Energy Recovery - Q1 2025
May 7, 2025
Executive Summary
- Q1 2025 came in line with management’s internal cadence for a back-end weighted year: revenue $8.1M (down 33% YoY), gross margin 55.3% (down 370 bps YoY), net loss $9.9M, adjusted EBITDA loss $8.7M, and free cash flow $10.5M.
- Management reiterated confidence in desalination and CO2 revenue guidance, citing contracted projects and a strong pipeline with visibility into more than 80% of expected 2025 desal revenue; they reaffirmed gross margin guidance.
- Tariffs have broadened in scope; ERII expects to offset the majority of the net tariff impact in 2025, with possible near-term manufacturing footprint actions to mitigate exposure.
- Significant consensus miss: Q1 revenue $8.07M vs S&P Global consensus $21.97M*, EPS -$0.18 vs $0.00*, driven by timing (including ~$2M shipped but not recognized) and fixed-cost absorption; sets up future quarters if shipments and mega-project revenue recognition catch up.
What Went Well and What Went Wrong
What Went Well
- “Q1 was in line with our expectations regarding revenue and profitability and consistent with another heavily back-end weighted year,” reinforcing the cadence narrative and multi-quarter visibility.
- Strong desalination pipeline and quoting activity, with continued bullishness on Middle East and North Africa demand, supporting 2025 visibility.
- CO2 refrigeration on track: three OEMs integrating the PX into rack designs, with pilot test sites expected for summer; Hillphoenix engagement advancing with a commercial agreement and integrated test site targeted as near-term milestones.
What Went Wrong
- Revenue declined 33% YoY to $8.1M due to timing of contracted projects; gross margin compressed to 55.3% on lower revenue over fixed costs.
- Wastewater faces potential China tariff exposure (~$9M of revenue), prompting efforts to offset with other geographies while holding guidance for now.
- EPS and revenue missed Wall Street consensus materially, reflecting timing and absorption impact; a shipped mega-project order (~$2M) wasn’t recognized in Q1, muting both revenue and margins.
Transcript
Operator (participant)
Good day, ladies and gentlemen, and welcome to Energy Recovery's first 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, May 7th, 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 like to now turn the call over to Mr. Moon.
David Moon (President and CEO)
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. I encourage all of you to read the letter in full. In addition, and in response to investor feedback, I'll make a few opening comments to highlight important takeaways from that letter. First, the first highlight is that Q1 was in line with our expectations regarding revenue and profitability and consistent with another heavily back-end weighted year. Our desalination business remains strong and on track for the year. Turning to tariffs, as we noted during our Q4 earnings call, we are directly affected by tariffs. As tariffs have increased in scope and magnitude during the last two months, so too have our initiatives to offset them.
We believe we'll be able to offset the majority of the net tariff impact with manageable impact to our financial results for 2025. Our CO2 business remains on track, and we're making clear progress towards full commercialization. We now have three OEMs working to integrate the PX into their rack designs and expect all these OEMs to have at least one pilot test site running for the summer season. We're also excited to be able to speak publicly about our work with Hillphoenix for the first time, as noted in our shareholder letter. I'd also like to take this time to reiterate my appreciation for the team here at Energy Recovery. We have experienced a lot of change in the past few quarters, and I'm proud of the resiliency and dedication they've shown. With that, we'll now move to the question and answer portion of our conference call.
Operator, please open the line for questions.
Operator (participant)
If you would like to ask a question at this time, please press star, then the number one on your telephone keypad. Please be prepared to state your question when prompted. Once again, please press star, then the number one on your telephone keypad to ask a question at this time. Your first question comes from Ryan Finks with B. Riley. Your line is open.
David Moon (President and CEO)
Hey, Ryan.
Ryan Finks (Analyst)
Hey, guys. Thanks for—hey, David. Thanks for taking my questions. Could you start with some broad color on the desal market? What geographies are you enthusiastic about, and any impacts you've seen from a potentially tougher macro backdrop?
