Energy Recovery, Inc. (NASDAQ:ERII) Q4 2024 Earnings Call February 26, 2025 5:00 PM ET Company Participants David Moon - President and Chief Executive Officer Mike Mancini - Chief Financial Officer Conference Call Participants Jeffrey Campbell - Seaport Research Partners Ryan Pfingst - B. Riley Securities Operator Good day, ladies and gentlemen and welcome to Energy Recovery’s Fourth Quarter and Full Year 2024 Earnings Call. During today’s call, Energy Recovery may make projections and other forward-looking ...

Core Insights - Energy Recovery (ERII) reported quarterly earnings of $0.50 per share, exceeding the Zacks Consensus Estimate of $0.42 per share, and up from $0.39 per share a year ago, representing an earnings surprise of 19.05% [1] - The company posted revenues of $67.08 million for the quarter ended December 2024, slightly missing the Zacks Consensus Estimate by 0.02%, but up from $57.19 million year-over-year [2] - Energy Recovery has surpassed consensus EPS estimates in all four of the last quarters and has topped consensus revenue estimates twice during the same period [2] Earnings Outlook - The current consensus EPS estimate for the upcoming quarter is $0.06 on revenues of $24.4 million, while for the current fiscal year, the estimate is $0.77 on revenues of $159.68 million [7] - The company's earnings outlook will be influenced by management's commentary during the earnings call, which is crucial for assessing the sustainability of the stock's price movement [3][4] Industry Context - The Pollution Control industry, to which Energy Recovery belongs, is currently ranked in the bottom 39% of over 250 Zacks industries, indicating potential challenges for stock performance [8] - Empirical research suggests a strong correlation between near-term stock movements and trends in earnings estimate revisions, which can be tracked by investors [5] Stock Performance - Energy Recovery shares have seen a slight decline of about 0.1% since the beginning of the year, contrasting with the S&P 500's gain of 1.3% [3] - The current Zacks Rank for Energy Recovery is 3 (Hold), suggesting that the shares are expected to perform in line with the market in the near future [6]

Market Demand and Growth Opportunities - The company anticipates greater demand for its products in the wastewater market due to expanding environmental regulations[20] - The company anticipates greater demand for its products in emerging wastewater markets due to expanding environmental regulations[20] - The company expects that sales outside the U.S. will remain a significant portion of its revenue[24] - The company expects that sales outside the U.S. will remain a significant portion of its revenue, contributing to overall growth[24] - The company anticipates that markets not traditionally associated with desalination, such as the U.S. and China, will develop and provide further revenue growth opportunities[20] Financial Projections and Efficiency - The company projects increased sales and lower marketing expenditures for 2025[24] - The company projects increased sales and lower marketing expenditures for 2025, indicating a focus on operational efficiency[24] - The company expects to continue receiving a tax benefit related to U.S. federal foreign-derived intangible income research and development tax credit[24] - The company expects to continue receiving tax benefits related to U.S. federal foreign-derived intangible income and research and development tax credits[24] Technology and Innovation - The company believes that the pressure exchanger is the industry standard for energy recovery in the seawater reverse osmosis (SWRO) industry[20] - The company believes that the Pressure Exchanger (PX) is the industry standard for energy recovery in seawater reverse osmosis (SWRO) desalination[20] - The company believes that its PX G1300 can contribute to making CO2-based refrigeration more economically viable in a broader range of climates[24] - The company believes that its PX G1300 can make CO2-based refrigeration more economically viable across a broader range of climates[24] - The company believes that leveraging its pressure exchanger technology will unlock new commercial opportunities in the future[20] - The company believes that leveraging its pressure exchanger technology will unlock new commercial opportunities in the future[20] Sustainability Integration - The company expects that the integration of sustainability principles into its corporate strategies can strengthen existing business and develop new applications[24] - The company anticipates that the integration of sustainability principles into its corporate strategies will strengthen existing business and new applications[24] Customer Considerations - The company believes that ongoing operating costs and life cycle costs are key factors in the selection of energy recovery solutions for customers[20] - The company emphasizes that ongoing operating costs and life cycle costs are key factors in the selection of energy recovery solutions for project customers[20] - The company expects to initially sell the PX G1300 to a variety of customers, including OEMs and contractors, with a shift towards primarily selling through OEMs as the product establishes itself[24]

