Energy Recovery, Inc. Aktie

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 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 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 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 Aidan 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 PX Q650. 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. Aiden 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.

[Operator Instructions] Our first question comes from the line of Ryan Connors with Northcoast.

David, congratulations on the retirement decision. And Aidan, congratulations on the elevation. Actually, a quick question on that. Will the search lean internal or external? Or is that just sort of everything is on the table in terms of your replacement, David?

Ryan, everything is on the table.

Okay. And then in terms of just unpacking the Middle East situation a little bit. I think we got two different types of issues, right? One is a short-term delay, a project gets pushed out six, nine months.

I think everyone -- 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 what's -- 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.

Yes. So, I think, Ryan, obviously, it's still early days. But what we're hearing both internally and as we talk externally to others that are in the industry is that the project delays will be just that. There are likely to be some delays as we move from '26 into '27.

But 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 delayed, we still feel good about the long-term fundamentals of desalinization.

Yes. Yes. I have to just keep track of it, I guess, as it plays out.

And Ryan, 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 what gives you confidence to be building that inventory when things 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 might -- if some of these things are delayed 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?

Yes. I think the answer to that is yes, but we already know projects that are on the board over the next 12, sort of 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 -- 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 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 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 of years and how many 650s that we should be building as well.

Yes. 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 any kinds of delays outside of the Middle East, just given the higher energy cost spike?

Yes, it'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. TBD, right, if it continues. But so far, the answer is no.

Our next question comes from the line of Ryan Pfingst with B. Riley Securities.

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 mega project side?

Yes. I think if you think about sort of the next two years, 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'd say those are the sort of the two dual areas.

The third, I would say, is the wildcard would be Texas. 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 update to how you're thinking about your manufacturing footprint expansion globally, just given the recent geopolitical events?

No. I think 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 we're really -- and so that -- and that's not going away in the near term.

And then I think the third thing is that the sort of 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. It's still our target by Q1 to be able to start manufacturing Q400s, assembly 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 million 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 -- Ryan, this is Aidan. 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.

Our next question comes from the line of Larry Solow with CJS Securities.

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?

Yes. Some of those things are definitely part of the existing plans, as we highlighted in the shareholder letter, our 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.

Yes. I would say the other thing, Pete, is that we did we did a major reduction in force last year. We did a reduction in force to start at the beginning of this year. And so as we think about further cost cutting in SG&A other than the belt tightening and continuing to sort of turn around the edges, there's not a lot of big onetime opportunities left.

I think we've done a pretty good job of reducing there where we have the opportunity. I think where we see opportunities going forward is really productivity gains at the factory and sort of continuing 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.

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 want -- just to repeat what I had said in my opening remarks, 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.

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 hard 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 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 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. 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. And what I've 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 use of 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, I was clear this business couldn't achieve scale adoption without significant continued time, investment and risk.

It's a disappointing outcome and I'm generally grateful for the hard work our team members put in 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. We're 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 question-and-answer portion of our conference call. Operator, please open the line for questions.

[Operator Instructions] Your first question comes from Larry Solow with CJS.

Just to quickly summarize. So essentially, the Q4 shortfall, 2 contracts, 2 projects, excuse me, pushed into '26, and then for 26, essentially, you're saying $45 million, if I take kind of the mine, plus or minus. I realize it's not exact science, but 3 particular projects are shifting into '27, and then you're adding kind of another, I'll call it, wiggle room, but I don't want to turn it, about $15 million to $20 million to sort of what you call derisking the revenue outlook. Is that a good way to summarize it? .

That's right. The only clarification I'd say is that the 3 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. .

So the -- but the -- you're assuming those 3 projects don't occur, right? And --

The guidance assumes those 3 projects, correct. And that is on the order of $25 million to $30 million of projects. .

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

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

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

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

It did happen kind of surprisingly fast and more widespread. It's only 3 projects. So there's 2 things going on. One is that products are getting bigger, right? So Five years ago, we didn't have many projects that were of this size, and now we do. So we will feel the pain on the large project lifts. 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 just a 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 the 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 time lines.

