Earnings call transcript: Energy Recovery’s Q4 2024 results show EPS beat

Energy Recovery Inc. (NASDAQ:ERII) reported its Q4 2024 earnings, surpassing expectations with an earnings per share (EPS) of $0.50, compared to the forecasted $0.40. The company’s revenue reached $67.1 million, slightly below the anticipated $68.51 million. Following the earnings announcement, the stock experienced a modest increase of 0.2% in after-hours trading, reaching $14.71. According to InvestingPro analysis, the company’s current market value appears fairly priced relative to its Fair Value, with analysts setting price targets between $16 and $22.

Want deeper insights? InvestingPro has identified 12 key investment tips for ERII, including strong balance sheet metrics and impressive profit margins.

Key Takeaways

• Energy Recovery completed a $50 million share buyback and announced an additional $30 million buyback.
• The company is expanding its CO2 system (PXG) into new markets, including Japan and South Africa.
• Manufacturing transformations are underway to improve efficiency and reduce costs.

Company Performance

Energy Recovery demonstrated strong performance in Q4 2024, highlighted by a strategic focus on product innovation and market expansion. The company is leveraging its PX technology to reduce costs in various industries, including lithium extraction and manufacturing sectors. This positions the company well against competitors in the desalination and wastewater markets. InvestingPro data shows the company maintains impressive gross profit margins of 66.13% and holds more cash than debt on its balance sheet, demonstrating strong financial management.

Financial Highlights

• Revenue: $67.1 million, slightly below forecast
• Earnings per share: $0.50, exceeding the forecasted $0.40
• Share buyback: Completed $50 million, with an additional $30 million planned

Earnings vs. Forecast

Energy Recovery’s EPS of $0.50 exceeded the forecast by 25%, indicating strong operational performance. However, revenue came in 2% below expectations. Historically, the company has shown fluctuating results, but this quarter’s EPS beat suggests effective cost management and strategic growth initiatives.

Market Reaction

Post-earnings, Energy Recovery’s stock rose by 0.2% in after-hours trading, reflecting investor confidence in the company’s performance and strategic direction. The stock remains within its 52-week range, with a high of $20.27 and a low of $12.26. InvestingPro’s comprehensive health assessment gives ERII a "GOOD" overall financial health score, with particularly strong ratings in cash flow management and profitability metrics.

Outlook & Guidance

Looking ahead, Energy Recovery is optimistic about 2025, with expectations of maintaining similar geographic revenue distribution and focusing on manufacturing efficiency improvements. The company projects continued growth in its wastewater business, with a guidance range of $13 million to $16 million for 2025. This aligns with the company’s strong historical performance, as InvestingPro data shows a robust revenue CAGR of 11% over the past five years. For comprehensive analysis and detailed financial metrics, investors can access the full Pro Research Report, available exclusively to InvestingPro subscribers.

Executive Commentary

CEO David Moon expressed confidence in the company’s strategic playbook, stating, "This is just another indication of how strongly we believe in our playbook." CFO Mike Mancini highlighted cost improvements, noting, "We see a continuous improvement throughout the year of costs for the Q400 and Q300s."

Risks and Challenges

• Potential tariff risks for the wastewater business in China could affect profitability.
• Market expansion efforts may face challenges in new regions like Japan and South Africa.
• Macroeconomic pressures could impact overall industry demand.

Q&A

During the earnings call, analysts inquired about the applications of PX technology and the company’s strategy for manufacturing transformation. Executives addressed potential market expansions and clarified the rationale behind the share buyback initiative, emphasizing confidence in long-term growth.

Full transcript - Energy Recovery Inc (ERII) Q4 2024:

Conference Operator: Good day, ladies and gentlemen, and welcome to Energy Recovery’s Fourth Quarter and Full Year twenty twenty four 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 and 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 and company files from time to time with

David Moon, President and Chief Executive Officer, Energy Recovery: the

Conference Operator: 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, 02/26/2025, 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.

Mancini.

Mike Mancini, Chief Financial Officer, Energy Recovery: Thank you and good afternoon. Beginning today, Energy Recovery is making a change to the format of our earnings conference calls. In advance of the call, we will now release a detailed letter to shareholders to review business and financial performance and provide any company updates. We will then use the live conference call to focus on Q and A. This change is in response to stakeholder feedback and we believe it will be a more efficient way for management to provide a thorough update on the business.