Revenue and Income - Revenue for Q4 2024 was $67.1 million, representing a 17% increase compared to Q4 2023, with full-year revenue at $144.9 million, up 13% year-over-year[4] - Net income for Q4 2024 was $23.5 million, a 19% increase from Q4 2023, with net income per share rising to $0.41, up $0.07[4] - Adjusted net income for Q4 2024 was $28.3 million, a 29% increase compared to Q4 2023, with adjusted net income per share at $0.50, up $0.11[5] - Net income for 2024 increased to $23,050,000 from $21,504,000 in 2023, representing an increase of 7.2%[19] Gross Margin and Operating Performance - Gross margin improved to 70.2%, an increase of 110 basis points from Q4 2023, primarily due to benefits from manufacturing transformation[6] - Adjusted EBITDA for Q4 2024 was $31.3 million, reflecting strong operational performance[5] - Adjusted EBITDA for Q4 2024 was $31,300,000, compared to $23,900,000 in Q4 2023, indicating strong operational performance[25] - Operating income for the year 2024 was $19,724,000, compared to $19,050,000 in 2023, reflecting a positive trend[21] Cash Flow and Investments - Cash provided by operations for Q4 2024 was $9.0 million, down from $13.8 million in Q4 2023[4] - Free cash flow for 2024 was $19,200,000, down from $23,500,000 in 2023[25] - Cash and investments totaled $99.9 million as of December 31, 2024, down from $122.4 million in 2023[6] - The total cash, cash equivalents, and restricted cash at the end of 2024 was $29,757,000, a decrease from $68,225,000 in 2023[19] Operating Expenses and Costs - Operating expenses increased by 13.9% to $21.5 million in Q4 2024, primarily due to $2.5 million in restructuring costs[6] - Stock-based compensation expense for 2024 totaled $10,322,000, an increase from $8,038,000 in 2023[23] - Capital expenditures for 2024 were $1,298,000, down from $2,567,000 in 2023, showing a reduction in investment[19] Future Outlook - The company anticipates continued growth in 2025, driven by increased demand for its energy efficiency technologies[7] - The Megaproject segment revenue grew by 12% year-over-year, totaling $46,475,000 in Q4 2024 compared to $41,382,000 in Q4 2023[20] - The company repurchased common stock amounting to $50,384,000 in 2024, indicating a commitment to returning value to shareholders[19]

Company Overview - Energy Recovery (NASDAQ: ERII) is a manufacturer of products designed to save energy in energy-intensive applications such as desalination, wastewater treatment, and refrigeration [1] Investment Focus - The focus is on investment ideas involving companies that provide healthy dividends while also offering potential for capital appreciation. The aim is to identify undervalued companies relative to their fundamentals, peers, and historical performance [2] Industry Insights - The HVAC industry is highlighted as a sector of interest, reflecting the professional background of the analysis, which may provide insights into investment opportunities within this field [2]

Core Viewpoint - USA Rare Earth, LLC has appointed Joshua Ballard as the new CEO, effective December 17, 2024, with a mission to establish a vertically integrated domestic rare earth magnet supply chain [1][3][4] Company Overview - USA Rare Earth is focused on developing a NdFeB magnet manufacturing plant in Stillwater, Oklahoma, and aims to control the supply chain for rare earth elements and critical minerals, including gallium [1][5] - The company holds mining rights to the Round Top heavy rare earth elements and critical minerals deposit in West Texas, which positions it strategically in the market [3][5] Leadership and Strategy - Joshua Ballard brings over 20 years of experience in finance and operations, having previously served as CFO of Energy Recovery, Inc., where he contributed to significant revenue growth and product diversification [2][3] - The Board Chair expressed confidence in Ballard's ability to lead the company towards becoming a leading domestic supplier of rare earth magnets, emphasizing the importance of re-establishing the U.S. rare earth supply chain amid global geopolitical tensions [3][4] Business Combination - USA Rare Earth has entered into a Business Combination Agreement with Inflection Point Acquisition Corp. II, which will result in the combined entity becoming publicly traded [3][4] - The proposed business combination is seen as a critical step in securing a domestic supply chain for essential resources, aligning with national priorities [4]

Core Insights - The Energy Recovery Ventilator (ERV) market is projected to grow from USD 4.44 Billion in 2023 to USD 10.73 Billion by 2032, with a CAGR of 10.30% from 2024 to 2032 [1][4]. Market Dynamics - The primary driver for the ERV market is the increasing demand for energy-efficient solutions to lower heating and cooling costs in buildings, alongside a focus on sustainability and improved indoor air quality [1][2]. - ERVs recover energy from exhaust air and transfer it to incoming fresh air, which significantly reduces energy consumption and enhances indoor comfort, especially in regions with extreme temperatures [2][5]. Market Segmentation - By Type: The ceiling-mount segment dominated the market with over 42% share in 2023, favored for easy installation and cost efficiency [4][6]. - By Application: The commercial segment led the market with over 52% share in 2023, as businesses adopt ERVs to meet energy efficiency standards and improve indoor air quality [5][6]. Regional Analysis - North America accounted for over 48% of the ERV market share in 2023, driven by a strong emphasis on energy efficiency and indoor air quality in both residential and commercial sectors [6][7]. - The Asia Pacific region is expected to experience the fastest growth in the ERV market, fueled by rapid urbanization and a growing focus on energy efficiency in countries like China, India, and South Korea [7][8]. Key Growth Drivers - Increasing health awareness and respiratory issues are driving demand for ERVs, as they filter pollutants and regulate humidity, ensuring a steady supply of fresh air [4][8]. - Technological advancements, including enhanced heat recovery capabilities and advanced filtration systems, are improving the efficiency and performance of ERVs [8]. Competitive Landscape - Major players in the ERV market include Carrier, Johnson Controls, Daikin Industries, Mitsubishi Electric, Trane, and LG Electronics, among others [3][4].

