Greetings, and welcome to the Energy Recovery 2Q '24 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, James Siccardi, Vice President of Investor Relations..

Hello, everyone, and welcome to Energy Recovery's 2024 Second Quarter Earnings Conference Call. My name is Jim Siccardi, Vice President of Investor Relations at Energy Recovery. I'm here today with our President and Chief Executive Officer, David Moon; and Brandon Young, our Controller and Interim Chief Accounting Officer.

During today's call, we 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 us and on management's beliefs, assumptions, estimates or projections.

Forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and other factors. We refer you to documents the company files from time to time with the SEC, specifically the company's Form 10-K and 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, July 31, 2024, 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.

At this point, I will turn the call over to our Chief Executive Officer and President, David Moon..

$2.6 million for Playbook consulting and $1.4 million for recruiting and executive transition cost. We are maintaining our operating expense guidance for the year of $78 million to $80 million, which includes the estimated $7 million in onetime costs. We expect operating expense to come in at $21 million to $22 million for the third quarter.

Of the remaining approximately $2.2 million of onetime costs, we expect 75% to be spent in the third quarter and 25% in the fourth quarter. As a result of these onetime items, we experienced a small net income loss in the quarter, though with a large sequential improvement from the previous quarter and putting us very close to breakeven.

We are on track to moving to positive operating income as the remainder of the year progresses. And lastly, we continue to grow cash in the second quarter, increasing our cash and investment position in the second quarter from $129 million to $138 million. We currently expect to end the year between $140 million and $150 million.

So to sum up, we delivered a strong quarter supported by a growing backlog, which gives us confidence in our full year revenue guidance of $140 million to $150 million. We anticipate our Wastewater business to generate $12 million to $15 million in revenue.

We expect to have 30 to 50 sites with our PX second-generation PX G installed by the end of the year. And we are maintaining our gross margin guidance of 64% to 67% and operating expense to $78 million to $80 million. With that, now let's move to Q&A..

[Operator Instructions] Our first question comes from the line of Pavel Molchanov with Raymond James..

Probably start with the Playbook. I know you do not want to -- kind of front run the specific targets that you will unveil towards the end of the year.

But just conceptually, will you provide kind of revenue, earnings, any other metrics? And will it be by product line?.

Pavel, this is David Moon. Nice to hear your voice today.

So the guidance that will -- so we'll break out, as I said on -- just a few minutes ago, we're going to break out the release of the Playbook into -- we'll have -- we'll provide the '25 and '26 revenue guidance as part of the earnings call for Q3, maybe a few milestones, but it will be pretty high level.

And then when we when we get to the actual webinar that we'll have later in Q4, we'll provide more detail around not only years in terms of years out. It will be a 5-year look, but we'll also provide not just revenue but also earnings and also a look by business unit as well..

Okay. That's something for us to look forward too.

When you talk about DC engineering in the measuring phase as it relates to the refrigeration product, what exactly is being measured? Is it the energy savings or something else?.

Yes. So there's two specific -- so there's two specific metrics that were -- that are being validated or measured by DC engineering. One is just purely energy segments. And then the second is capacity extension. And I think we've talked in previous calls well about how the PX G provides capacity extension and high heat load dates.

And so DC engineering is measuring and confirming both of those..

And as you speak with prospective customers, do they have a particular threshold or target that they want to see in terms of the improvement in the refrigeration system?.

I think so. Largely, the feedback has been around -- it's a very first cost conscious industry. And so largely, the feedback has been around pay that period. And anything from 2 to 3 years is acceptable. And so that's been sort of the -- and so then you can roll in capacity extension under that, you can roll in certain energy saving as part of that.

But that's the primary feedback we get or what end users supermarkets way you'd be looking for. And that's a very, very short payback period..

Okay. Last question, a little bit more macro.

Is there any evidence that interest rate -- high interest rates, currency, oil price or anything else is structurally hindering the development of desalination in the Middle East?.

None. I'd say nothing that we can see at this point. And our field team is as good as it gets and as close to customers as any. And so far, full steam ahead..

The next question comes from the line of Ryan Pfingst with B. Riley Securities..

I know you don't want to get ahead of the 3Q update and webinar in the fourth quarter around CO2.

But maybe can you talk a little bit about the recently deployed PX G's and maybe how they performed compared to what you were seeing from the prior generation?.

So I think what's most important about what we've seen out of the second gen is that they're just -- they're not running nonstop. No vibration, sound levels are better than the first gen PX G which were the 2 issues that we saw wanted to solve for when we developed the second gen. And so field time so far, they're running like clockwork in the field.

So very, very pleased thus far with the performance we've seen in the field. And we're starting to get in several areas like Southern California, we're starting to get really some stress test, our PX G stress test, right? I mean we've had 100-plus degree days in Southern California for most of the last month or so and so far so good.

So we're happy with the performance..

Great. And then turning over to the Water side. The AI theme is obviously super topical today and data centers are huge consumers of water.

