Prepared remarks
Good day, ladies and gentlemen, and welcome to Energy Recovery's Fourth Quarter and Full Year 2025 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 risks, uncertainties and other factors. We refer you to the 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, February 25, 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 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. Moon.
Thank you, operator. Thank you, and good day, 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, our outlook for 2026 and other important updates. Prior to opening the line for questions and answers, I'd like to highlight a few important takeaways from the letter. First, I'm now excited to be fully focused on our water business. As you will have seen in the letter, this is a large, growing and profitable end market where we have the best pressure exchanger technology and continue to maintain our strong market position. As you can see from our results and guidance, we have hit an air pocket in 2025 and 2026 due to delays at several large desalination projects. This is a great business, but one that remains lumpy. We know investors find this frustrating and so do we.
The good news is that we are confident in our growth for 2027 based on our pipeline and underlying demand trends. Second, as we've highlighted, we're winding down our CO2 retail grocery business. As conversations with customers evolved over the last few months, it was clear this business couldn't achieve scaled adoption without significant continued time, investment and risk. It's a disappointing outcome, and I'm grateful for the hard work our team members put into this effort over the past several years. Ultimately, we believe that the $7 million of annual savings was the optimal path for shareholder value creation. Now against this backdrop, we, as a management team, will continue to focus on optimizing performance and controlling what we can control. We're keeping a high bar for capital allocation, investing in innovation, growing our wastewater business, cutting operating expenses and buying back stock.
As always, I want to thank our employees here at Energy Recovery, our progress in 2025 and continued transformation in 2026 cannot be done without the great team that we have. With that, we'll now move to the questions-and-answer portion of our conference call. Operator, please open the line for questions.
Questions and answers
At this time, we'll take questions. Your first question comes from Lawrence Solow with CJS.
Just to quickly summarize. So essentially, the Q4 shortfall, two projects, excuse me, pushed into '26. And then for '26, essentially, you're saying $45 million, if I take the midpoint, plus or minus, I realize it's not exact size, but three particular projects are shifting into '27. And then you're adding another, I'll call it 'wiggle room,' but I don't know how you want to term it, but $15 million to $20 million to sort of what you call the de-risking the revenue outlook. Is that a good way to summarize it?
That's right. The only clarification I'd say is that the three projects kind of get us to the high end of guidance—things we are highly confident will slip. And then the additional buffer is as we scrub the pipeline to really look at things that we think could also slip throughout the course of the year. That sort of sets the low end of our guidance.
So you're assuming those three projects don't occur, right?
The guidance assumes those three projects slip, correct. And that is on the order of $25 million to $30 million of projects.
And then you slip another $15 million to $25 million in other things that kind of creates that buffer?
Other things that we think are at risk of slipping throughout the course of the year, yes.
As we look at the course over the last 30 days, those are the projects that come up on our radar screen.
You mentioned a host of things, construction delays—this is usual stuff. But these delays seem, as a percentage of your total business, maybe larger than normal. Is that fair to say? Is there any common theme that they're all being pushed out? It sounds like a bunch of different things.
It did happen surprisingly fast and more widespread, but it is only three projects. Two things are going on. One is that projects are getting bigger. Five years ago, we didn't have many projects of this size; now we do. So we will feel the pain if a large project slips. Secondly, with those large projects, they're more susceptible to slipping. A lot of them are in countries that are newer to desalination. One is a very project-specific land issue. Generally, if there's a trend, we see fewer EPCs bidding on desalination projects given broad-based construction demand, and that can sometimes extend the tendering process for our products in our pipeline because there are fewer EPCs bidding. That's the main trend we've seen. Importantly, there is no disruption in demand—people still need water. All the underlying demand trends are still in place. It's really just about timing, project complexity and timelines.
And the cost savings you spoke about—irrespective of the CO2 matter—you said your OpEx went from $77 million to $64 million. I assume, again forgetting CO2 for a moment, your OpEx of $64 million core, is that the level and do you plan further cuts in 2026?
Yes. The CO2 business comes out of that number. So you take the base $64 million, adjust for CO2. There's some other room for additional cost savings. We're getting towards the bottom of the curve on OpEx, getting quite efficient, but there's still ways for us to improve margins and OpEx.
I guess the bigger opportunity over time is when you relocate some of your manufacturing—more of a structural margin improvement?
There is a margin benefit from lower-cost manufacturing for sure. We're incurring some of the costs of that this year, and we'll get the benefits next year.
Do you realize the full $7 million this year from the CO2 exit, or maybe not quite?
Not quite. Not quite, but not too far off. That $7 million is an annualized number.
Your next question comes from Soundarya Iyer with B. Riley.
I'm asking on behalf of Ryan Pfingst from B. Riley Securities. On the PX Q650, your new product, it represents a meaningful step-function improvement over your existing product. Can you help us understand how it is priced relative to the existing product? Is it a premium product with an ASP uplift? Or what's the strategy—bringing cost down or improving revenue? How should we look at that?
The way we think about it is that any given desalination plant is priced more on the plant's total CapEx per cubic meter per day. When we introduce a product with a higher flow rate, we expect to get similar dollars per plant, but deliver fewer units. So we end up with a higher effective ASP per product. That effective ASP typically grows more than the increased cost of the product, so we see some gross margin expansion. In the past, we have also priced at a premium because these products deliver better specific energy consumption, and SEC over a plant's lifetime is a massive factor in a plant's profitability. When we can deliver better SEC, we can typically realize some pricing increases by sharing some of that savings with the customer and capturing value ourselves.