No. That's all fair. And the cost savings, you spoke about irrespective of the CO2 stuff, you said your OpEx, I guess, from 77% to 64%, And I assume, again, to get into CO2 I have 1 question on that, but your OpEx 64 core or whatever that is XO2, that -- you plan further cuts in 2016? Yes. So -- so CO2 comes

Of that number. 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 OpEx. And

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

Beyond there's margin benefit there from lower cost manufacturing for sure. And so we're incurring some of the cost of that this year. and we'll get it next year.

Do you realize the full 7 this year or maybe not quite from the CO2 exit.

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

Your next question comes from Sandra with B. Riley.

I'm asking on behalf of Ryan Pfingst from B. Riley Securities. Yes. So just on this PxQ 650, your new product, it presents a meaningful step function improvement over your existing products? So can you maybe help us understand how is it priced relative to the existing product? And is it a premium product with ASP uplift? Or what's the strategy bringing cost down or improving the revenue, how do we look at that?

Yes, 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 sharing some of that savings with the customer and us.

And one more on the manufacturing expansion outside of U.S. So what's the expected time line on the selection and selection of the new site? And what's the total capital commitment beyond given for 2026?

Yes. So we're working on the site selection now -- and that should be -- we should be able to finalize that by the end of the first half, with 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 with the idea that we'd be on ground in first quarter of next year.

It's a our capital costs, we're earning a lot of the CapEx this year. You saw in our guided range. We've been spending about $1.5 million for the last 2 years. This year, we're guiding $3 to $6 million. 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.

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

I would expect similar cadence, yes.

And then just last one for me. On the CO2 business, are there any other applications we use are looking into potentially developing now that -- this one is -- so -- or is it like 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 and 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 immediate.

[Operator Instructions] Your next question comes from Jeffrey Campbell with research Seaport Research Partners.

Yes. First of all, thanks for the expanded guidance. Very helpful. And a quick one, do the savings from the wind down of the CO2 represent a further reduction in head count SP1 There was about

There was about 20 heads associated with the wind down of CO2. And that was both salaried and manufacturing. .

Going back to the question about the PX, QX6500. I was just wondering how will it -- I understand what Mike said about how you market. The device and arrive at your number, what you charge and so word. But I just wondered how is it going to affect the rest of your lines, meaning the PX Q400 was the top of the line before. mean I guess that gets knocked down a peg with the 650 coming. Is there a point where some of these more legacy pieces of equipment, do they migrate to wastewater? Or do you just quit making them? Or how do you manage that?

So when we had introduced the Q400 about 2 years ago, we thought that the Q300 is the transition of the would take us about 2 to 3 years. That's proving out to be the case. We'll still be making 300, 300 this year and should be making much fewer in 2027. And so we suspect the same sort of transition from the $400 million to the $650 million. We'll start manufacturing the $6.50 per sale in the second half of the year. And so my guess is we'll start seeing the Q4 ramp down as we get into -- back half of '27 sort of 2028. So I think it will take a couple of years, 2 to 3 years. for us to read down the Q400.

And just to add some color on that too, Jeff, is we saw a fair amount of Q300s in our OEM business. And in our wastewater business. We sell some Q400s there -- if some systems get bigger, that might be a thing, but I can see the Q400 being lower than the Q300 a few years when to make that transition. And that transition happens mostly in the mega project space.

So does that imply when you said earlier, you thought the Q300 would worse out in like 2 years. Is that projects? It is doing a project. But the idea is you may still make it, and it may find an implementation of wastewater. Is that what you're saying?

It already does. Yes, we sell it in our OEM cell business and our wastewater business today. And I expect that to you. And you pointed out that the new device is going to start being manufactured in the

Second half of 2026 that we're sitting here talking about project delays. Does that create an opportunity to try to move some of these 50 into some of these projects that haven't quite born their fruit yet -- that would be

That would be the absolute plan is to just try and do that. Okay.