Earlier today, we released our first letter to shareholders on the Investor Relations portion of our website. I encourage you all to read it in full. With that, we will now move to the question and answer portion of our conference call. Operator, please open the line for questions.

Conference Operator: Thank you. We’ll now be conducting a question and answer session. And our first question comes from Jeffrey Campbell with Seaport Reap Search Partners. Please proceed with your question.

Jeffrey Campbell, Analyst, Seaport Reap Search Partners: Good evening and congratulations on the strong fourth quarter results.

David Moon, President and Chief Executive Officer, Energy Recovery: Hi, Jeff. Thanks. You didn’t

Jeffrey Campbell, Analyst, Seaport Reap Search Partners: say I’m restricted to two questions, so I’ll be a little hoggy and I’ll ask three. You mentioned a case study and how the PX reduced cost at a nanofiltration based lithium extraction facility in China. I was curious what other commercial applications this result might validate?

David Moon, President and Chief Executive Officer, Energy Recovery: So potentially four of our other verticals that we’re focusing on wastewater. So one would be mining applications, where water reuse or water use there is important. Second would be heavy manufacturing. Third would be chemical manufacturing. And fourth would be textile manufacturing.

So anywhere there are large solids or solids streaming through the system, this product is applicable.

Jeffrey Campbell, Analyst, Seaport Reap Search Partners: Okay. Well, you just mentioned just to follow that up, an interesting point. I mean, typically when we when I think about the benefits of the pressures change, the first order of business is saving energy. And then with regard to the CO2 systems, there’s also reduced water use in the high pressure transcritical part. You mentioned water here too.

So how is water use or more efficient use of water coming up in the mining application and heavy manufacturing?

David Moon, President and Chief Executive Officer, Energy Recovery: Yes. So, I’m speaking more to cleaning up the stream of it’s a mixture of solids and whatever stream that they’re trying to clean up on-site, on either manufacturing side, textile side or whatsoever. Water could be a part of that about could be a part of that stream, maybe not to just what’s making up the fluid. So I was speaking in terms of water, as making part of the fluid that needs to be treated on these sites.

Jeffrey Campbell, Analyst, Seaport Reap Search Partners: Okay. All right. That’s helpful. I was just wondering in your guidance you have talked you guided for further growth margin improvement in 2025. And I think there was some mention of OpEx and also the manufacturing transformation going better than expected.

I just wanted to ask you if you could just sort of elaborate the specific drivers of that growth margin improvement that you feel most confident in for 2025?

Mike Mancini, Chief Financial Officer, Energy Recovery: This is Mike. Thanks for the question. Look, I think the key drivers of the manufacturing transformation that we’ve seen already start to flow through the factory and we expect in 2025 is a lot of just efficiency. I think the way that this company has scaled manufacturing in the past has been to take sort of the process we did when we were a smaller company and start to stack it. And so, we are seeing a lot of opportunities for optimization along every step of the process, how the kiln is stacked, what the cycle time is, how many billet we can press with our ISO presses, sort of every step along the way has an opportunity for some efficiency.

And so our manufacturing transformation plan is really just laying out all of those steps of the process and going and attacking each one. And so we see a continuous improvement throughout the year of costs for the Q400 and Q300s as well as others.

Jeffrey Campbell, Analyst, Seaport Reap Search Partners: Okay. And the last one, I’ll ask a CO2 question. You mentioned in the shareholder remarks seeing increased activity from customers outside of the core focus areas. First, are these areas with hotter climates that would benefit from the PXG and not meaning in any way to be a pejorative? Why were they previously not targeted?

And how did they learn about the PXG?

David Moon, President and Chief Executive Officer, Energy Recovery: Yes. So it’s a good question. So there are two areas outside of Europe and The U. S. Where we’re seeing some interest in the PXG.

One is Japan, so a very established CO2 market and they learned about us through trade shows. This specific company, this specific OEM learned about us through trade shows, continue to follow-up with us. We did a test site with them last year. We’re doing a second site with them now and actually I think today we just got our first order from them, for additional sites and so our first official order. So that’s Japan.

