Energy Recovery (ERII) Q1 2026 Earnings Transcript

Image source: The Motley Fool.

Date

Wednesday, May 6, 2026 at 5 p.m. ET

Call participants

• Chief Executive Officer — David Moon
• Interim Chief Financial Officer — Aidan Ryan

Takeaways

• Product launch -- PX Q650 launched in March; first commercial order received and ongoing design work with multiple large customers for installation in major desalination plants.
• Leadership changes -- CEO David Moon announced his intention to retire with a formal successor search underway; Mike Mancini has resigned as CFO and Aidan Ryan appointed as Interim CFO.
• Financial guidance -- The company is withdrawing its 2026 financial guidance due to the Iran conflict and associated uncertainties in the Middle East, stating previous guidance is "no longer reliable."
• Middle East exposure -- Management identified meaningful exposure to the region and stated that "project delays will be just that," expecting delays to extend into 2027, but reaffirmed confidence in long-term demand drivers for desalination.
• Inventory and product mix -- The company is building inventory to serve delayed projects and expects Q650 to become its primary product around 2028, with current projects over the next 12 to 24 months still centered on the Q400 product.
• Global demand impact -- Management reported no evidence of project delays in desalination globally outside the Middle East, despite higher energy prices.
• Geographic opportunities -- Activity is ramping up in China and South America, and Texas is cited as a potential source of large project growth in upcoming years.
• Manufacturing plans -- The company remains committed to establishing manufacturing in the Middle East to meet customer demand for local content and intends to start assembling Q400s overseas by Q1 next year.
• Wastewater segment -- Prior 2026 revenue outlook of $10 million to $15 million for wastewater is now paused along with all other forward-looking guidance.
• Cost discipline -- Cost reduction efforts have included major reductions in force last year and at the start of this year, with future opportunities expected primarily from productivity gains and incremental SG&A efficiencies.

Need a quote from a Motley Fool analyst? Email pr@fool.com

Risks

• The company explicitly withdrew all 2026 financial guidance due to uncertainty from the Iran conflict, citing that guidance "is no longer reliable."
• Management confirmed project delays are occurring in the Middle East and are anticipated to extend into 2027.
• Wastewater and desalination project timing is partly dependent on region stability, as guidance for both has been suspended until further notice.
• David Moon stated, "no big-time opportunities left" for further one-time cost reductions in SG&A, potentially limiting earnings improvement levers in near-term uncertainty.

Summary

Energy Recovery (NASDAQ:ERII) withdrew its full-year 2026 financial guidance in response to project delays and heightened regional risk from the Iran conflict, impacting a significant portion of its Middle East business. New product PX Q650 demonstrated early commercial traction, with the first order already booked and active design integration discussions underway with large customers. The company cited increased business momentum in China and South America and affirmed ongoing investment in local manufacturing capacity targeted for Q1 next year, despite geopolitical uncertainties. Leadership transitions were announced, with CEO David Moon planning retirement and CFO Mike Mancini’s departure, as Aidan Ryan steps in as Interim CFO. Cost reductions implemented over the past two years were described as largely complete, shifting future focus to operational productivity and select cost discipline measures.

• Moon highlighted persistent, long-term demand for desalination in the Middle East driven by structural factors such as water scarcity and population growth, despite acknowledging short-term setbacks.
• The company confirmed no current impact of the Iran conflict on global desalination projects outside the Middle East and noted only minor delays in small-scale wastewater projects arising from input cost inflation.
• Manufacturing footprint expansion in the Middle East remains on track to meet customer requirements for local content and to deliver cost efficiencies.
• All prior wastewater revenue guidance has been placed on hold, reflecting the absence of visibility until further geopolitical clarity is achieved.

Industry glossary

• PX Q650/Q400: Latest-generation and incumbent energy recovery devices designed for high-efficiency seawater reverse osmosis systems in desalination plants.
• SG&A: Selling, General, and Administrative expenses, representing overhead costs outside direct manufacturing expenses, frequently targeted for efficiency measures.

Full Conference Call Transcript

David Moon: Thank you, operator, 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. Prior to opening the line for questions and answers, I would like to highlight a few important takeaways from that letter. First is our new product, PX Q650. We launched the product in March, have already received our first commercial order, and are working with multiple large customers to design it into large desalination plants. It is off to a strong start and we are excited about the commercial momentum that we have achieved in such a short time. Second, two leadership updates.