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, where they just short-term opportunities, and now you're taking a different tact and going someplace else or how do we put those 2 together?

The move to Korea was short term in nature. -- and that was to protect our China business over tariffs, right? And so we were able to -- in 6 months' time, we were able to quickly put that in place. It's an assembly-only operation. we take advantage of the Korea, China tariff 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 and places like that to ensure that the Fenix rate that we're looking at going forward, our newest factoring will sort of be holistic in terms of where we can ship product to a 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 manufactured overseas was not what you would consider to be rich in -- so is it still going to be that whatever you consider to be more mission critical to screen in the U.S.? And then are there some overseas? Or are you actually paying about building IT valuable stuff overseas.

Yes, it's a good -- so I think to start, it will be sort of mission critical, but over time, over a 2- to 3-year period. will be full on manufacturing in that new site. So that's how to think about it. over a 2- to 3-year period, there'll be a self-sustaining full-on manufacturing Okay. Without meaning to suggest a lack of faith, you've invested meaningfully in wastewater in 2026 to suggests a huge amount of revenue growth on an absolute basis just yet.

So I'm just wondering, what are your gaining items for deciding that this business is not meeting investment goals similar to what you've demonstrated with CO2? Or is that just not part of the thinking.

Yes, 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 fly. We all let 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, right, this business has done $10 million to $12 million in the past before is a high 60% -- mid- to high 60% margin business. And it's 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.

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

And finally, we've noted that you have taken Flowserve to court for patent infringement. I wondered how you arrived at the decision to move forward here, particularly since we sort of select device that's not to our knowledge, granted any large contractor date.

Yes. Look, I think the court cases are proceeding, and we're still going through the early additional phases of the corporate savings, and that's all I can really say as it relates to that at this point. We're going to protect our IP that I will say. And so this case reflects us protecting our IP.

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.

Good day, ladies and gentlemen, and welcome to Energy Recovery's Third Quarter 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 Securities (sic) [ 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 other 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, November 5, 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. Moon.

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. Prior to opening the line for questions and answers, I'd like to highlight a few important takeaways from that letter. First, we had a strong quarter of sales execution. Mega-project shipments improved during the quarter and wastewater revenue continued to rebound such that we are reiterating our full year revenue guidance. Second, the team has done a nice job this year controlling costs, and we are reducing our full year OpEx guidance even further.

We have made a number of decisions to drive efficiency and lower costs while still investing in our growing wastewater business. We expect growth in Q4 and next year to be achievable with only modest increases in operating expenses. And finally, our CO2 business had a nice summer season of testing. While OEM engagement is strong, we remain in the very early days for commercialization.

We are focused on gaining traction in 2026 and plan to provide clear updates on our progress. As always, I want to thank our employees here at Energy Recovery. Our sales execution and cost control were strong this quarter, and this could not have been done without a lot of great teamwork. With that, we'll now move to the question-and-answer portion of our conference call. Operator, please open the line for questions.

[Operator Instructions] And our first question comes from the line of Ryan Pfingst with B. Riley Securities.

I'll start where you left off there on CO2. Just curious, what were some of the main takeaways from the recent white paper that you think customers and investors should most be aware of?

Yes. So I think there are 3. So the first, similar to the white paper from last year, we just validated the fact that we save energy and up to 15% at peak times. And so strong energy savings performance. So that's number one. Second is to the extent that a store is located in a part of the country or in Europe, in Southern Europe where adiabatic coolers are required, we can save tremendous amounts of water. So that's number two. And we validated that as part of our summer season of testing here in California.

And then I think the third and a really important part of our value proposition that we didn't talk about, we should have talked about more last year was the fact that we provide an increased performance during high heat load days. So when the system is working its hardest, the PX G allows for additional capacity during those high heat load days. And so those are the 3 critical parts of the value proposition that we proved out over the course of this summer.

Appreciate that. And then you touched on this and maybe you want to save it for your next update. But I was wondering if you could tell us about your progress with OEMs and your confidence in signing a commercial agreement with an OEM partner over the next few months.