And so we like so we’ll be doing more test sites over the course of the summer. They want to get another summer under their belts, and we like the way this is headed. And then the second area is South Africa. It’s just now starting to sort of the and there’s a large supermarket chain in South Africa called Macros. And they learned of us as well through trade shows.

We’re working with a specific consultant that’s based in South Africa that had talked to the supermarket about our technology. And so we’re looking we’re working with them now on setting finding a site test site for this year, for this summer, for Southern. So those are the two other areas that could be really interesting for us as we progress through the year.

Jeffrey Campbell, Analyst, Seaport Reap Search Partners: Okay, great. That’s great color. Thank you very much.

David Moon, President and Chief Executive Officer, Energy Recovery: You’re welcome.

Conference Operator: Thank you. And our next question comes from Ryan Finkst with B. Riley Securities. Please proceed with your question.

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

Ryan Finkst, Analyst, B. Riley Securities: Hey, guys. Thanks for hey, David. Thanks for taking my questions and for posting the shareholder letter. I guess just to start for the additional buyback of $30,000,000 was it just a combination of the early progress on costs in combination with desal visibility for 2025 that made you comfortable repurchasing more shares here?

Mike Mancini, Chief Financial Officer, Energy Recovery: Yes, Ryan, this is Mike. Yes, I think visibility on our cash flow into the year coming out of Q4 with that we had a large AR balance and really understanding the revenue, profits and then the cash flow for the year. And the fact that we pretty quickly went through our first fifty million dollars gave us a lot of comfort in adding on. I’d said at the webinar that we’re going to be quick to return excess cash and so dipped our toe in the water with $50,000,000 once our cash flow forecast would have firmed up and we saw what we’d be, felt comfortable increasing it. And so hopefully, I think this one will be outstanding for a little bit longer and so kind of align with our capital allocation strategy.

David Moon, President and Chief Executive Officer, Energy Recovery: It’s also just another indication of how strongly we believe in our playbook. And I know we’ve got it we know this is the first full year of execution for the playbook. We’ve got a lot of work to do, but we feel really good about that. We feel really good about the playbook.

Ryan Finkst, Analyst, B. Riley Securities: Well, appreciate that color. And then sticking with desal, could you remind us or give us a sense of what your expectations are for the geographic breakdown of desal revenue in 2025?

Mike Mancini, Chief Financial Officer, Energy Recovery: We expect it to be actually relatively similar to 2024. It is very project driven, so it can be hard to predict if things come in or out. But in 2024, I think we had a little over 60% of our business coming from Middle East and North Africa and that was split sixtyforty between Middle East and North Africa. So we’ve seen some nice diversification away from Middle East in North Africa and there’s still lots of projects in those North African countries and the Middle East. So I think actually a generally similar mix is what we expect.

Ryan Finkst, Analyst, B. Riley Securities: Got it. Thanks for that, Mike. And then just one more. You mentioned in the shareholder letter the potential impact of tariffs on the wastewater business. It looks like revenue guidance takes current policies into account.

I’m just trying to determine, is there upside without trade issues or is it really just a risk to that guide for wastewater of $13,000,000 to $16,000,000 in 2025?

Mike Mancini, Chief Financial Officer, Energy Recovery: Yes, right. We gave that guidance in November, sort of I know the election had just happened, but there wasn’t a lot of clarity into exactly what it was. So, I’d say that guidance was free known tariffs. And what we’re really alluding to there is because we export into China, if there is any sort of major change to the effective price of RPX products in the wastewater business in China, you could see a degradation of the ROI to our customers, which could impact sales. There’s a lot of coulds and maybes in there.

We don’t see anything impacting it today, but we did want to highlight it that about half or more of our business in wastewater does come from China and that is a true export. So if it gets caught up in the trade war, it may impact the ROI to customers.

Ryan Finkst, Analyst, B. Riley Securities: Understood. Appreciate it guys. I’ll turn it back.

Conference Operator: Thank you. It does look like there are no further questions at this time. I’d like to pass it back to Mr. Mancini for any closing remarks.

Mike Mancini, Chief Financial Officer, Energy Recovery: Great. Thank you. Well, thanks to all our stakeholders for their continued support of Energy Recovery. And we look forward to updating you on our next call. Enjoy the rest of the day.

Conference Operator: Thank you. And with that, this does conclude today’s teleconference. We thank you for your participation. You You may disconnect your lines at this time.

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