Earnings call transcript: Energy Recovery Q1 2025 misses EPS forecast, stock drops

Energy Recovery Inc. (ERII) reported its Q1 2025 earnings, revealing a significant miss on both earnings per share (EPS) and revenue forecasts. The company posted an EPS of -$0.13, falling short of the expected -$0.03. Revenue also came in below expectations at $8.1 million compared to the forecasted $21.97 million. In response, Energy Recovery's stock fell by 16.89% in after-hours trading, dropping to $12.50. Despite the earnings miss, InvestingPro 's Fair Value analysis, the stock appears slightly undervalued at current levels, with analyst price targets ranging from $17 to $22. Get access to 13 additional ProTips and comprehensive valuation metrics with an InvestingPro subscription.

Outlook & Guidance

Despite the Q1 miss, Energy Recovery reaffirmed its revenue guidance for the desalination and CO2 divisions. The company is exploring international manufacturing to offset tariff impacts and is targeting growth in markets such as India, North America, the Middle East, and North Africa.

Executive Commentary

CEO David Moon emphasized the strength of the company's pipeline, stating, "We're still seeing the pipeline very strong, quoting remains strong." CFO Mike Mancini highlighted the company's commitment to maintaining high-quality ceramic manufacturing, noting, "We would not in the short term move the ceramic manufacturing anywhere."

Risks and Challenges

• Revenue Recognition: Delays in recognizing significant project orders could impact financial performance.
• Tariff Impacts: Ongoing tariff issues may affect costs and margins, though mitigation strategies are in place.
• Market Expansion: The company faces challenges in expanding into new markets amid competitive pressures.
• Global Economic Conditions: Macroeconomic factors could influence demand in key markets.

Energy Recovery's Q1 2025 results reflect challenges in meeting financial expectations, but the company remains focused on strategic initiatives to drive future growth.

Full transcript - Energy Recovery Inc (ERII) Q1 2025:

Conference Operator: Good day, ladies and gentlemen, and welcome to Energy Recovery's First Quarter twenty twenty five 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.

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We refer you to documents the company files from time to time with the SEC, specifically the company's annual Form 10 ks 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, 05/07/2025, 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 Chief Executive Officer, Energy Recovery: 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 Hill Phoenix 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.

Conference Operator: Your first question comes from Ryan Pfingst with B. Riley. Your line is open.

Ryan Pfingst, Analyst, B. Riley: Hey, Ryan. Hey, guys. Thanks for taking my questions. Could you start with some broad color on the desal market? What geographies you're enthusiastic about?

And any impacts you've seen from a potentially tougher macro backdrop?

David Moon, President and Chief Executive Officer, Energy Recovery: Well, 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 the projects that we're following remain very active. And so we continue to be very bullish on the diesel market and continue to be very bullish on The Middle East and North Africa.

Ryan Pfingst, Analyst, B. Riley: Got it. And 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, Chief Financial Officer, Energy Recovery: Yes, Ryan. It was a relatively small order. It was about $2,000,000

Ryan Pfingst, Analyst, B. Riley: Okay. Appreciate that, Mike. And then 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 of your thoughts there.

David Moon, President and Chief Executive Officer, Energy Recovery: Yes. Our first preference is to go in on our own, right? And so, we established 100% owned and operated energy recovery facility. And so that's what we're looking 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 Pfingst, Analyst, B. Riley: Appreciate that. And then 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 Chief Executive Officer, Energy Recovery: Yes, we're working on that. So 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 $9,000,000

Ryan Pfingst, Analyst, B. Riley: Great. Then I'll just ask one more on CO2. Could you ask a look or could you talk a little bit about your progress with Hill Phoenix and what some of the milestones are that we should be looking for ahead of potential broad deployment of the PXG as a feature in their refrigeration systems?