David Moon (President and CEO)
I think as it relates to a tougher macro backdrop, nothing changing. We're still seeing the pipeline very strong. Quoting remains strong. The contracted projects that we're following remain very active. We continue to be very bullish on the desal market, and we continue to be very bullish on the Middle East and North Africa.
Ryan Finks (Analyst)
Got it. For the mega project order that was shipped but not recognized as revenue in 1Q, curious what the revenue impact was there to get a sense of how the first quarter might have looked for revenue and for gross margin as well.
Mike Mancini (CFO)
Yeah, Ryan, it was a relatively small order. It was about $2 million.
Ryan Finks (Analyst)
Okay. I appreciate that, Mike. Turning to your international footprint strategy, will you be looking to partner with someone in a contract manufacturing capacity or establish your own capacity? Curious your thoughts there.
David Moon (President and CEO)
Yeah. Our first preference is to go it on our own, right? To establish a 100% owned and operated Energy Recovery facility. That is what we are looking at now. In the short term, could there be an opportunity to partner with someone in order to help get product into China and around the tariffs, possibly? Those are all on the table at the moment, but I would tell you our preference is to do it on our own.
Ryan Finks (Analyst)
Appreciate that. Along those lines for wastewater, is there any opportunity to offset some of the lost China revenue this year with sales in other geographies?
David Moon (President and CEO)
Yeah, we're working on that. The answer is we think the answer is yes. Where it's all going to come from to be determined, but I think there's an opportunity to offset some of that $9 million.
Ryan Finks (Analyst)
Great. I'll just ask one more on CO2. Could you talk a little bit about your progress with Hillphoenix and what some of the milestones are that we should be looking for ahead of potential broad deployment of the PX G as a feature in their refrigeration systems?
David Moon (President and CEO)
Yeah. We are really happy with—so we spent a lot of time working with Hillphoenix last summer with field sites, right, testing during the summer to summer heat period with several Hillphoenix locations in North America. Because we had such good—we made such good progress and had such good results on those test sites, we now have moved into a phase with Hillphoenix where we are talking about integrating the PX G into their CO2 rack design. I would say there are two important milestones between sort of now and sort of Q3 with Hillphoenix. One is getting the commercial agreement done, which we are working on now with Hillphoenix. Number two is getting a test site for the summer with a PX G integrated into a Hillphoenix system. Those would be the next two milestones.
Ryan Finks (Analyst)
Great. Appreciate that, Color. I'll hop back into Q.
Operator (participant)
Once again, if you would like to ask a question at this time, please press star, then the number one on your telephone keypad. Your next call comes from Jeffrey Campbell with Seaport Research. Your line is open.
Jeffrey Campbell (Senior Analyst of Cleantech and Sustainability)
Good afternoon, and thanks for taking my questions.
David Moon (President and CEO)
Sure.
Jeffrey Campbell (Senior Analyst of Cleantech and Sustainability)
With regard to the alternative sourcing for the PX, you've always emphasized the stringent manufacturing quality of the PX as a barrier to entry for competitors. You said you would prefer to do 100% yourself. I was just wondering, where do you think you could move manufacturing and ensure the quality remains robust while providing the tariff production protection from the current production that's not provided?
Mike Mancini (CFO)
Hey, Jeff, this is Mike. Yeah, I think you got to think about a PX in two parts. One is the ceramics, and one is the pressure vessel. We would not, in the short term, move the ceramic manufacturing anywhere. We will do that here. That is really the key of the quality is in the ceramics. No thinking about short-term moving of the ceramics. That goes to some of the quality points we made in the letter. We will not sacrifice that quality. Where we assemble and where we do some of the testing and other things and bringing the vessels and screws and other pipes together is on the table. Longer term, that also goes to why David mentioned of us wanting to do it standalone by ourselves because of our process and our know-how on the ceramic side.
Jeffrey Campbell (Senior Analyst of Cleantech and Sustainability)
Thanks. Sort of thinking in an opposite way, are there any long-term advantages to developing an international production presence if the current situation is sort of pushing you toward?
