Fueled by gas your water heating appliance will discharge products of combustion know as flue gasses. A higher efficiency is achieved when the waste heat in the discharge gas is reused to “Pre-heat” the water  before introduced to the main heat exchanger.
In a conventional boiler, fuel is burned and the hot gases produced pass through a heat exchanger where much of their heat is transferred to water, thus raising the water’s temperature.
One of the hot gases produced in the combustion process is water vapour (steam), which arises from burning the hydrogen content of the fuel. A condensing boiler extracts additional heat from the waste gases by condensing this water vapour to liquid water, thus recovering its latent heat of vaporization. A typical increase of efficiency can be as much as 10-12%. While the effectiveness of the condensing process varies depending on the temperature of the water returning to the boiler, it is always at least as efficient as a non-condensing boiler.WIKIPEDIA