One more on the manufacturing expansion outside of the U.S. What's the expected timeline on the site selection, and what's the total capital commitment beyond what's guided for 2026?
We're working on site selection now, and we should be able to finalize that by the end of the first half of the year. The plan is to start phasing production by the first quarter of 2027. We'll take this year to plan and start executing, building up equipment with the idea that we'll be on the ground in the first quarter of next year.
On capital costs, we're incurring more CapEx this year. You saw our guided range. We've been spending about $1.5 million the last two years. This year, we're guiding $3 million to $6 million. Next year may be a similar range or a little bit lower, and that would be all of the capital we need to get into a new facility.
On the revenue cadence for 2026, is that similar to 2025—heavily back-end weighted?
I would expect a similar cadence, yes.
And then one last question. On the CO2 business, are there any other applications you're looking into potentially developing now that this one is winding down? Any other potential projects in development other than the CO2 effort?
In terms of products, nothing immediate. We think there might be applications for our current CO2 product in other CO2 markets like heat pumps, but we have a long way to go to prove that out. There's still more work to do; nothing immediate.
Your next question comes from Jeffrey Campbell with Seaport Research Partners.
First of all, thanks for the expanded guidance. It's very helpful. A quick one: do the savings from the wind down of CO2 represent any further reduction in headcount?
Yes. There were about 20 heads associated with the wind down of CO2. That included both salaried and manufacturing positions.
Going back to the PX Q650: I understand Mike's explanation about how you market the device and arrive at what you charge. But how will it affect the rest of your line? The PX Q400 was top of the line before—does it get knocked down a peg? Will legacy equipment migrate to wastewater or be phased out? How do you manage that?
When we introduced the Q400 about two years ago, we expected the transition out of the Q300 to take about two to three years. That's proving out to be the case. We'll still be making Q300s this year and should be making much fewer in 2027. We suspect the same transition from the Q400 to the Q650. We'll start manufacturing the Q650 for sale in the second half of the year, and I expect we'll see the Q400 ramp down in the back half of 2027 into 2028. It will likely take a couple of years—two to three years—for us to ramp down the Q400.
To add color, we sell a fair amount of Q300s in our OEM wastewater business, and we sell some Q400s there as well. If some systems get bigger, that might change, but I could see the Q400 becoming less prominent than the Q300 in a few years when we make that transition. That transition happens mostly in the mega project space.
So the Q300 transition occurred in mega projects over two years. Is that the benchmark for these transitions as well?
It did in mega projects. It is doing that in mega projects.
Yes.
But the idea is you may still make legacy products and they may find implementation in wastewater. Is that what you're saying?
Yes. We already sell them in our OEM desal and wastewater businesses today and expect that to continue.
You noted the new device will start being manufactured in the second half of 2026. Given project delays, does that create an opportunity to move some Q650s into projects that have been delayed?
That would be our plan—to try to do that.
Regarding the greater CapEx for the manufacturing footprint, how does this differ from the moves you made during the period of tariff uncertainty? Were those short-term solutions and now you're taking a different long-term approach?
The move to Korea was short-term to protect our China business from tariffs. In six months' time, we were able to set up an assembly-only operation and use the Korea-China free trade agreement. That was always meant to be a short-term solution. As we look at a longer-term factory outside the U.S., we'll consider China, India and other markets so that the new factory is holistic in terms of where we can ship product and is longer term in nature.
Korea was assembly-only. For these new facilities, will mission-critical, IP-rich manufacturing stay in the U.S., or are you thinking about building IP-valuable manufacturing overseas?
To start, we expect to transfer mission-critical manufacturing. Over a two- to three-year period, the new site will become a full manufacturing facility.
Okay.
It will, over a two- to three-year period, be a self-sustaining full manufacturing facility.
You have invested meaningfully in wastewater, yet 2026 guidance doesn't suggest a huge revenue increase just yet. What are the gating items for deciding whether that business is meeting investment goals, similar to the CO2 decision? Is that part of your thinking?
2025 was a tough year from a tariff standpoint. Heading into 2026, we've hired a lot of salespeople in the last few months. The key uncertainty is the ramp-up time for salespeople. We expect significant growth from that business and expect this year to build the flywheel and get the mechanism in place. The wider range in guidance is probably more about timing of salespeople than our faith in the business. That said, this business has done $10 million to $12 million in the past before and is a mid- to high-60% margin business. It's on a different footing than CO2 was but still subject to our strict capital allocation policies and is scoring well as we look at it today.
The gating item for the wastewater business over 2026 is adding reference cases. For China, we've done that and continue to do so because we have an existing wastewater business there. For India, South America, the U.S. and Europe, continuing to add reference cases in advance of 2027 will be an important benchmark for us.
Finally, you've taken Flowserve to court for patent infringement. How did you arrive at the decision to move forward, particularly since Flowserve's FLEX device has not, to our knowledge, landed any large contracts to date?
The court cases are proceeding and we're still going through the early phases of the court proceedings. That's all I can really say at this point. We will protect our IP, and this case reflects our protecting our IP.
There are no further questions at this time. I'll hand the floor back to David Moon for closing remarks.
Thank you, operator. Thank you, everyone, for listening in today. I want to thank all our stakeholders for your continued support, and we look forward to updating you on our next call after the first quarter. Enjoy the rest of your day. Thank you, operator.
Thank you. That concludes today's call. All parties may disconnect.