Energy Recovery, Inc.

Greetings. Welcome to the Energy Recovery Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. Also, please note that company's prepared remarks can be found on the company's website, ir.energyrecovery.com, 15 minutes after the hour. I will now turn the conference over to your host, James Sicardi, Vice President of Investor Relations. You may begin.

Good afternoon, everyone. Welcome to Energy Recovery's 2021 Third Quarter Conference Call. My name is Jim Sicardi, Vice President of Investor Relations at Energy Recovery. I am 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, 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. Poor-looking statements are not guarantees of future performance and are subject to 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 poor-looking statements. All statements made during this call are made only as of today, November 4th, 2021, 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 Mao. Bob, the floor is yours.

Thank you, Jim, and thank you, everyone, for joining us. Our approach today will differ from recent quarters. I will discuss the opportunities we see before us in more detail and our strategies to achieve our revenue targets in three of our industries, desalination, industrial wastewater, and refrigeration. I will also provide updated expectations on the vortex. Josh will then discuss our results, guidance for the next two years, as well as our final financial targets over the next five years. As usual, we will start with our water business. But I would like to preface the discussion with some context. We often speak about the growing water supply gap globally. The world is already experiencing these effects of this phenomenon. and the supply gap is expected to grow to 40% or 2,700 trillion cubic meters by 2030. A 40% gap and 2,700 trillion, for that matter, is almost impossible to wrap your head around. It's an annual equivalent to nearly three quarters of the waters in the Mediterranean Sea. or over 1 trillion Olympic-sized swimming pools. Water scarcity related to this gap is not felt evenly across the world. Areas of greatest water need include the Middle East and North Africa, and we continue to see strong desalination demand, as well as Southern Africa, Asia, the Western United States, and the western coast of South America. Let's take two coastal countries in Asia who are experiencing water stress as an example, China and India. China has 21% of the world's population but has only 6% of the world's fresh water. And India accounts for 18% of population with only 4% of the world's fresh water. Both countries are experiencing high water stress and begin to We invest proactively to address it. The water gap must be bridged and there are limited ways to do so. We, of course, address two of these methods via our desalination and industrial wastewater business. For desalination, we can already see the effect of this supply gap in our desalination revenues today. We have consistently guided roughly Thank you very much. and many more. In our opinion, it is only a matter of time until regions outside of the Middle East and Asia begin to look at sea water desalination as a critical solution to their growing water needs. We will remain diligent in our efforts to support the needs of this market growth. To protect our position in seawater desalination, we must invest in this business, and we are focused on three specific areas. First, R&D to contribute advancing our PX technology to remain ahead of potential competition. Second, growing our sales and service teams to be where our customers and products are. Finally, expanding and modernizing our manufacturing where needed to address growing demand. Now on to industrial wastewater. Our industrial wastewater business also addresses the world water supply gap by reducing the electricity consumption needed to filter and reuse this water. The industrial wastewater market is complex and touches many industries, everything from textile to lithium-ion battery manufacturing. In processes where wastewater is filtered by passing through multiple reverse osmosis stages, we also have the potential to expand our output PX sales alongside of our PX and turbochargers. There is a variety of estimates as to the total amount of annual industrial water discharge today. The United Nations, for example, cites estimates as high as 620 billion cubic meters per year. And one can find estimates a fraction of that number. What is more settled is that roughly 80% of this wastewater is discharged into local water sources without treatment. This untreated water then pollutes other water sources, further reducing access to clean, fresh water. To address their own water issues, the governments of China and India have taken the lead in mandating advanced water treatment and recycling technologies to be applied to industrial wastewater. China discharges more than 20 billion cubic meters of industrial wastewater annually and has committed to invest 50 billion U.S. dollars into wastewater treatment in the most recent five-year plan. We conservatively estimate world water wastewater, the industrial wastewater discharge, to be between 100 and 150 billion cubic Under the assumption that China constitutes roughly 20% of global wastewater discharge, in this flow, we can roughly estimate