David Moon, President and Chief Executive Officer, Energy Recovery: Yes. So we're really happy with it. So we spent a lot of time working with Hill Phoenix last summer with field sites, right, testing during the summer sub, the summer to the summer heat period with several locations with several Hill Phoenix locations in North America. And so 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 Hill Phoenix where we're talking about integrating the PXG into their CO2 rack design. And so I'd say there are two important milestones between sort of now and sort of Q3 with Hill Phoenix.

One is getting the commercial agreement done, which we're working on now with Hill Phoenix. And number two is getting a test site for the summer with the PXG integrated into a Hill Phoenix system. Those would be the next two milestones.

Ryan Pfingst, Analyst, B. Riley: Great. Appreciate that color. I'll hop back in the queue.

Conference Operator: Your next question comes from Jeffrey Campbell with Seaport Research. Your line is open.

Jeffrey Campbell, Analyst, Seaport Research: Good afternoon and thanks for taking my questions. Sure. 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. And 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, Chief Financial Officer, Energy Recovery: Hey, Jeff, this is Mike. Yes, I think you got to think about TX in two parts. One is the ceramics and one is the pressure vessel. So we would not in the short term move the ceramic manufacturing anywhere. We will do that here.

And that is really the key of the quality is in the ceramics. So no thinking about short term moving of the ceramics. And that goes to some of the quality points you made in the letter. We will not sacrifice that quality. But 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.

And 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. Okay.

Jeffrey Campbell, Analyst, Seaport Research: Sort of thinking of it in an opposite way, are there any long term advantages to developing an international production presence if the current situation is sort of pushing it to work?

David Moon, President and Chief Executive Officer, Energy Recovery: Yes. I think what it does is we have the opportunity to get closer to some of our customers. And so for the foreseeable future, our 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 as we think about that five fifty million dollars pipeline, the majority of that pipeline is in that North Africa and The Middle East. So 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, Analyst, Seaport Research: Yes. 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 Chief Executive Officer, Energy Recovery: Yes. So I think as we think about so we have a small presence in India today, which is we've been really successful with we've got two people on the ground in India. We're looking to double that this year. And so we've had early success there. So that's certainly a market.

And there's some regulatory driven opportunity there as well. And so 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.

And so we like and so we're we just hired a sales leader for The U. S. Business. We're looking to add additional resources on the ground in The U. S.

And so I think The U. S. Is the other market where we like our chances going forward.

Jeffrey Campbell, Analyst, Seaport Research: Okay. And you made it clear in the shareholder letter, you wanted to hold the wastewater guidance for now, which makes perfect sense. And it seems as though you I think you did reaffirm 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, Chief Financial Officer, Energy Recovery: Yes. 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. And so we think we can we've reaffirmed gross margin guidance as well. So we think we'll fall right in there.

Jeffrey Campbell, Analyst, Seaport Research: Okay. And my last question, I agree with the earlier remark that the Hillphonics 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 Hillphonics. 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 touch points, if you will. Is it possible that there could be some upside by the end of twenty twenty five from what was expected coming into the year?

David Moon, President and Chief Executive Officer, Energy Recovery: Yes. Think Hill Phoenix is a very diverse customer. And so they're not only they not only participate in the retail space, but they also participate in the industrial space. And so 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. And so I think there's, Hill Phoenix could become a multifaceted customer for us.

Jeffrey Campbell, Analyst, Seaport Research: Okay, great. I appreciate the color. Thanks for taking my questions.

Mike Mancini, Chief Financial Officer, Energy Recovery: You're welcome, Jeffrey.

Conference Operator: At this time, there are no further questions in queue. I'd like to turn the call back to David Moon for any further remarks.

David Moon, President and Chief Executive Officer, Energy Recovery: Thank you, operator. So just a few closing remarks. I think number one is, look, we're confident in our desal and CO2 revenue guidance. For 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.

And then finally, as it relates to costs, we've been executing on rightsizing our cost structure and also working towards margin expansion for 2025. So thank you all for joining today. That's it operator.

Conference Operator: This concludes the call. You may now disconnect. Have a wonderful rest of your day.

David Moon, President and Chief Executive Officer, Energy Recovery: Goodbye.

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