Yes. So I think -- so look, this summer season of testing was about working closely with OEMs to prove our value proposition in the field. And I think we checked the box on that. So where -- so what's the next step? So what is happening now is that OEMs are now beginning to have conversations with some of their largest end users about the PX G, and to the extent that they already haven't done so.

And what's going to happen, Ryan, is that most likely, those customers are going to want to test the PX G themselves over the course of next summer. So I think we have another summer season of testing in front of us. And I think because of that, we're probably a year away from being able to sign a commercial agreement with a large OEM. I think the large OEMs are going to want to see that summer season of testing, a successful testing season with some of their larger customers before they're going to sign a commercial agreement. Now we've signed an MOU with Hillphoenix already. And so we're on a path to being able to sign a commercial agreement with them, but it's likely going to be in 2026.

Got it. Appreciate that. And then turning to the water side. We've seen the U.S. administration kickstart efforts across different industries, such as nuclear energy or critical minerals. Do you think there's a possibility that we could see something like that on the water front maybe for desalination?

Ryan, this is Mike. Look, I think that all of the AI and the energy that's going to serve it only goes to improve our long-term water trends, right? There's a long-term desalination trend already, and I think it does help the long-term trends. I think what we're really cautious about is translating that to near-term results for us as this infrastructure takes a long time to build. So I think we're highly encouraged with the long-term trends and some additive stuff there. We want to be cautious about near-term expectations on it.

Appreciate that, Mike. And then I'll just sneak in one more, somewhat related to your comments there. On the data center opportunity, curious if there's anything new to report there, either on the wastewater front or refrigeration.

No. Look, Ryan, we continue to monitor it closely. So -- and I think we said on the last call that because CO2 is still a very small part of the refrigeration portion of data centers, that there likely wasn't going to be any near-term opportunity for us. Now should CO2 jump to the front of the refrigeration line, then that could change.

And so I think as it relates to refrigeration, still nothing near term that we see. I think as it relates to water reuse and water treatment for data centers, that's something that we're just starting to better understand. And I think we'll have a better view of that over the next couple of quarters.

The next question comes from the line of Larry Solow with CJS.

I guess just a follow-up on the CO2 question first. So it sounds like the white paper takeaways and the data were in line or with your expectations and good. So your -- maybe your confidence in the adoption hasn't changed or maybe even better, but timing sounds less certain. I'm just curious, I know it's more, but you changed your strategy more to a top-down OEM to customer versus vice versa.

But I guess at the end of the day, some of these larger customers still -- do they normally make the decision? Or is it in conjunction with the OEM? Or do the OEMs -- since their reputation is on the line on a big switch like this, do they -- is it just taking them more time and they just need to -- they want their customers to be on board as well? Or is there just anything that's holding up the adoption or pushing it out a little bit?

No, it's a good question. Look, large retailers, both in U.S. and Europe, rely on OEMs, not only for the design of the -- the equipment design, but the install and in some cases, the service [ afterwards ]. And so they really want to pull along their OEMs, especially when it comes to new technology. And so as we -- and then -- so that's what we're -- we knew that was going to be the case, and that's certainly what we're finding. And so our path to a large retailer like a Walmart is going to go through a large OEM like Hillphoenix.

And so the 2 are going to have to be in lockstep. And so what we expect to happen as the next step now that we've gotten through a successful summer season of testing is that we expect Hillphoenix will now start promoting us to the likes of a Walmart, and we'll get test stores in the first half of the year with them. And so we'll start that process with -- confirming the technology with a couple of these large retailers over the course of next year. But it's going to be with these large retailers pulling the OEMs along in lockstep. That's just the way it's going to work.

Okay. So it doesn't sound like your confidence has changed at all, right? Or the inevitable -- listen, the ROI, I guess, goes down a little bit because it's pushed out 1 year, but it doesn't feel like -- right, that's kind of the one change. I guess I know you're not ready to make any major decisions today, but it sounds like you're not going to get to that sort of 4 or 5 customer adoption next year, but that doesn't necessarily mean your confidence in the overall program has changed. Is that a fair assumption?

