Energy Recovery, Inc. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Strategic Planning: Hosted a live investor webinar on 11/18 to present the Playbook, including growth plans for desalination, wastewater, and CO2; 2025-2026 guidance; and 2029 financial targets.
• Third Quarter Results: Record revenue of $38.6M, upper end of Q3 guidance. Confident in full-year revenue guidance of $140M-$150M. Q4 revenue expected $62M-$72M.
• Water Segment: Strong demand in MENA and India; notable shipments and new contracts in Morocco and UAE.
• Wastewater Segment: Diversification strategy underway, but revenue impacted by NEOM project phasing.
• CO2 Segment: Progress on PX G installation and testing, with white paper released highlighting performance benefits.

Segment Performance

• Water: Total revenue of $38.3 million, up 4% y-o-y and 42% q-o-q. Contributes ~94% of the midpoint of 2024 revenue guidance. Notable shipments include the Perur project in India ($4.1M), Hassyan IPP in Dubai ($10.5M ytd), and contracts in Morocco ($27.5M).
• Wastewater: Signed wastewater contracts up ~46% y-o-y, but revenue expected towards lower end of $12M-$15M guidance due to the NEOM project in Saudi Arabia transitioning to a phased project. Outperformance in OEM channel expected to offset some impact.
• CO2: Second generation PX G has 11 sites installed and operating by year-end, with plans to install 30-50 sites. A white paper on energy savings and cooling capacity improvement from DC Engineering collaboration was published, showing PX G reduces energy consumption by up to 30% and increases cooling capacity.

Guidance

• Reaffirmed full-year revenue guidance of $140M-$150M.
• Q4 revenue expected $62M-$72M, representing over 45% of full-year midpoint.
• Gross margin guidance 64%-67%.
• Operating expense guidance reduced to $76M-$78M from prior $78M-$80M.
• Wastewater revenue expected towards lower end of $12M-$15M.
• CO2 aims to install 30-50 sites by year-end.

Risks

• Customer-driven delays or slippage in shipments could shift revenue recognition to 2025 but not impact intrinsic value.
• Economic and geopolitical concerns globally could affect business.

Q: What is the competitive landscape in CO2?

A: No other pressure exchanger competition; compete against other technologies/applications in the space.

Q: Thoughts on capital allocation strategy?

A: Discussed in the webinar on 11/18, including growth strategy plans, capital needs, and capital allocation policy.

Q: Is there geographic diversification in desal customer mix?

A: Still reliant on MEA, which accounted for over 70% of Q3 revenue and 60% of first nine months of 2024.

Q: What were initial impressions as CFO?

A: Opportunity for efficiency in manufacturing, cost, growth, and capital allocation; focus on profitable growth.

Q: Was the performance of PX G consistent across sites?

A: Consistent energy savings and capacity increase, varying by location due to temperature variation.

Q: How is PX G site deployment prioritized?

A: Using a site selection tool for optimization, combining Europe, U.S., existing and new OEM customers.

Q: Details on OpEx cost control?

A: Cost avoidance was a driver, with ~$1M left in one-time costs out of $7M total planned for the year.

Q: Relationship between PX G and adiabatic coolers?

A: PX G can replace adiabatic coolers, reducing costs and operating expenses.

Q: Competition between CO2 and HFO refrigeration?

A: CO2 is the outright winner, with OEMs moving full speed ahead with CO2.