Energy Recovery, Inc.

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 in 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 disclaimed 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, Today's call are David Moon, President and Chief Executive Officer of Energy Recovery, and Aiden 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 PXQ650. 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.

Thank you. We will now be conducting 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 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 key. One moment please while we poll for questions. Our first question comes from the line of Ryan Connors with North Coast. Please proceed with your question.

Thank you, good afternoon. Hi Ryan. Hi, David, and congratulations on the retirement decision. And Aiden, congratulations on the elevation. Actually, quick question on that. Will the search lean internal or external, or is that just sort of everything's on the table in terms of your replacement, David?

Ryan, everything's on the table.

Okay. And then in terms of just unpacking the Middle East situation a little bit, I think we've got two different types of issues, right? One is a short-term delay. A project gets pushed out six, nine months. I think everyone's, that's totally, that's not a big deal even from a modeling standpoint. But there's this sort of 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 kind of just sort of deflate confidence in the region for a little longer period and kind of just take away some of the growth economically and tourism and whatnot that underpins some of the project activity. I mean, I know you don't have a crystal ball either, but I'd love to get your take on that issue and whether the delays are likely to be the first sort or more of the second sort, which would be a little more concerning.

Yeah, so, you know, I think, Ryan, obviously it's still early days, but what we're hearing both internally and as we talk externally OTHERS THAT ARE IN THE INDUSTRY, IS THAT, YOU KNOW, THE PROJECT DELAYS WILL BE JUST THAT. THERE ARE LIKELY TO BE SOME DELAYS AS WE MOVE FROM 26 INTO 27, BUT THAT THE FUNDAMENTALS THAT ARE DRIVING DESALINATION AND WASTEWATER, BUT PRIMARILY DESALINATION IN THE MIDDLE EAST IS WATER SCARCITY AND WATER SECURITY, RIGHT? AND SO POPULATIONS CONTINUE TO GROW. THOSE AREN'T GOING AWAY. And so while we may see some projects delay, you know, we still feel good about the long-term fundamentals of desalinization. Yep.

Yeah. Yeah, we'll have to just keep track of it, I guess, as it plays out.

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

Sure. One of my questions, David, you answered to some extent, which is I was going to ask how – you're managing inventory and production schedules given that kind of uncertainty. But you did mention just there at the end of your prepared remarks that you're building inventory to be ready to serve customers. So I guess that was, my question is twofold there. One is, you know, what gives you confidence to be building that inventory when things, you know, could push further right or not on a certain project? And B, given the good news on the 650 gaining traction, How do you know which inventory to build? Because if some of these things are delayed, you know, a year or so, might you actually have the opportunity to try to spec in some of the 650s in place of what was supposed to go in? Or is that just not feasible?

Yeah, I think the answer to that is yes. But we already know projects that are on the board over the next, well, sort of the 24 months that are Q400 spec. and frankly are so far along in the design phase, it's unlikely that those projects will change product. And so we've got a pretty good, you know, given where we're at today, we've got a pretty good crystal ball of sort of the Q650 transition time. And so that's sort of number one. Number two is that, you know, we saw the Q300, Q400 transition sort of take sort of two plus years to play out to get it to where the Q400 is our primary product today. And so we think it's going to take, even with sort of this early momentum around the 650, we think it's going to take a couple of years for the 650 to become our primary product. And that's probably 2028 before we see that. So we feel pretty good about how many Q400s we need to be building over the next couple years, and how many 650s that we should be building as well.

Yep. Okay. And then my last one, and then I'll pass it on, is just obviously the delays are focused on the Middle East and the conflict, but the conflict itself has led energy prices higher Obviously, desal is very energy intensive no matter where on the globe people are doing it. Now, the PX device is going to lower that energy footprint, but still versus a few months ago, any project is going to look a little more expensive. So is there any sign that there's, you know, any kinds of delays outside of the Middle East just given the higher energy cost spike?

