Greetings, and welcome to the Energy Recovery First Quarter 2024 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, James Siccardi, Vice President of Investor Relations. Thank you, Mr. Siccardi. You may begin.

Hello, everyone, and welcome to Energy Recovery's 2024 first quarter earnings conference call. My name is Jim Siccardi, Vice President of Investor Relations at Energy Recovery. And I'm here today with our President and Chief Executive Officer, David Moon; and our Chief Financial Officer, Joshua Ballard. 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 outlooks, 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, May 1, 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 President and Chief Executive Officer, David Moon.

Thank you, Jim, and thank you all for joining us today. The first quarter was a busy one for us and played out as anticipated. Revenue at $12.1 million was in line with our guidance for the quarter of $10 million to $13 million. With regards to the CFO transition, we've been actively interviewing some promising candidates and are making real progress. We believe we will have our candidate in place prior to Josh's last date of June 30. I stated on our last call that I, as well as the Board, strongly believe Energy Recovery's strategy of PX diversification to drive growth is the right strategy and is critical to our future. While continuing to recognize the importance of maintaining our foundational market leadership in desalination, it is critical that we also continue to look for ways to accelerate our penetration into the wastewater and the CO2 refrigeration markets, as this is from where the lion's share of potential revenue growth will originate. We anticipate our strategic future will build off this perspective. We have now formally kicked off work on our strategic planning cycle and have enlisted the assistance of industry experts to provide us additional guidance, specifically in wastewater and refrigeration. These industry experts will play integral roles in providing intelligence and hard data, while challenging us on our product development and market strategy and contributing to the development of our strategic Playbook. This will add significant expense in the second quarter especially, but I believe it is critically important work to establish a strong strategic foundation from which to grow in the coming years. Now let's get into our update, starting with water. First, we are maintaining our revenue guidance of $140 million to $150 million for the year. Our current 2024 contracted projects, including the…

Good afternoon, everyone. First quarter revenue fell comfortably within expectations, with no real surprises and within the midpoint of our guidance from our last earnings call. Unlike the first quarter last year, our water channel mix was more balanced, with roughly half our revenue coming from mega projects, and the remaining split between OEM and aftermarket sales. Although our OEM channel shows a significant decline as compared to Q1 last year, this is simply due to the timing of projects shipping. We currently expect to show healthy double-digit growth in our OEM channel in 2024. We are reporting no material emerging technology revenue this quarter, which is in line with David's comments in February with regards to our short pause to make and test the enhancements to the PX G, and now launch the second generation here in the second quarter. We are maintaining our estimated range for water revenue in the second quarter at $20 million to $25 million. This means that we are still heavily weighted to the second half of the year. Where we sit today, we are assuming that the last 2 quarters will show 40% of the second half revenue falling into Q3, and 60% in Q4. However, we will be better prepared to update you more precisely in our August call as the third quarter comes into focus. Note that our target water revenue range of $140 million to $150 million this year includes a buffer against possible movements of up to a couple of mega projects. David mentioned the status of our signed and shipped contracts year-to-date. We have been getting a lot of questions on the status of our pipeline from all of you to get a sense as to how the year is progressing. Our plan is to continue to update…

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

3 months ago, you talked about a desal project in India that was pushed into the first half of '24 versus last year. What's the status on that? Is that still on track to be recognized before June 30th?

Pavel, it's Josh. It has not shipped out yet. Technically, we're moving along pretty well. We got an update today. We'll see whether it's by June 30th, but still expected this year.

Okay. So maybe in the second half, correct?

Could be in the second half, yes.

Okay. Understood. Also, 3 months ago, [Technical Difficulty] there was a comment that deployments of the [Technical Difficulty] how is that effort progressing?

You broke up there, Pavel. Can you repeat that question, please?

3 months ago, there was also a comment about deployments of the refrigeration product being deliberately slowed to improve its reliability. How is that effort progressing?

