Energy Recovery, Inc. (ERII) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to Energy Recovery's Second Quarter 2026 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 risk, 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 5, 2026, 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 host for today's call are Alex Buehler, Interim President and Chief Executive Officer of Energy Recovery; and Aidan Ryan, Interim Chief Financial Officer. I would now like to turn the call over to Mr. Buehler.

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. We are focused on bringing our CEO search to a close and have been impressed with the breadth and the quality of the candidate pool. The combination of Energy Recovery's long-term tailwinds, technology leadership and platform strength have allowed us to attract accomplished leaders who are ready to lead our next chapter of growth. We look forward to updating you further as this search progresses. As Interim CEO, I'm focused on ensuring the successful execution of our business initiatives and continuity with our customers and employees during this search process. In addition to my past career across water, energy and infrastructure services; I have also had the privilege of serving on Energy Recovery's Board for over a decade. With this background, I am ensuring that we keep pace on growth, innovation, manufacturing transformation and capital discipline. Moving now to our outlook. We sit in attractive end markets with durable structural growth in the high single digits. While the war has temporarily impacted us and clouded our visibility, we are confident in our long-term pipeline and a return to growth as these headwinds pass. Lastly, we've demonstrated our discipline in operating costs this year and that practice will continue. In addition to a steady pace of improvements in overhead efficiency, our ongoing manufacturing transformation will provide significant cost improvement when our new facility in Saudi Arabia achieves planned run rate production. With that, we will now move to the question-and-answer portion of our conference call. Operator, please open the line for questions.

[Operator Instructions] Our first question is from Ryan Pfingst with B. Riley Securities.

First, could you just talk about your current visibility on Megaproject in the Middle East as of the last call? I believe there were no formal delays given to you guys, but they were expected. Is that still the case?

Well, let me start kind of with the pipeline and then I'll specifically address the second part of your question, Ryan. I will say the pipeline is strong. I would even characterize it as uniquely strong. We do have really good forward visibility. Obviously in this market, we've got structural durable demand drivers and those certainly have not changed. So we are predicting a market recovery although we're unable at this juncture to kind of put a date and a timeline on that. When we look at our pipeline, we do have named projects in some cases with EPCs appointed, in other cases without, with named customers as well. And that forward visibility can extend out for 5 years. So the pipeline looks good. It looks uniquely strong from my perspective, but we are still in this environment where we are seeing delays. Some of those delays to your specific question have in fact been formalized and communicated. Obviously those are caused by financing challenges in this current environment of geopolitical risk where risk premiums go up. Obviously we have procurement challenges from our EPCs. And then we just have logistic challenges as well in terms of getting things started and proceeding into the execution phases of these things. So good pipeline, but still with uncertain timing is the punchline there.

I appreciate that detail. And then secondly, could you dig in more on the cost impact that your new facility in Saudi Arabia is expected to have and the extent of the potential margin uplift there?

Yes. So the Saudi Arabia facility is primarily strategic in nature. It's designed to get us closer to customers and to minimize freight and shipping costs to those customers and also to build a local presence in a region that's very important for us over time. It is, I'd say, complementary with our facilities in California. We plan to use both as we talked about in the letter. We do see it as a source of margin improvement in the future and a lot of those margin improvements come from just freight and shipping and procurement and then there are some generally lower operating costs in the region. We'll see those margin improvements come gradually over time as the facility ramps in '27 and '28 and beyond as well as when we introduce new products, including our Q650 into the market. So don't think about it as a we open the factory, all of a sudden margins snap up. It is something that's going to happen over time and it's probably too early to quantify that, but we do expect improvement.

That makes sense. I appreciate that. And then last one for me on the wastewater side. What are some of the key actions that you're taking today to accelerate business there? And when do you think we'll ultimately see a commercial inflection point for Energy Recovery's products in that market?