a current one-time TAM of between $5-$45 billion across all our products. If 100% of the wastewater was treated using advanced RO technologies, Today, only 20% of water is properly filtered, which would imply a time closer to $1 billion. The United Nations has a sustainable development goal, which we align to, to triple the amount of filtered industrial wastewater to 60% by 2030, tripling our estimated addressable market over the next 10 years to closer to $3 billion. While we believe we can address a significant portion of this market today, we will need to advance our product line to address the challenges that exist to unlock this additional time over the next two to three years. The market is made up of a variety of wastewater types with an array of viscosities, thickness, size differences, volume solace, biofoil potential, and diverse contaminants. Additionally, there is a strong push toward utilizing reverse osmosis to recover precious metals captured during desalination. Our product roadmap envisions multiple ultra-PX and potential PX derivatives none of which are expected to incur significant R&D timelines or cost expectations, but their own portions of the market. To accelerate the unlocking of this scam and to further penetrate these industries, we must commission and present actual data supporting the value of our technology to better educate the industry that will benefit. We should commission our first two to three plants over the next three to four months with data points available shortly thereafter. Investment will be required to grow our position in these markets as well as to further build partnerships not only in China and India but globally. First, as I mentioned earlier, We will invest in R&D to increase the portion of the market that we are able to address. Second, we intend to build out our sales teams and marketing efforts in China, India, and eventually other regions to educate the market as interest in our products grows. With that, let's turn to refrigeration. In refrigeration, we are talking about the next generation CO2 refrigeration system. I have previously referred to our PXG 1300 as a transformative technology that could help accelerate the global transition from climate-damaging HFCs to natural refrigerants, such as CO2. We are convinced that our PXG can become the foundation of the next generation of CO2 refrigeration systems. As deadlines to transition away from HFC continue to approach in Europe, now in the United States, the $55 billion global refrigeration industry, including end users such as supermarkets, are under increased pressure to identify technologies to reduce the higher operating costs of CO2 refrigeration systems. Our PXG does just that. Our momentum is accelerating as we move to achieve our internal targets of commercializing any new product by the end of the second year. We are in discussions with a number of grocer chains in Europe and North America for potential first PXG deployment. In fact, we just received our first order for the PXG by Viata Supermarkets in Southern California. Our PXG will not only help Viata reduce the cost of complying with California's requirements on refrigeration, which are more stringent than the proposed EPA rules, but will also help Viata lower their emissions via reduced energy consumption. We target commissioning this unit during the first quarter of next year. As you can see, neither energy recovery nor the refrigeration industries and customers are waiting for the industry to realize the importance of reducing the cost impact of these Next Generation Systems. Grocery store owners, in particular, are anxious to ease the financial strain felt in providing more climate-friendly refrigeration systems. Our initial deployments are designed to show the industry the benefits that the PXG provides compared to existing CO2 refrigeration technologies, which we believe will help drive the transition to a PXG-centric CO2 refrigeration model. We will help educate the contractors how to design the PXG-centric systems, who in turn can present the designs to the OEMs for manufacturing. Meanwhile, we're also speaking with several refrigeration manufacturers in the U.S. and in Europe who senses what an opportunity to partnership with us provides. By combining our PXG with the OEM duration expertise, we could potentially maximize both OPEX and CAPEX savings delivered by the next generation CO2 systems. Last quarter, we discussed a potential billion-dollar annual TAM in this industry for us by 2030. We intend to achieve that TAM and we are focused on investing in specific areas to be successful. First, we have developed a roadmap of our PXG development to address the total TAM and beyond. This includes varying sizes of our PXG, which will allow us to deploy in different sized systems than we are targeting today. We will also invest in making our PXG even more efficient and more cost-effective as we expand. Second, starting in 2022, we will build out our commercial equipment starting with sales and technical support to work with our OEM partners, engineering contractors and end customers. Finally, we will continue to invest in our marketing outreach to educate the industry on the value of the PXG and Drive Industry Interest. We have made solid progress and look forward to updating you further next year.