David Moon (President and CEO)
Yeah. I think what it does is we have the opportunity to get closer to some of our customers. For the foreseeable future, the Middle East and North Africa are going to be both important regions for us, for sure, are today and will continue to be in the near future. If we think about that $550 million pipeline, the majority of that pipeline is in North Africa and the Middle East. Potentially having a location there closer on the ground to those desal facilities and those desal projects could serve us well and could serve our customers much better as well.
Jeffrey Campbell (Senior Analyst of Cleantech and Sustainability)
Yeah. I was sort of thinking along the same lines. I thought the deployment of wastewater sales resources also might be a long-term positive in disguise. Can you give us any color on alternative markets besides China that could potentially be positive for ERI solutions?
David Moon (President and CEO)
Yeah. I think as we think about it, we have a small presence in India today, which we've been really successful with. We've got two people on the ground in India. We're looking to double that this year. We've had early success there. That's certainly a market. There's some regulatory-driven opportunity there as well. We like our chances in India, both this year and into the long term. I think the other market where we have a lot of upside is North America, especially the U.S., and especially the municipality movement around moving to water reuse, especially in states like California. We like it, and we just hired a sales leader for the U.S. business. We'll be looking to add additional resources on the ground in the U.S.
I think the U.S. is the other market where we like our chances going forward.
Jeffrey Campbell (Senior Analyst of Cleantech and Sustainability)
Okay. You made it clear in the shareholder letter you wanted to hold the wastewater guidance for now, which makes perfect sense. It seems as though you—I think you did reaffirm the guidance for the other two divisions. I'm just wondering, what should we think about gross margins for the year with all these moving parts?
Mike Mancini (CFO)
Yeah. We're comfortable with the gross margin guidance that we've given. I think some of the key takeaways from this letter should be that we are very, very focused on margins, both gross and EBITDA net. We think we can—we've reaffirmed gross margin guidance as well. We think we'll fall right in there.
Jeffrey Campbell (Senior Analyst of Cleantech and Sustainability)
Okay. My last question, I agree with the earlier remark that the Hillphoenix collaboration is really positive, especially considering that you've been working with these guys off and on since the early days of the CO2 effort. When I read the shareholder letter, it sounded like there were a number of pockets of potential activity with Hillphoenix. Maybe I didn't understand that correctly based on the answer you gave earlier, but I was just wondering, maybe not thinking so much about revenue, but just collaborations or points of touchpoints, if you will, is it possible that there could be some upside by the end of 2025 from what was expected coming into the year?
David Moon (President and CEO)
Yeah. I think Hillphoenix is a very diverse customer. They not only participate in the retail space, but they also participate in the industrial space. As we build a relationship and get wins with them in the retail space, that's going to open up an opportunity to work closer with them on the industrial, the large warehouse, the food processing, those types of applications. I think Hillphoenix could become a multifaceted customer for us.
Jeffrey Campbell (Senior Analyst of Cleantech and Sustainability)
Okay. Great. I appreciate the color. Thanks for taking my questions.
David Moon (President and CEO)
You're welcome, Jeffrey.
Operator (participant)
At this time, there are no further questions in Q. I'd like to turn the call back to David Moon for any further remarks.
David Moon (President and CEO)
Thank you, Operator. Just a few closing remarks. I think number one is, look, we're confident in our desal CO2 revenue guidance. Our desal, our contracted projects, plus high-probability pipeline gives us visibility into more than 80% of the expected 2025 revenue, plus the desal market remains strong. As it relates to tariffs, we've mitigated most of the tariff impact and are still working on additional options to mitigate the rest. Finally, as it relates to costs, we've been executing on right-sizing our cost structure and also working towards margin expansion for 2025. Thank you all for joining today. That's it, Operator.
Operator (participant)
This concludes the call. You may now disconnect. Have a wonderful rest of your day.
Speaker 5
Good.