Energy Recovery, Inc. 2026 Q2 Earnings Call

Thank you, operator. 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. We 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. 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.

Well, let me start kind of with the pipeline. 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. 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. That forward visibility can extend out for five years. 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 We just have logistic challenges as well in terms of getting things started and proceeding into the execution phases of these things.

Good pipeline, but still with uncertain timing is the punchline there.

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. 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 2027 and 2028 and beyond, as well as when we introduce new products, including our Q650 into the market.

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.