Participants

Michael Mancini; Chief Financial Officer; Energy Recovery Inc

David Moon; President, Chief Executive Officer, Director; Energy Recovery Inc

Jeffrey Campbell; Analyst; Seaport Research Partners

Ryan Pfingst; Analyst; B. Riley Securities

Presentation

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 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 the 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 and 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, February 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.

Michael Mancini

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 live conference calls to focus on Q&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.

Question and Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions)
Jeffrey Campbell, Seaport Research Partners.

Jeffrey Campbell

Good evening and congratulations on the strong fourth quarter result.

David Moon

Thanks.

Jeffrey Campbell

You didn't 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

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

Jeffrey Campbell

Right, 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 pressure exchange, 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 in the mining application in the heavy --

David Moon

So I'm speaking more to cleaning up the stream of -- and I, it's a mixture of solids and whatever stream that they're trying to clean up on site.
On either manufacturing side or textile side or whatsoever, water could be a part of that, but could be a part of that stream, maybe not. It just depends on what's making up the. 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

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. I think there was some mention of OpEx and 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 know that you feel most confident in for 2025.

Michael Mancini

This is Mike. Thanks for thanks for the question. Yeah, 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 we, the way that this company has scaled manufacturing in the past has been to take sort of the process we work we did when we were a smaller company and start to stack it.
And so we're seeing a lot of opportunities for optimization along every step of the process, how the how the kilnness is stacked, what the cycle time is, how many bullets 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 those steps in 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

Okay, and the last one I'll ask a few two questions. You mentioned in the 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 of why were they previously not targeted and how did they learn about the PHG?

David Moon

Yeah, so it's a good question. So there are two areas. Outside of Europe and the US 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 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 tests, 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.
And there's a large supermarket, chain in South Africa called Macro, 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. So we're looking, we're working with them now on setting finding a site, test site for this year for the summer for shopping. So those are the two other areas that, could be really interesting for us as we progress through the year.

Jeffrey Campbell

Okay, great, that's great call thank you very much.

David Moon

You're welcome.

Operator

(Operator Instructions)
Ryan Pfingst, B. Riley Securities.

Ryan Pfingst

Hey guys, thanks. For, hey, David, thanks for taking my questions and and for posting. The shareholder letter, I guess just to start for the additional buyback of $30 million 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?

Michael Mancini

Hey Ryan, this is Mike. Yeah, I think visibility on our cash flow into you're coming out of Q4 with we have 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 $50 million gave us a lot of comfort in adding on, I 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 million. On our cash flow forecasts would have firmed up and we saw what we would 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

It's also just another indication of how strongly we believe in our playbook, and I know, we've got, 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 the playbook.

Ryan Pfingst

Cool appreciate that color, and then sticking with DSal, could you remind us or or give us a sense of what your expectations are for the geographic breakdown of desal revenue in 2025?

Michael Mancini

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 the Middle East and North Africa, and that was split 60 to 40 between the Middle East and North Africa. So we've seen some nice diversification away of the 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 Pfingst

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 30 million to 60 million in 2025?

Michael Mancini

Yeah, 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 that that guidance was free no 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 our PX 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 goods and maybes in there. We don't see anything impacting it today, but we did want to highlight it that, about 5% or more of our business 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 Pfingst

Understood, appreciate it guys. I'll turn it back.

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.

Michael Mancini

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.

Operator

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