Yeah, that's a really good question. So the answer is no. Not to this point. We have seen a few delays in some wastewater projects because of the cost, input cost of materials. And so, but there have been small projects and pretty small scale. So nothing really at this point that would say desal projects in general globally are being impacted even given sort of the high energy price at this point, are being impacted by the war. Now, TBD, right, if it continues. But so far, the answer is no.

Understood. Very clear. Thanks for your time.

Thank you, Ryan.

Thank you. Our next question comes from the line of Ryan Finks with B Riley Securities. Please proceed with your question.

Hey, David. Thanks for taking my questions. 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 megaproject side?

Yeah, I think if you think about sort of the next two years of We're excited about China and some of the desal activity that looks to be ramping up there. And I would say South America, which would be the sort of second area where we see some activity that's starting to pick up there. So I think those are the sort of the two general areas. The third I would say is a wild card would be Texas. You know, there's been a lot of talk about desal projects for the last couple of years. Should some of those projects really start to prove out and start to happen, that could be some really nice business for us. And so I would say those are sort of the three areas that we're watching pretty closely.

Got it. And then has there been any change or updates to how you're thinking about your manufacturing projects? footprint expansion globally, just given the recent geopolitical events?

No, I think, you know, the strategic reasons for us looking in the Middle East are still the same regardless of conflicts, right? So first and foremost, it's our biggest base of business and looks like it will be over the next five to 10 years. And so that's sort of reason number one, right? Reason number two is we've got customers there that are really, really pulling us for local content as it relates to building PXs on the ground. And so that's not going away in the near term. And then I think the third thing is that the icing on the cake would be the low cost benefits that we get by moving a manufacturing facility to the Middle East. And so, look, we continue to be full speed ahead in our planning. You know, it's still our target by Q1 to be able to start manufacturing Q400s, assembling Q400s overseas. And so we continue to push down that path.

Appreciate that. And then maybe just One more on wastewater. The prior 2026 outlook was 10 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. Hey, Ryan, this is Aiden. We are pausing our guidance on both desalination and wastewater. So we're not going to comment specifically, but there's a lot of good things going on in wastewater. We also have some challenges, like David mentioned, and we look to update that when we update our overall guidance, hopefully here in Q2 or Q3.

Got it. Appreciate it, guys. I'll turn it back. Thank you.

Thank you. Our next question comes from the line of Larry Salo with CJS Securities. Please proceed with your question.

Yes. Hi. It's Pete Lucas on for Larry. You covered a lot in your previous answers. I guess just one for me. Given the short-term uncertainty, how do you think about cost-cutting as a lever to pull to maintain free cash flow, and how should we think about that as an option for you?

Yeah, some of those things are definitely part of the existing plans, as we highlighted in the shareholder letter. Focus is on maintaining cost discipline. So we've talked about reducing manufacturing costs domestically with Lean and Kaizen programs. David just talked about the manufacturing footprint strategy. That is part of our plans to reduce cost. And we're always focused on that.

Yeah, I would say the other thing, Pete, is that, you know, we did a We did a major reduction in forest last year. We did a reduction in forest to start the beginning of this year. And so, you know, as we think about further cost cutting in SG&A, other than the belt tightening and continuing to sort of trim around the edges, there's not a lot of big one-time opportunities left. I think we've done a pretty good job of reducing there where we had the opportunity. Where we see opportunities going forward is really productivity gains at the factory and sort of continue to get smarter where we work in our SG&A to the extent that there are opportunities. But sort of no big-time opportunities left.

Very helpful. That's it for me. Thanks.

Thank you. 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. So I just wanted just to repeat what I had said in my opening remarks. You know, our strategic direction will not change during this uncertain time. We will remain focused on product innovation. I think we've proven that with the Q650. We've got more products on the drawing board. As we move forward, cost discipline, our manufacturing transformation efforts, both here and overseas, and then the growth of our wastewater business are all things that we'll remain focused on as we move throughout the year. Thank you, Operator.

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

Goodbye.