Energy Recovery - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 revenue was $28.1M (+3% y/y), gross margin 64.0% (-60 bps y/y) and operating expenses $16.5M (-15.8% y/y), driving operating income of $1.5M and net income of $2.1M.
• Results were a significant beat versus Wall Street consensus: Primary EPS $0.07* vs $0.02* and revenue $28.05M vs $25.44M*, with three estimates contributing to the consensus*. Values retrieved from S&P Global.
• Management reiterated full‑year 2025 guidance across all metrics and reinstated wastewater guidance; they highlighted improving tariff dynamics enabling shipments to China and maintained conviction in long‑term trends across desalination, wastewater reuse, and CO2 refrigeration.
• Capital return remains a catalyst: a new $25M buyback was authorized, bringing total authorizations to $105M since Nov 2024 (4.8M shares repurchased at a $14.90 average).

What Went Well and What Went Wrong

What Went Well

• Order execution and cadence: “Q2’2025 financial results were in‑line with internal expectations and consistent with our communicated expectations for quarterly revenue cadence in 2025”.
• Desalination pipeline and awards: Management has “line of sight to full year revenue based on our contracts and pipeline,” and reiterated 2025 guidance while reinstating wastewater guidance.
• China tariff relief unlocked shipments: “As soon as tariff rates dropped, we were able to execute on those projects and ship more than $2,000,000 in the quarter”.

What Went Wrong

• Gross margin compression: Gross margin fell 60 bps y/y to 64.0% due to product mix and tariffs.
• Emerging Technologies loss: ET segment posted a $3.95M operating loss in Q2 2025 (vs $5.56M loss in Q2 2024), reflecting ongoing commercialization and testing costs in CO2 PX G.
• Lower adjusted profitability y/y: Adjusted EBITDA was $4.4M vs $5.2M in Q2 2024 and adjusted EPS $0.07 vs $0.09, reflecting margin headwinds and mix.

Transcript

Speaker 5

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.

Speaker 2

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. Today we announced an additional share repurchase program. In the past 10 months, we've announced three share repurchase authorizations, totaling $105 million.

We believe these programs will enable us to repurchase over 10% of our expanding shares in aggregate while still executing our playbook and reinvesting for growth. 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 towards 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.

Speaker 5

At this time, we will conduct the question and answer session. If you would like to ask a question, please press star then the number one on your telephone keypad now, and you will be placed in the queue in the order received. Once again, to ask a question, press star then the number one on your telephone keypad now. Your first question comes from Ryan Pfingst with B. Riley Securities. Your line is open.

Speaker 4

Hey guys, thanks for taking my questions and congrats on, hey David, and congrats on the strong, strong updates 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?

Speaker 2

Yeah, I think that's a good question. I think it's too early to tell. Just a reminder, that contracted capacity, those are projects that we believe will be tendered during that time period, but making water could be two or three years out in terms of when the projects are ready. 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 2026, we're feeling confident about 2026, and we'll be able to give you some guidance around 2026 as we get into the third quarter earnings call.

Speaker 3

Yeah, 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 it's 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.

Speaker 2

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

Speaker 4

Great. Yeah, it makes sense. I appreciate all that. For the next gen PX, it sounds like you expect some meaningful improvements 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?

Speaker 3

Yeah, Ryan, this is Mike. 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. We typically price on a capacity basis, so a cubic meters per day basis. You can have an increasing price per unit as we try to price per capacity. 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 the unit, if that makes sense.

Speaker 4

Yeah, that does. Appreciate that, Mike. 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?

Speaker 2

Hillphoenix, the discussions around the commercial agreement are ongoing. 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 seven new sites in the quarter, and in the second quarter, we'll add new sites in the third quarter as well. I'd say the summer testing season is going as expected, and engagement with OEMs remains high as we move through this testing season.

Speaker 4

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

Speaker 2

Yeah, 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 the very nascent, sort of very small part of that market. Unless that is going to grow at some, you know, some sort of increased pace, it's looking like data centers are 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 are looking promising, but more to come over the next couple of months.

Speaker 4

Got it. Thanks for taking my questions, guys.

Speaker 2

Welcome.

Speaker 5

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 question comes from Jeffrey Campbell with Seaport Research Partners. Your line is open.

Speaker 0

Good evening and congratulations on. It's a pretty strong quarter, all things considered.

Speaker 2

Thank you. Thank you.

Speaker 0

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 anticipated, or some combination of the two?

Speaker 2

Yeah, you know, I'd say that pause in tariffs back in May really opened up projects that were sitting there on the board that we had been working on through that period where there were 100%+ tariffs for products going into China. Our team continued to work on, continued to nurse those projects along. 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. I chalk that up to a very focused sales team in China who never stopped pushing, and the pause in tariffs really helped us. Would you add anything, Mike?

Speaker 3

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.

Speaker 0

Okay. It seemed like that you've broadened your wastewater footprint meaningfully in the last quarter. When I looked at some of the other countries that you cited, did that meet your expectations or did it exceed them?

Speaker 2

I think, look, we set ourselves a goal. There are five verticals, right? There are five 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. Those are the five, out of the 20 or so wastewater verticals that we could be focused on, those are the five, those were the five with the largest share market size and where we think we have the right to win. We've been ultra-focused on those five over the last 18 months or so. The fact that we've really broadened our reference case list over in the second quarter, the first and second quarter, that's just a great effort by the sales team to really go after those five verticals. It was expected, maybe not as soon as we got the reference cases, but we've been working hard to focus on those five verticals.

There's more to come. We gave ourselves a goal. We said back in November, two reference cases in each of those five verticals by the end of the year, and we're well on track to be able to do that.

Speaker 0

Okay. You mentioned that the reliability is a key issue for the PX G1300 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?

Speaker 2

Yeah, last season was about proving the value proposition, right? Our white paper that we published in September of last year laid out the value proposition. We got good response from OEMs. OEMs told us, "Great. Now let's move on to another testing season." This season, we're going to focus on reliability, right? That's what we're in the middle of now. We've got the rest of August and September in terms of testing time. So far, so good. 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 that has been enough or whether they're going to want to see an increased sample size next time around for the following summer. That's TBD.

We'll know a lot more about this as we get into the end of September, beginning of October.

Speaker 0

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 potable presumably would require more treatment than industrial effluents. Just sort of trying to get an idea of what's going on. Also, is the motivation here more economic, or is it environmental regulations or environmental stewardship?

Speaker 3

Yeah, this is Mike, Jeff. I'd say that it's all the above, especially with 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 increase the geography as well, as we expand municipalities, those reference cases can then expand to other geographies. I think it's sort of all the above for wastewater, that we have a broad product portfolio that can reach lots of things. The main driver typically is regulatory, but what's driving that regulatory is a serious water scarcity issue. I think it really, it's hard to say it's regulatory-driven, but it's for economic and, you know, growth reasons and water scarcity reasons. We're encouraged with the long-term trend.

Speaker 0

Okay, great. Thanks for answering my questions.

Speaker 2

Thanks, Jeff.

Speaker 5

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.

Speaker 2

Thank you, Operator. 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 Q3. Thank you, Operator.

Speaker 5

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

Good.