No. Larry, look -- no, I think -- look, I think we had a good summer season of testing. That's what we know. And we know that OEMs are now starting to talk to some of their larger customers, which is a good thing. We know that we're going to have another season of testing in front of us in 2026, and that real commercialization is likely going to happen in 2027. So our view, OEMs are still very, very interested in the product, still very interested in the product. We're getting pull. And so it's just a question of speed.

Okay. That's fair. I appreciate that. Just quickly on the desal. It sounds like -- I know the long-term fundamentals don't change much. Just so fast that is just curious, we're somewhat newer to the name. Your visibility, I know always could move around a little bit from quarter-to-quarter. But this time of year, as you look out to the next year to '26 without giving us numbers, but does your visibility start to fill in as we look out on a 12-month rolling basis, even though I know quarters could slip a little bit?

Yes. We should start to see backlog building now for 2026. So now it will be relatively small because if you think about our last -- now what's going on in year 3, the sort of the pattern of backlog build for us has been sort of slow first half, very heavy second half. And that's not going to change for 2026. We expect the same sort of pattern. So we should enter the year with some backlog. It's likely not going to be significant, but the second half is where the story will be told. And that's been the MO for the last 3 years.

The next question comes from the line of Jeffrey Campbell with Seaport Research Partners.

Congratulations on the solid results. I wondered -- David, I wondered if the impressive operating cost reduction that you have highlighted, did it benefit in some way from your efforts to establish an international footprint? Or did they occur in spite of those changes? Or were they just completely unrelated to each other?

Yes, they're unrelated to each other. Jeff, we were able to reduce costs, and we've been very mindful of costs since starting last year. And so we've been able to really, really watch our costs over the course of the year, especially when tariffs hit us so hard in the first quarter. So we took action very quickly. That's why we've been able to be so successful this year to be able to drive OpEx down. But it hasn't stopped us from investing in growing wastewater nor did it stop us from investing in this manufacturing option to be able to forgo the tariffs from China. So we've been able to do both.

Okay. The announced lithium project is an application of PX that I was excited to see progressing from a pilot to a project. I'm just wondering, is there enough potential work in this area to make it a meaningful niche in wastewater treatment.

Yes. I mean this lithium extraction project that we just won, which is in Argentina, that's a $350,000 project, and that should hit us this quarter. And so we think this is the first -- and we've had several projects in China already where we've been able to win lithium extraction projects. And so we think there are more to come here.

Okay. I was just curious, you've talked intermittently about hiring new people for the wastewater effort as your confidence in this growth has increased. I just wonder what do you look for in these kind of hires? Are you looking for existing relationships or industrial knowledge or something else?

Yes. So we're looking for people that have a track record in the wastewater space. That's number one. Number two, a track record within at least 1 or 2 of the 5 verticals that we're focusing on. So that they bring experience, they bring relationships with OEMs, with end users. And so those are the 2 primary attributes that we're looking for when we're hiring these -- hiring new salespeople and technical support people.

And the last question, regarding these retailer tests for next year that you kind of laid out for us in CO2, are these likely to be skid installations as you've done in the past?

Yes, more than likely, Jeff, there'll be -- I would say majority will be skid. Existing CO2 locations with the skid install.

There are no further questions at this time. I'd now like to turn the call back to David Moon for closing remarks.

So thank you, operator. So thank you to all of our stakeholders for your continued support, and we look forward to updating you on our next call. Enjoy the rest of your day.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.

Good day, ladies and gentlemen, and welcome to Energy Recovery's Second Quarter 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 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, August 6, 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. Moon.

Thank you, operator, and good afternoon, 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, we are reiterating our 2025 guidance on all metrics and reinstating our wastewater guidance. Our core desalination business is proving resilient to the macro environment. We signed multiple large deals in the period, and we have line of sight to full year revenue based on our contracts and pipeline. In wastewater, the tariff impacts are expected to be better than we initially indicated in Q1, and we are comfortable issuing guidance despite remaining tariff uncertainty.