Group 1 - Energy Recovery, Inc. (NASDAQ: ERII) reported strong performance in Q3 2024, particularly in delivering products for mega-projects and generating revenues [1] - The company is optimistic about achieving $150 million in revenues for FY24, contingent on performance in Q4 [1] Group 2 - The investment approach focuses on operational aspects and long-term earnings potential rather than market-driven dynamics [1] - The strategy emphasizes holding companies for the long term, with a preference for a small fraction of companies being rated as buys [1]

Financial Data and Key Metrics Changes - Total revenue for Q3 2024 was $38.6 million, achieving the upper end of guidance and setting a quarterly revenue record [12] - Gross margin improved to 65.1%, exceeding the previously guided range of 62% to 64% [34] - Net income for the quarter was $8.5 million, a substantial increase compared to the previous quarter [38] Business Line Data and Key Metrics Changes - Water revenue reached $38.3 million, a 4% increase year-over-year and a 42% increase compared to Q2 2024 [14] - Wastewater contracts increased by almost 46% compared to the same period last year, with expected revenue towards the lower end of the $12 million to $15 million range [22] - CO2 business made progress with 11 sites installed year-to-date, on track to meet the target of 30 to 50 sites by year-end [29] Market Data and Key Metrics Changes - Over 70% of Q3 revenue came from the Middle East and Africa, indicating continued reliance on these markets [46] - Strong demand for desalination projects in India and North Africa, with significant contracts awarded [17][18] Company Strategy and Development Direction - The company is focusing on strategic planning, referred to as the "Playbook," which will be detailed in an upcoming investor webinar [10] - Emphasis on growth in desalination, wastewater, and CO2 markets, with a commitment to maintaining revenue guidance of $140 million to $150 million for the year [40] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in achieving the largest quarter in company history in Q4 2024, marking the 11th consecutive year of revenue growth [13] - Economic and geopolitical concerns are acknowledged, but long-term trends for fresh water demand remain intact [23] Other Important Information - The company maintained a cash balance of $140 million at the end of Q3, with expectations to end the year between $140 million and $150 million [39] - The upcoming investor webinar on November 18th will provide further insights into growth strategies and capital allocation [11] Q&A Session Summary Question: Competitive landscape in CO2 - Management noted no other pressure exchanger competition exists, although they compete against other technologies [43] Question: Capital allocation strategy and share repurchases - Management indicated that details on capital allocation and growth strategy will be discussed in the upcoming webinar [44] Question: Geographic diversification of customer mix in desalination - Management confirmed that the concentration remains heavily in the Middle East and Africa, with over 70% of revenue from these regions [46] Question: Performance consistency of PX G across monitored sites - Management confirmed consistent energy savings and capacity increases across different locations, with variations based on temperature [51] Question: Thoughts on competition between HFO and CO2 refrigeration - Management believes CO2 remains the preferred choice, with strong support from OEM customers for CO2 technology [59]

Core Insights - Energy Recovery (ERII) reported quarterly earnings of $0.21 per share, exceeding the Zacks Consensus Estimate of $0.14 per share, and showing a year-over-year increase from $0.20 per share [1] - The company achieved revenues of $38.58 million for the quarter ended September 2024, surpassing the Zacks Consensus Estimate by 2.24% and up from $37.04 million a year ago [2] - Energy Recovery has outperformed consensus EPS estimates three times over the last four quarters and has topped revenue estimates twice in the same period [2] Earnings Performance - The quarterly earnings surprise was 50%, and the company previously exceeded expectations by 550% when it reported earnings of $0.09 per share against an expected loss of $0.02 [1] - The current consensus EPS estimate for the upcoming quarter is $0.48 on revenues of $70.25 million, and for the current fiscal year, it is $0.63 on revenues of $147.28 million [7] Market Position - Energy Recovery shares have declined approximately 6.7% since the beginning of the year, contrasting with the S&P 500's gain of 22.3% [3] - The Zacks Rank for Energy Recovery is currently 3 (Hold), indicating that the shares are expected to perform in line with the market in the near future [6] Industry Context - The Pollution Control industry, to which Energy Recovery belongs, is currently ranked in the bottom 37% of over 250 Zacks industries, suggesting potential challenges ahead [8] - Empirical research indicates a strong correlation between near-term stock movements and trends in earnings estimate revisions, which could impact Energy Recovery's stock performance [5]