building up equipment. But the idea that we'd be on the ground in first quarter of next year.

I'd say for capital costs, you know, we're, Earning a lot of CapEx this year is all our guided range. We've been spending about $1.5 million or less the last two years. This year, we're guiding three to six. Next year, maybe a similar range or a little bit lower next year, and that would be all of the capital we need to get into a new facility.

Got it. Got it. That's helpful. And on the revenue cadence for 2026, is that similar to 2025? We expect, like, heavily back-end rated?

I would expect similar cadence, yes.

Okay. Okay. And then just last one for me. On the CO2 business, are there any other applications you guys are looking into potentially developing now that this one is... Or is it too early to say? Any other potential projects in development other than the CO2 thing?

No, I think in terms of products, nothing. We think there might be application for our current CO2 product, potentially in some other CO2 markets like heat pumps. But we have a long way to go to prove that out. And so still more work to do. Nothing to me.

Thank you. Thank you so much for the panel.

You're welcome. Thank you. And a reminder to the audience, ask a question, press star 1. To remove yourself from the queue, press star 2. Your next question comes from Jeffrey Campbell with Seaport Research Partners. Please state your question.

Yeah, good evening. First of all, thanks for the expanded guidance. It's very helpful. And a quick one. Did the savings from the wind down of the CO2 represent any further reduction in head count?

Yeah, there was about 20 heads associated with the wind down of CO2. And that was both salaried and manufactured.

Okay. Going back to the question about the pH. I was just wondering, I understand what Mike said about how you market the device and arrive at what you charge and so forth. I just wondered, how is it going to affect the rest of your line? Meaning the PX-Q400 was the top of the line before. I guess that gets knocked down a peg with the 650 coming. Is there a point where some of these more legacy devices seasons of equipment, did they migrate to wastewater or do you just quit making them or how do you manage that?

So, you know, so when we introduced the Q400 about two years ago, you know, we thought that the Q300, the transition out of the Q300 would take us about two to three years. That's proving out to be the case. We'll still be making 300 Q300s this year. and should be making much fewer in 2027. And so we suspect the same sort of transition from the 400 to the 650. You know, we'll start manufacturing the 650 for sale in the second half of the year. And so my guess is we'll start seeing the Q400 ramp down as we get into the back half of 27, sort of 2028. So I think it'll take a couple of years, two to three years, for us to ramp down the Q400.

And just to add some call on that too, Jeff, is that we sell a fair amount of Q300s in our OEM business.

In our wastewater business.

And in our wastewater business. We sell some Q400s there. If some systems get bigger, that might be a thing. But I could see the Q400 being lower than the Q300 in a few years when we make that transition. And that transition happens mostly in the megaproject space.

So does that imply when you said earlier you thought the Q300 would work itself out in like two years?

It did in megaprojects. It is doing that in megaprojects, yes.

But the idea is you may still make it and it may find an implementation of wastewater. Is that what you're saying?

Yeah, it already does. Yeah, we sell it in our OEM desal business and our wastewater business today and expect that to continue.

Okay. And, you know, you pointed out that the new device is going to start being manufactured in the second half of 2026, and we're sitting here talking about project delays. Does that create an opportunity to try to move some of these 250s into some of these projects that haven't quite borne their fruit yet?

That would be the absolute plan. Just try and do that.

Okay. With regard to the greater capex being spent on manufacturing footprint, I just would like to understand, how does this differ from the moves that you made during that period of tariff uncertainty? Were they just short-term opportunities, and now you're taking a different tact and going someplace else? Or how do we put those two together?

Now, the move to Korea was short-term in nature, and that was to protect our China business over tariff. Right? And so we were able to, in six months' time, we were able to quickly put that in place. It's an assembly-only operation. We take advantage of the Korea-China free trade agreement. And so that was always meant to be a sort of short-term solution. As we look at our longer-term solution for a factory outside of the U.S., we'll take into account China, India, in places like that to ensure that the factory that we're looking at going forward, our newest factory, will sort of be holistic in terms of where we can ship product to in longer term in nature.

And you mentioned that Korea was assembly only, but these new facilities you're thinking of, are these still, I think in the past you've told me that the stuff you've manufactured overseas was not what you would consider to be rich in IP. So is it still going to be that whatever you consider to be more mission critical is going to stay in the U.S. and then other stuff is overseas? Or are you actually thinking about building IP-valuable stuff overseas?

Yeah, that's a good question. So I think to start, it'll be sort of mission critical. But over time, over a two- to three-year period, we'll be full-on manufacturing in that new site. So that's how to think about it.

Okay.

So over a two- or three-year period, it will be a self-sustaining, full-on manufacturing facility.

Okay. Without meaning to suggest any lack of faith, you've invested meaningfully in wastewater, and 2026 doesn't. suggests a huge amount of revenue growth on an absolute basis just yet. So I'm just wondering, what are your gating items for deciding if this business is not meeting investment goals similar to what you've demonstrated with CO2, or is that just not part of the thinking?

Yeah, this is Mike Jeff. No, I think, look, 2025 was a tough year from a tariff standpoint. And so heading into 2026 here, we just hired a lot of salespeople in the last few months. And so the key thing for me is it is difficult to know exactly what their ramp-up time will be. And so I think we expect significant growth out of that business and really expect this year to build that flywheel and get that mechanism in place. And so the wider range is probably more about timing of salespeople than our faith in the business. That said, this business has done $10 million to $12 million in the past before. is a mid-high 60% margin business and is just a different footing than CO2 was. Still beholden to our strict capital allocation policies, but is scoring well on that as we look at it today.

Yeah, I would say the guiding item for the wastewater business over the course of 26 is adding reference cases. So as we think about, you know, China, we've done that, and we continue to do that because we have an existing wastewater business there today. But as we think about, continue to think about India, about South America, about the U.S., about Europe, continuing to add reference cases in advance of 2027 is going to be a really important benchmark for us.

Okay. Yeah, that's really helpful. Thank you. And finally, we've noted that you have taken flow serve to court. for patent infringement. I wondered how you arrived at the decision to move forward here, particularly since Closer Select's device has not, to our knowledge, landed any large contracts to date. Thanks.

Yeah, look, I think, you know, the court cases are proceeding, and we're still going through, you know, the earliest, the additional phases of the And that's all I can really say as it relates to that at this point. You know, we're going to protect our IP. That I will say. And so, this case reflects us protecting our IP.

Okay. That's fair. Thank you.

You're welcome.

Thank you. And there are no further questions at this time, so I'll hand the floor back to David Moon for closing remarks.

So, thank you, Operator. So, look, thank you, everyone, for listening in today. I want to thank all our stakeholders for your continued support, and we look forward to updating you on our next call after the first quarter. Enjoy the rest of your day.

Thank you, Operator. Thank you. And that concludes today's call. All parties may disconnect.