Energy Recovery, Inc.

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Energy Recovery Third Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Should you require operator assistance during the conference, please press star-zero to signal an operator. Please note, this conference is being recorded. I will now turn the conference over to your host, James Sicardi, Vice President of Investor Relations for Energy Recovery. Thank you. You may begin.

Good afternoon, everyone, and welcome to Energy Recovery's 2020 Third Quarter Earnings Conference Call. My name is Jim Sicardi, Vice President of Investor Relations at Energy Recovery. I'm here today with our Chairman, President, and Chief Executive Officer, Bob Mao, 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 outlook, the company's ability to commercialize Vortec, 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. Four 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, October 29, 2020, 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 would like to turn the call over to our Chairman, President, and Chief Executive Officer, Bob Malk. Bob, the floor is yours.

Thank you, Jim, and thank you, everyone, for joining us today. I want to start today's call as I did last quarter with sincere hope that everyone listening and your families are safe and healthy. Once again, I am happy to report that the energy recovery team and our business remain healthy, well, and strong. Energy recovery is evolving well into a COVID-inspired new normal. where we continue to steadily achieve growth both in our base business as well as in our new business initiatives. The disciplined financial and time-bounded approach to our new initiatives as reported in our last earning call is being strictly executed which should translate to greater bottom line results and increased return for our investors. Following in the format of my previous earning call report, I will provide you updates to our water business and water tech development in our oil and gas business. In addition, in our last earning call, we committed to provide more details on our incubation efforts. for the PX Technology Platform, which was started at the end of the first quarter of this year. Today, we are happy to report on one of the efforts, ZLD, Zero Liquid Discharge, which has just graduated into commercialization with receipt of the first purchase order. Let's begin with our water business. which continues to be healthy and strong riding on incredibly strong global desalination growth even amidst the COVID pandemic. This third quarter was ERI's biggest water revenue generating quarter ever eclipsing last year's prior quarter record by 26%. At this time, we feel confident increasing our previously projected 20 to 25% water revenue growth for fiscal year 2020 up to 25%. We also feel confident increasing our 2021 growth outlook to 10% from the flat to 5% growth rate we communicated last quarter. Finally, existing desalination industry trends allows us to optimistically anticipate water revenue bills in 2022 similar to what we are achieving in 2020. The strong global seawater reverse osmosis desalination growth trend is anchored in the critical need to provide access to clean water in many parts of the world. In addition to the basic needs, Three other trends are helping to growth in seawater reverse osmosis. First, the technological shift from inefficient thermal desalination plants to reverse osmosis is becoming a growing portion of our pipeline. Second, acceptance of private financing into desalination construction in places like Saudi Arabia, Dubai, Egypt, and India is increasingly decoupling desalination capital projects from national fiscal budgets which may be susceptible to oil price swings and COVID-19. And finally, geopolitical shifts are creating an urgent strategic need for desalination in countries like Egypt when the construction of the Nile River Dam in Ethiopia threatens Egypt's water independence. In addition to our fundamentally strong baseline seawater reverse osmosis outlook, our first incubation initiative, Euliquid Discharge, or ZLD, is focused on our water business. Specifically, A global regulatory push is currently being led by China and India to implement more environmentally friendly practices in industrial wastewater treatment. Those countries are struggling with maintaining clean water sources, and they are seeking to maximize the recovery of clean water and minimize the impact of wastewater disposal polluting their waterways. VRB allows for this. by fully removing the harmful industrial waste from the water and reintroducing or recycling only clean water. The VLD market is in its nascent stages. It is a fragmented market and multiple competing technologies, none of which has emerged as a dominant technology. Much like the desalination market, we believe our reverse osmosis is the optimal solution. However, unlike desalination, the pressures needed to achieve zero or minimal liquid discharge are nearly 2,000 PSI, or roughly double that of seawater desalination. To address this, we are using our PX technology platform to build a high-pressure PX application, which we call the Ultra PX. We believe our technology has the potential to become the dominant solution in ZLD wastewater, just like our legendary PX has dominated the seawater reverse osmosis market. Our preliminary ZID market research identified existing wastewater application of our Ultra PX with a potential total addressable market in China as high as 100 million U.S. dollars, which would not include further annual growth as the market expands. We see a similar opportunity in India where we recently received our first purchase order and we believe that markets globally will move further toward those real and minimal discharge technology over time as clean water becomes a more critical resource. Now that it has Achieved commercialization, ELD will move out of incubation and into our water business unit. We're proud of our R&D and commercial teams and their ability to commercialize our new Ultra PX is in several months from initial incubation, well below our two-year project commitment. ELD should achieve and We turn on investment far exceed 0.2%, and we anticipate ultimately achieving margins at levels comparable to our base water business. Finally, we