Second, today, we announced an additional share repurchase program. In the past 10 months, we've announced 3 share repurchase authorizations totaling $105 million. We believe these programs will enable us to repurchase over 10% of our outstanding shares in aggregate while still executing our playbook and reinvesting for growth. And lastly, our conviction in the long-term trends driving our business is increasing. Contracted desalination capacity, water reuse capacity and CO2 refrigeration installations are all growing at high rates. We are poised to capture the upside of these trends as we march toward our 2029 goals. I'd also like to say thank you to our employees here at Energy Recovery. The team was creative and decisive this quarter in executing during an environment of high volatility.

With that, we will now move to the question-and-answer portion of our conference call. Operator, please open the line for questions.

[Operator Instructions] Your first question comes from Ryan Pfingst with B. Riley.

Congrats on the strong update here. Appreciate the color around annual desalination contracted capacity in the shareholder letter just now, David. Does that kind of expected capacity growth in addition to your recent awards give you confidence perhaps in achieving the higher end of the longer-term ranges you set in November for desal revenue, particularly if we're thinking about 2026?

Yes. I think -- so that's a good question. I think it's too early to tell. And just a reminder, that contracted capacity, those are projects that are -- we believe will be tendered during that time period, but making water could be 2 or 3 years out in terms of when the projects are ready. So we're still getting clarity around the content of that $550 million pipeline. But I think with the awards that we saw this quarter and what we're seeing early in '26, we're feeling confident about '26. And we'll be able to give you some guidance around 2026 as we get into the third quarter earnings call.

Yes. And Ryan, just to add there, I think it's more indicative of the increasing pace of desalination that the water scarcity trends are driving action, and that is really good for our long-term growth. It's hard to pinpoint that and make that any specific annual growth, but it is just a coming wave.

And I think that's a coming wave for desal, and I also think it bodes well for wastewater as well.

Great. Yes. Makes sense. I appreciate all that. And then for the next-gen PX, it sounds like you expect some meaningful improvement compared to the Q400, which already appears to be performing extremely well. Do you expect this new product to carry a higher selling price? Or is the key here to maintain or even increase market share to the extent you're able to?

Yes. Ryan, this is Mike. So yes, I'd say the general trend here and what we saw from going from Q300 to Q400 and then Q400 to something greater than 500 is that we typically price on a capacity basis, so cubic meters per day basis. So you can have an increasing price per unit as we try to price per capacity. So that is a trend that we have seen in the past and I think we'll continue to see. Exactly how much is still TBD. But in general, yes, you'll need fewer units to fill a plant, but we will charge based on capacity, not unit, if that makes sense.

Yes, that does. Appreciate that, Mike. And then on CO2, do you have a broader update on your work with Hillphoenix or some of the other OEMs that you're working with today?

So Hillphoenix, the discussions around the commercial agreement are ongoing. So I'd say we continue to make progress there. We're in the middle of our summer testing season, and we continue to add new sites. We added 7 new sites in the quarter, in the second quarter. We will add new sites in the third quarter as well. So I'd say the summer testing season is going as expected, and engagement with OEMs remains high as we move through this testing season.

Got it. Great. And then last one for me. It might still be early days, but you talked about potentially developing a business case for data center markets. Curious if that has progressed at all.

Yes. So we've been working on a business case for data centers and for heat pumps both. I'd say the early read on data centers is that CO2 is still a very nascent, sort of very small part of that market. So unless that is going to grow at some sort of increased pace, then it's looking like data centers is not going to be an opportunity for us. We'll finalize that view here over the next few months, but that's the early read on data centers. Now heat pumps is looking promising, but more to come over the next couple of months.

[Operator Instructions] Your next question comes from Jeffrey Campbell with Seaport Research Partners.

Congratulations on a pretty strong quarter, all things considered. David, the letter described a much better result in China than the worst-case scenario that was provided last quarter. Is this because the tariffs have touched your work less than anticipated? Or has it emerged that there's more commitment to your product at a higher price than you anticipated or some combination of the 2?