Yes. Pavel, this is David Moon. So, the second generation is progressing well. So we just passed through the first gate or milestone, which was internal testing in the lab, got really good results in terms of reliability and performance. And so, since the end of March -- or since beginning of March, we've now been doing beta testing in the field in the U.S. and Europe with very good results. And so, we are now moving on to pushing it out to the 10 summer sites that I've talked about in the script. And getting through the summer testing season would be our next milestone, but so far, very pleased with the results.

Okay. And David, another question for you, kind of big picture strategy. When you came in, as you know, there were some targets for 2026, which, as you acknowledged 3 months ago, were kind of on the aggressive side. When do you think you will be ready to put out some updated targets?

So, we're in the middle of our strategy work now, what we're calling our Playbook, and I expect latest that we'll be talking about the outyears '25, '26, '27 by the time we get to the third quarter earnings call.

Okay. That's helpful. Last 1 for me. You mentioned a minute ago, desal customer in Brazil, which sounds interesting because we really do not think of Brazil as a particularly kind of water scarce geography. Can you talk about how big that project is and how it came about?

Yes. So it's a part of Brazil's -- the government's initiative to increase the portable water supply by 12%. And so, this is our first desal megaproject. It's in Fortaleza, which is in the Northeast part of Brazil. It's the fourth biggest city in Brazil. It's going to be roughly, I think, 86,000 cubic meters per day. It's planned to be online by the end of 2026. And this will be all Q400s, which will be our newer product. And so, we're very excited about our first large desal project in South America and given the government's initiative, hopefully more to follow.

[Operator Instructions] Our next question will come from the line of Ryan Pfingst with B. Riley Securities.

For the PX Gs getting deployed ahead of this summer, if all goes well, would you expect these customers to place meaningful additional orders later this year? Potentially that could translate into some significant revenue in '25, or is the focus here really on getting that data in the hands of the OEMs?

It's the latter first. And that's getting at least 3 months worth of data, which will turn into a white paper sometime in Q4, into the hands of OEMs first. So that's -- my trip over the last few months to visit OEMs in the U.S. and Europe, I mean, that's what they pounded the table for, was with summer data, summer data. And once that's in the hands of the OEMs and they feel good about it, then they'll start going to their end users and start talking up the PX G more so than what they're doing today. So, first steps first, let's get through the summer. Let's get our white paper done, prove the fact that we're getting good energy savings, and then I think we'll start to see some momentum build in the last half of the year for 2025. What that revenue stream looks like at this point? Too soon to tell.

Okay. That's helpful. And then, for water, you guys have signed the $87 million in contracts for shipments this year. Curious if you have a number handy of what that might look like for '25, just to try to get some visibility early on, on how next year is shaping up?

I don't have that number on top of my head, but it wouldn't be very big yet, Ryan. It'd still be fairly small. I mean, we're still a year out, right? So, it wouldn't be a large number anyway.

Okay. What about more general visibility, Josh, about next year? Just what you're seeing in terms of projects out there? Are things getting delayed kind of what you've expected, given we only spoke about 2.5 months ago? Any changes since then?

No. No real changes since then. We're not seeing any new delays or any new strange movement in our pipeline or anything like that. Things are moving on track generally. And I would probably point -- because we're not ready to yet talk about 2025 numbers, but I'd point you to the industry data source for desal, which is desal data coming out of the GWI. They've got some good industry data that still shows pretty strong growth over the next few years. I point you there for now, and then when we get to the November call, the Q3 call, we'll be talking more about 2025 and the future, more explicitly.

That's helpful. And maybe just 1 more for you on water. In the past, you've talked about an estimated PX TAM of $0.5 billion solely for replacing thermal with SWRO tech. What does that opportunity look like today?

We've done -- we've already covered about 20% of that. So we're at somewhere around $400 million left, which will play out over the next 10 years, 15 years, coming -- as plants age out.

Thank you. [Operator Instructions] Thank you. We have reached the end of our question-and-answer session. And with that, I would like to turn the floor back over to James Siccardi for any closing comments.

Thank you, everyone, for joining us today. We look forward to speaking with you again in late July. Good evening.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.