Are you hearing anything in terms of desalination or RO and wastewater participating there?.

So we're starting to push that discussion on our side. And so this is something we've been talking about the last 3 or so months about how we can -- we capture a lot of data. There's a lot of -- our PXs are data-rich in terms of opportunity.

And so we're talking to our EPCs and all lines operators about how potentially we can go faster and some ideas we have on the AI front. We're not getting pulled that we're pushing, we're doing and pushing at this moment..

Okay. Interesting. And then maybe just one more. Could you potentially talk a little bit about 2025? I know you just said the macro wasn't really hindering desalination projects moving forward.

But what are you seeing in terms of the visibility you have on 2025 today and the potential growth for you guys?.

Yes. So I think -- so we're confident we're -- this 2024 will be the 10th consecutive year of growth that we've had. And I would say, looking where sort of understanding today, I would say that 2025 should be no different. I mean, that should be the 11th year of growth that we'll be looking at for ERI.

So more to come when we talk in third quarter, certainly as part of the webinar, but I see the growth trends, the macro story continues to look good. So -- and we're going to continue to ride that way. So I think it looks good for 2025..

The next question comes from the line of Jason Bandel with Evercore ISI..

First question on the refrigeration side. I know you mentioned in your prepared remarks about Kroger test in our PX G and I saw their recent announcement that they're going to start using the CO2 refrigeration system starting next year.

Just curious, based on your experience so far, what would a typical supermarket rollout look like? Do they typically start with new store openings and distribution centers? Do they kind of wait for the end of the useful life for older systems? Like how is that transition typically happen?.

It's going to really depend. So in this space, there are -- what we call first movers or first adopters and then their followers. And so those sort of supermarkets fall in those 2 camps, sort of nobody in between really.

And I see Kroger as someone that you would call an early adopter, right? And so how this will play out with Kroger, we're doing the one store announced Cincinnati. It's getting a lot of exposure, by the way, because it's their headquarters.

And that continues to go well and as Kroger begins to work on their capital plans for rolling out CO2 over the next 5 years. And I believe we have a real chance to be a part of those capital plans. And they'll go faster. And they'll start with stores that are older, most likely that are older, where there may be some leaks, may be a problem.

The system might not be running well or it's just the equipment is sort of at its expiration day. And so they'll start with the older stores first. And then as the new stores are obviously built, those would be certainly CO2, but I think they'll start from the bottom of their list and their most problematic stores will be where they start..

Got it. Okay. That makes sense.

And then with the white paper, the OEMs, will they feel comfortable with the amount of run time data in the white paper? Or will some want to see even more run time data in order to get comfortable with the real-world performance of the PX G?.

Yes. So it's a very good question. So the run time that we've laid out as part of this work with DC Engineering has been largely given to us by the OEMs. And so this is what they're mandating. This is what they're comfortable with in order to be able to sit with end users and have this next discussion.

And so we are following their direction when it comes to run time. And what's critical is this is the summer period, and nothing more, nothing less. And so if we come out of the summer period with good results, that will be enough then to take our discussion to the next level..

Got it. Now switching gears a little bit to Wastewater. I know you reiterated the full year revenue guidance despite the slower start to the year. Just curious if you can provide a little more color. I will give you the confidence that the second half revenue will come in to meet your full year guidance..

Yes. So we did about $600,000 in wastewater this quarter, which was equal to what we did at this time last year. Our backlog, as I talked about earlier, is growing -- we're seeing an uptick over the last 4 weeks, we've seen a real uptick in quoting that we hadn't seen for a while, largely driven by China.

And so we're seeing that China is starting to see just an increased level of activity that we haven't seen for the year in China. And so I think that bodes well for the rest of the year.

And if we look at the uptick and quality plus what we've already count on the books in terms of backlog, we're still comfortable with the 12% to $15 million of guidance, even though we started slow..

Understood. And one last one for me. Just on the CFO search process. I know you went -- kind of went through Michael's background in the prepared remarks. Just curious if you can share a little more details on, I guess, how you decided to then picked him.

And if you regret not having an overlap with Josh starts?.

Look, I think in a perfect world, have been great. If we would have had some overlap. But Michael is an experienced CFO. He brings a skill set with his start-up work. He knows how to work under pressure given his previous background. He knows how to work with investors. He'll hit the ground running. I have no doubt.

And so yes, would have been good, yes, but where he'll hit the ground he nearly starts next Monday. And so -- and Josh has been kind enough to say that he will make himself available if needed. So I'm pretty happy that we hit the ground running. I'm not worried about that..

[Operator Instructions] There are no further questions at this time. I would like to turn the call back to James Siccardi for closing remarks..

Thank you, everyone, for joining us this evening. We look forward to speaking to you again in the third quarter call and as a webinar. Please take care..

This concludes today's conference. You may disconnect your lines at this time. Enjoy the rest of your day..