anticipate positive operating cash flow from the asset with our first purchase order in hand. We're truly confident in the potential of our water business as we look forward. Our business, our baseline seawater desalination business continues to enjoy a circular upswing with no end in sight over the next few years. And we are excited about the potential of our new wastewater business efforts. We look forward to update you on those in the future. Next, we turn to our oil and gas business and Vortec. Where I continue to view the progress we made was great pride. We have developed our production model 1.0, which was utilized during our previously recorded fuel simulation track with Liberty Oil Fuel Services. However, the three hurdles we outlined must still be Before we commercialize. One, successfully complete two to three life racks. Two, validate our customer value proposition. And three, maximize the amount of sand that can be pushed through the cartridges before repair or replacement. Let us begin with life racks and by extension our value propositions. We are aggressively seeking to get out a LIFRAC before year-end, as LIFRAC verification is critical to establishing the VORTAX value proposition for our customer and to verify our VORTAX cartridge service spec. In addition to our ongoing dialogue with Liberty, we have taken calls from and Hostet and Katie, additional oil fuel service companies interested in the potential use of Vortec. We are pleased with the response companies are giving us and the willingness in which they have introduced Vortec to their own customers. We remain confident in our ability to achieve the life well requirements as outlined last quarter and quantifying our value proposition. As soon as we have achieved our first life bill, we will let you know. With regard to the final hurdle, we're making solid progress in cartridge life extension and manufacturing and finance. We believe we identified a solution to achieve our cartridge life, or as a minimum, a solution that would give us a material step forward to this end goal, and we will be testing the solution as we end the year. We continue to remind ourselves We need to commercialize VORTEX by mid-year 2021 or else stop investing. Our committed timeline has not changed. Next, we report on incubation. I discussed earlier our ZLD initiative, the first incubation effort to graduate to an exciting business unit. In addition to the ZLD market, there are a multitude of potential applications for our ultra-high pressure PX in a variety of industries, within and outside of water. We see significant future potential for our ultra-high pressure PX technology and believe it could become a significant percentage of our revenue in the coming years. We're also making progress on a second PX incubation initiative targeted at a very large global industry currently undergoing regulatory-driven transformation. While this product has the potential of being transformative, in much the same manner the PX transforming the desalination industry We are at the technology feasibility stage, and so will forego deeper discussion at this point. We expect to report on the progress of the incubation effort when we speak to you again in March, at which time we will have either proved our technical feasibility or ceased investing. We mentioned last quarter that we are working on a project that will expand the aperture of our PX technology platform, thereby creating new PX applications in new industries. This project is a zero mixing PX. Zero mixing simply means that there is no co-mingling of fluids as columns of fluid transfer their pressure within the PX. Such mixing does occur in our current applications in desalination and in oil and gas. But, mixing however slight can exclude the PX from being applied in many applications such as gas processing or chemicals, among others. where our technology could potentially help reduce energy consumption and thereby cost in existing systems. We have already proven the technical feasibility of this extension of our technology and we are now working on longer life and reliability. As we begin to apply this technology to new applications, we will update you and the potential of these new markets. With that, let's turn to ESG. As you know, we released our inaugural ESG report in September. While our business has always been aligned with sustainability issues, such as addressing global water scarcity and improved access to affordable and clean energy. Our ESG report reflects our commitment to become a more sustainable and resilient business. The initial drive to build out our ESG program is based on our business skills as well as inputs from our key stakeholders. The pursuit of more efficient, sustainable customer solutions has been the core of our DNA since our founding more than 20 years ago. We're proud of the impact our technology has been making desalination more efficient and sustainable, particularly as our world confronts growing water scarcity. Our new ventures will continue to focus on energy efficiency and the environment. As we use our home pressure exchange technology to drive new growth opportunities, we desire to do so while providing new, efficient and sustainable solutions to industrial needs. This is an exciting time at Energy Recovery. Our water team is focused on maintaining the momentum of our desalination business as well as expanding our reach with the launch of the new ZLD project. Our oil and gas team is focused on finding and on finalizing and commercializing vortex. And finally, Our incubation efforts are focused on achieving technical verification on one product that could prove transformative and another that could further expand the aperture of our PX interface platform. We are transitioning energy recovery into a gross company on the basis of our very versatile pressure exchanger. We are investing our hard earned cash and you should know how and why we are investing it. We will continue to tell you what to expect, give you updates on our progress and provide details on the outcomes. If we fail, you will know why, but when we succeed, you should not be surprised. In short, you will see every punch we land and every hit we take, and we do not plan to take any hits. With that, I will hand it over to Josh. Thank you, Bob.