I have informed the board of my intention to retire, and a search for my successor is underway. Until that person is named, I am fully engaged in my role. Behind me is a strong bench of talent here at Energy Recovery, Inc. that will ensure a smooth transition. We are also announcing that Mike Mancini has resigned as CFO. Aidan Ryan, who joined in 2024, will take over as Interim CFO and ensure business as usual from a finance and shareholder standpoint. Third is the war in Iran. As we talked about in our letter, we have meaningful exposure to the Middle East, and we know the conflict will impact us.

As such, our original financial guidance for 2026 is no longer reliable, and we are temporarily withdrawing guidance until we have better visibility on the evolving conflict. We have seen these situations in the past, and while timing is a key factor, we know the demand is there, and we are building inventory to serve customers when they are ready. Our strategic direction will not change during this uncertain time. We remain focused on product innovation, cost discipline, manufacturing transformation, and the growth of our wastewater business. With that, we will now move to the question and answer portion of our conference call. Operator, please open the line for questions.

Operator: We will now open the call for questions. Thank you. We will now be conducting a question and answer session. You may press 2 to remove yourself from the queue by pressing the star key. One moment while we poll for a question. Our first question comes from the line of Analyst with Northcoast. Please proceed with your question.

Analyst: Thank you. Good afternoon. Hi, David, and congratulations on the retirement decision. And Aidan, congratulations on the elevation. Actually, quick question on that. Will the search lean internal or external, or is that just sort of everything is on the table in terms of your replacement, David? And then, in terms of just unpacking the Middle East situation a little bit, I think we have two different types of issues. One is a short-term delay; a project gets pushed out six to nine months. I think everyone is— that is totally— it is not a big deal even from a modeling standpoint.

But there is this sort of concern that the nature of this conflict and some of the images that were out there that people are seeing, and potential investors in the region are seeing, could kind of just deflate confidence in the region for a little longer period and take away some of the growth economically in tourism and whatnot that underpins some of the project activity. I know you do not have a crystal ball either, but I would love to get your take on that issue and whether the delays are likely to be the first sort or more of the second sort, which would be a little more concerning.

David Moon: Ryan, everything is on the table. As to the conflict, it is still early days. What we are hearing both internally and as we talk externally to others that are in the industry is that project delays will be just that. There are likely to be some delays as we move from 2026 into 2027. The fundamentals that are driving desalination and wastewater, but primarily desalination in the Middle East, are water scarcity and water security. Populations continue to grow. Those are not going away. While we may see some projects delay, we still feel good about the long-term fundamentals of desalination.

Analyst: One of my questions, David, you answered to some extent, which is how you are managing inventory and production schedules given that kind of uncertainty. You mentioned in your prepared remarks that you are building inventory to be ready to serve customers. So I guess my question is twofold. What gives you confidence to be building that inventory when things could push further out on a certain project? And given the good news on the 650 gaining traction, how do you know which inventory to build?

If some of these things are delayed a year or so, might you have the opportunity to try to spec in some of the 650s in place of what was supposed to go in, or is that just not feasible?

David Moon: I think the answer to that is yes, but we already know projects that are on the board over the next 12 to 24 months that are Q400-spec and, frankly, are so far along the design chain and in the design phase, it is unlikely that those projects will change product. Given where we are today, we have a pretty good [inaudible] for the Q650 transition time. Number two is that we saw the Q300 to Q400 transition take roughly two-plus years to play out to get to where the Q400 is our primary product today.

Even with this early momentum around the Q650, we think it will take a couple of years for the Q650 to become our primary product, and that is probably 2028 before we see that. We feel pretty good about how many Q400s we need to be building over the next couple of years and how many Q650s we should be building as well.

Analyst: Obviously, the delays are focused on the Middle East and the conflict. But the conflict itself has led energy prices higher. Desal is very energy intensive no matter where on the globe people are doing it. The PX device is going to lower that energy footprint, but still, versus a few months ago, any project is going to look a little more expensive. Is there any sign that there are any kinds of delays outside of the Middle East just given the higher energy cost spike?