Yes. Obviously we like the wastewater market that goes without saying. We continue to invest there. What we see is a growing market as we look at several use cases and applications for our products and technologies. You would have noted in some of our earlier press releases that we have achieved and announced product success and reference projects. We have also expanded and diversified our portfolio of products so we can do high pressure, ultra-high pressure, low pressure and ultra-low pressure that certainly broaden the aperture of our technologies in those range of use cases. But certainly, we are also focused on accelerating market adoption and revenue growth. I think some things we're doing there are we are better allocating our resources to where the market opportunity is. For example, a lot of opportunity in Asia especially in places like China and India where they haven't really taken up MLB, ZLD as industrial or national policies in those markets for obvious reasons. We are also trying to balance kind of our key account management approach and our go-to-market strategy. So we are trying to position with the right sort of OEM players in the right end markets and cover those accounts. Obviously if we can get spec-ed in with some of those RO companies, that could mean a significant uplift in revenue and an opportunity to scale more quickly. We are also thinking we're going to run this with more efficiency as well. So you would have probably picked up on that in the shareholder letter. So we're balancing revenue growth and efficiency and that's through better resource allocation and, in some cases, leaner operations on the sales management side. And that certainly not reducing our sales resources especially as we think about our priority geo markets and target accounts, but running it more efficiently from a sales management perspective. So that's how we think about wastewater. Obviously the results were pretty soft, but we still feel really good about the market, its size, our product success and the case of project references that we are developing.

Our next question is from Ryan Connors with Northcoast.

I wanted to start off on the big picture and then kind of move down from there. But obviously the Iran conflict is a key part of the story right now. I'm just -- I think one of the unique things about it has been the on again, off again nature of it. One minute we're looking at a resolution and then we're not. I'm just curious what do you think is going to be the catalyst to open the market up and reduce those risk premium as you talked about, Alex. I mean when this thing keeps head faking that it's resolved and then not. Does it have to be resolved for 6 or 9 months very clearly before some of these countries open things back up? Just curious because it seems like a very -- something that just is coming and going almost every other day or week here.

Yes. Look, obviously difficult to say where things are going on the geopolitical side and yes, we can all acknowledge and appreciate that whiplash, right? There's a deal, there's no deal. Missiles are flying again, now we're in the ceasefire. I think what we need to see on our side is projects moving to financing, EPC appointments as well as sort of execution in terms of award to delivery. In certain cases, we get awards although delivery is pushed out. Obviously that doesn't help. That helps us from a backlog perspective, but not necessarily from a revenue perspective, right, because we're still dependent on that execution timeline. It's one of those things we'll know it when we see it because we'll see normal order of operations, timing and velocity in our detailed pipeline, which is sort of the difference between an award date and a make water date and then earlier than that, the difference between a project manifesting in its award date. Right now we're just out of bounds there. So we will see it come inbounds hopefully soon, but one can never tell, right? How that correlates to geopolitical environment, I can't possibly say, right, like what needs to happen on that side; cease fire, a cessation of hostile activity, whatever that is. What I can tell you we'll know it when we see it in our project pipeline as we measure those key project milestones and then timing between those milestones.

That's very helpful perspective on it. And that kind of leads to my next question, which was totally understand the impossibility of reinstating guidance in this kind of environment like you described. But the one thing you do stress a couple of times in the release and the letter is the backlog so the $27 million. How do we think about that number? What does that number mean for us? Is that -- can we think about that as kind of a floor for the second half or is that -- I'm just curious? That is the one metric we have and I'm just curious how you would frame that for us. How we should be thinking about that from a modeling perspective?

Yes. I primarily look at our comments around the strength of the backlog in 2027 and beyond. I think that's when we're going to see growth start to reappear. We have seen some contracting activity this year resume, but there is also some delay in contracting activity. So we disclosed the backlog number, but the ability to use that to read through into the rest of our year I think is limited in this circumstance. So I think we're trying to get the focus to really be on the long-term pipeline and that's on the MPD side though. You've heard us say that OEM and aftermarket business we expect to be resilient through the rest of this year. So keep that in mind too.

Yes. Now you talked about the PX Q650 earlier. Obviously, this whole air pocket here with the Iran conflict ends up being poorly timed as it relates to that launch. I mean should we think about this as kind of pushing out the PX Q650 launch and rollout to where that's really going to impact the top line? And I guess you've mentioned it will impact the margins as well. I mean do we kind of think about that more as almost a late '27, '28 story at this point where it really moves the needle?