Yes. So I'd say that pause in tariffs back in May really opened up projects that were sitting there on the board that we have been working on through that period where there were 100% plus tariffs for products going into China. Our team continued to work on -- continued to nurse those projects along. And as soon as tariff rates dropped, we were able to execute on those projects and ship more than $2 million in the quarter. We continue to ship now. And so I just -- I chalk that up to a very focused sales team in China who never stopped pushing, and the pause in tariffs really helped our -- really helped us. Would you add anything, Mike?

No, I'd say at 125% tariffs, it's difficult to do business in China. And so I think the reduction of 10% was a big deal.

Okay. It seems like that you've broadened your wastewater footprint meaningfully in the last quarter when I look at some of the other countries that you cited. Did that meet your expectations? Or did it exceed them?

No, I think -- look, we set ourselves a goal. So there are 5 verticals, right? There are 5 verticals in wastewater that we're focused on, right? It's municipal, it's chemical, it's textile, it's manufacturing and it's mining. So those are the -- out of the 20-or-so wastewater verticals that we could be focused on, those are the -- those were the 5 with the largest share of market size and where we think we have the right to win. And so we've been we've been ultra-focused on those 5 over the last 18 months or so.

And so the fact that we've really broadened our reference case list over the second -- the first and second quarter, that's just a great -- that's a great effort by the sales team to really go after those 5 verticals. And so it was expected maybe not as soon as we got the reference cases, but we've been working hard to focus on those 5 verticals. And there's more to come. So we gave ourselves a goal. We said back in November 2 reference cases in each of those 5 verticals by the end of the year. And so we're well on track to be able to do that.

Okay. You mentioned that reliability is a key issue for the PX G related to current testing. I just wondered how much time on task do you think is likely required to convince testers to become dedicated users.

Yes. So last season was about proving the value proposition, right? And so our -- the white paper that we published in September of last year laid out the value proposition. We got good response from OEMs. And so OEMs told us, great. Now let's move on to another testing season. And this season, we're going to focus on reliability, right? And so that's what we're in the middle of now. We've got a couple -- we've got the rest of August and September in terms of testing time. And so, so far, so good.

And so I think what will happen is we'll get through this summer testing season. OEMs and the select number of end users that we've been working with will then step back and take a look and understand whether has that been enough or whether they're going to want to see an increased sample size next time around for the following summer. And so that's TBD. And we'll know a lot more about this as we get into the end of September, beginning of October.

And my last question, I'll go back to wastewater. In the shareholder letter, it said increasing water reuse across industries and geographies, which is a trend you called out. Do you see this as more of a push for industrial reuse of their water or trying to treat it all the way to being potable water? I just ask because potables presumably would require more treatment than industrial effluent. Just sort of trying to get an idea of what's going on. And also, is the motivation here more economic or is it environmental regulations or environmental stewardship?

Yes. This is Mike, Jeff. So I'd say that it's all of the above. So especially with our -- some of our new products we came out, especially the low-pressure PX, when we say the municipal end market, that is really tertiary treatment for potable reuse. I think that's kind of going to increasing the geography as well that as we expand municipalities that those reference cases can then expand to other geographies. So I think it's sort of all of the above for wastewater that we have a broad product portfolio that can reach lots of things. And the main driver typically is regulatory, but what's driving the regulatory is a serious water scarcity issue. And so I think it really -- it's hard to say -- it's regulatory driven, but it's for economic and growth reasons and water scarcity reasons. So we're encouraged with the long-term trend [indiscernible].

At this time, there are no further questions in queue. I'd like to turn the call back to our presenters for any further remarks.

So thank you, operator. So thank you to all of our stakeholders for joining us today on the call. We appreciate all of you very much. We look forward to updating you on our next call after the Q3 -- after Q3. Thank you, operator.

This concludes today's call. Thank you for attending, and have a wonderful rest of your day.