David Moon: It is a really good question. The answer is no, not to this point. We have seen a few delays in some wastewater projects because of input cost of materials, but they have been small projects and pretty small scale. Nothing at this point would say desal projects in general globally are being impacted, even given higher energy prices at this point, by the war. TBD if it continues, but so far, the answer is no.

Analyst: Understood. Very clear. Thanks for your time.

David Moon: Thank you, Ryan.

Operator: Thank you. Our next question comes from the line of Analyst with B. Riley Securities. Please proceed with your question.

Analyst: Hey, David. Thanks for taking my questions. Maybe just a follow-up to the last one. On the flip side with the Middle East uncertainty, are there other geographic regions where you are particularly enthusiastic about project development on the mega project side?

David Moon: If you think about the next two years, we are excited about China—some of the desal activity looks to be ramping up there. I would also say South America, which would be the second area where we see activity starting to pick up. A third I would say is a wildcard would be Texas. There has been a lot of talk about desal projects the last couple of years. Should some of those projects really start to prove out and start to happen, that could be some really nice business for us. Those are the three areas that we are watching pretty closely.

Analyst: Got it. Has there been any change or update to how you are thinking about your manufacturing footprint expansion globally, just given recent geopolitical events?

David Moon: No. The strategic reasons for us looking in the Middle East are still the same regardless of conflict. First and foremost, it is our biggest base of business and looks like it will be over the next five to ten years. Reason number two is we have customers there that are really pulling us for local content as it relates to building PXs on the ground, and that is not going away in the near term. The third thing, the icing on the cake, would be the low-cost benefits that we get by moving a manufacturing facility to the Middle East. We continue to be full speed ahead in our planning.

It is still our target by Q1 to be able to start assembling Q400s overseas, and we continue to push down that path.

Analyst: Appreciate that. And then maybe just one more on wastewater. The prior 2026 outlook was $10 million to $15 million in revenue. Is that still how you are thinking about wastewater revenue for this year, or should we consider that on hold as well?

Aiden Ryan: Hey, Ryan, we are pausing our guidance on both desalination and wastewater, so we are not going to comment specifically. There are a lot of good things going on in wastewater. We also have some challenges, like David mentioned, and we look to update that when we update our overall guidance, hopefully here in Q2 or Q3.

Analyst: Got it. Appreciate it, guys. I will turn it back.

David Moon: Thank you.

Operator: Thank you. Our next question comes from the line of Analyst with CJS Securities. Please proceed with your question.

Analyst: Yes, hi. It is Pete Lucas on for Larry. You covered a lot in your previous answers. I guess just one for me. Given the short-term uncertainty, how do you think about cost cutting as a lever to pull to maintain free cash flow, and how should we think about that as an option for you?

Aiden Ryan: Some of those things are definitely part of the existing plans, as we highlighted in the shareholder letter. The focus is on maintaining cost discipline. We have talked about reducing manufacturing costs domestically with lean and kaizen programs. David just talked about the manufacturing footprint strategy; that is part of our plans to reduce cost, and we are always focused on that.

David Moon: I would add that we did a major reduction in force last year and a reduction in force at the beginning of this year. As we think about further cost cutting in SG&A, other than belt-tightening and continuing to trim around the edges, there is not a lot of big one-time opportunities left. I think we have done a pretty good job of reducing where we have the opportunity. Where we see opportunities going forward is really productivity gains at the factory and continuing to get smarter where we work in our SG&A to the extent that there are opportunities, but no big-time opportunities left.

Analyst: Very helpful. That is it for me. Thanks.

David Moon: Thank you.

Operator: Thank you. We have reached the end of the question and answer session. I would like to turn the floor back over to CEO, David Moon, for closing remarks.

David Moon: Thank you, operator. I want to repeat what I said in my opening remarks. Our strategic direction will not change during this uncertain time. We will remain focused on product innovation—I think we have proven that with the Q650, and we have more products on the drawing board as we move forward—cost discipline, our manufacturing transformation efforts here and overseas, and the growth of our wastewater business. These are all things that we will remain focused on as we move throughout the year. Thank you, operator.

Operator: Thank you. This concludes today's conference. You may disconnect your line at this time. We thank you for your participation. Goodbye.

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. Parts of this article were created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.