Energy Recovery, Inc.

Greetings and welcome to the Energy Recovery Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce to you James Sicardi, VP of Investor Relations. Thank you, James. You may begin.

hello everyone and welcome to energy recovery's 2023 second quarter earnings conference call my name is jim sicardi vice president of investor relations at energy recovery and 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 and reform act of 1995 regarding future events for 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 companies 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, August 2, 2023, 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 Chairman, President, and Chief Executive Officer, Bob Mao.

Thank you, Jim, and thank you everyone for joining us today. First, as usual, let me start with our core water business. Using desalination, we have now signed all megaprojects that we targeted to ship this year and are now filling out our OEM and aftermarket channels, which happen closer to their shipping date. We're well positioned for the remainder of this year, and Josh will give you more specifics on these numbers. In wastewater, our overall signed contracts and pipelines remain robust, and we now believe we shall land at the mid to high end of our six to $8 million guidance by the end of the year. The team is most importantly focused on where we need to invest to deliver another doubling of revenue in 2024. We have discussed our intent to build out this team in the regions in which we operate, and this effort continues at a quickening pace as we enter the second half of 2023. In June, we announced our expanded UltraPx product series, In the broad range, from smaller flows as low as 10 gallons per minute up to 250 gallons per minute under operating pressures as high as 120 bar or 1,740 PSI. Additionally, our low pressure PX enables us to provide pressure exchanger technology in all trains of a plant, from low pressures to ultra high pressure. We will update you more on our plans for wastewater at our next earning call in November, but our progress continues to yield confidence in not only achieving our 2023 wastewater guidelines, but also our 2026 revenue targets in this segment. As we look further out, we continue to pay attention to specific regions globally that may have potential for energy recovery in the coming years. Last quarter, we spoke about the potential for our business in North Africa, in particular, the strengths we see in Morocco, Algeria, and Egypt. We have also identified potential growth markets in South America, which is also experiencing severe water stress and turning to desalination, water reuse, and wastewater treatment for relief. Chile, which has been dealing with record drought conditions, continues to be a leader in Latin America desalination markets. In the second quarter, we announced contracts totally over 8 million for projects in the country, all of which are scheduled for delivery later this year. Chile is projected to see growing water stress in the coming decades, which is already affecting their water supplies. According to World Resources Institute, during the 2010s, Chile experienced only low to medium water stress based on the ratio of local water with stores to their renewable supply. This decade, they are already in the high stress category and are expected to be classified as most extreme by the 2030s and 2040s. The rising temperatures will likely further accelerate, particularly in the Andes Mountains, which is the source of most of the country's water supply. In addition, central Chile, where 70% of the populations live, is expected to see significant reduction in rainfall. This water stress is playing out today in the mining industry. a critical industry for Chile's economy, which supplies nearly a quarter of the world's copper supply. As of a year ago, Chile was expecting to nearly triple its use of desalination in magnetic mining, from eight desalination plants to 23 by 2028. Additionally, the mining industry uses enough water to supply 75% of Chile's population. And by 2028, it's expected that over 50% of the water used in mining will be disseminated. The need for water in Chile is appearing on our pipelines today, with sales expected to nearly double by 2026. Water reuse and recycling is another option for Chile, which could potentially generate material increases in our wastewater business as the decade plays out. Mexico, ranked at 24th in the world for water stress, is another country experiencing significant drought and recurring heat waves in recent years. The current water crisis began in 2022, and up to 60% of the country could be under severe water stress in the coming decades. In fact, earlier this year, Mexico City itself announced it would reduce water pressures as reserves in the main reservoirs fell below 50%. We believe desalination and wastewater reuse will be critical components of Mexico's water strategy in the coming years. Although we have not seen significant revenue from Mexico in recent years, our pipeline is growing and we are nearly doubling our business there in 2023. However, the future of desalination or water reuse in Mexico will depend on their ability to build sufficient water distribution networks. Argentina. Despite it not being a material revenue generator for energy recovery, is another South American country experiencing significant water stress. The country's worst drought in 60 years led to Argentina reporting significantly lower crop yields for 2023, which is a strain on an economy heavily dependent on agricultural exports. These three countries have a combined population of roughly 200 million. which is more than twice that of the Middle Eastern countries that have been driving large-scale desalination growth in recent years. In 2023, revenues in Central and South America are potentially nearly doubled from single-digit millings to the mid-teens. As with North Africa, how and when water stress finally pushes these countries into consideration to a considerable ramp up in alternative sources of recycling water is not known, but that there is a growing need is clear. We have already recently deployed additional resources To continue to serve this market, we'll continue to invest in the future as the coming years as needed. Now let's turn over to CO2, where we continue to receive both market validation that our technology is being accepted, as well as concrete proof points with customers. In a clear signal, that our PXG is beginning to truly resonate with the refrigeration market. We were recognized in two significant ways in the second quarter. First, the PXG was awarded the refrigeration innovation of the year at the ECMO America Summit in Washington DC in June. This award was chosen by a vote of industry players globally, and Energy Recovery's PXG was selected over nomination of other leaders in the industry. Additionally, the PXG as well as APTA's XTE refrigeration system have been separately selected as finalists. in multiple award categories for the annual RAC Cooling Industry Awards, including the Refrigeration Innovation of the Year Award. This award is granted to a product that provides existing refrigeration systems with definitive and impactful change. As a reminder, the core innovation of Aptos XT refrigerators of our PXG. We're proud of both the Padmo Award and Win or Lose. These latest nominations are encouraging signs that our innovative technology is becoming increasingly accepted by a conservative and mature industry. However, validation must become pipeline and pipeline orders. and those orders must become profitable revenues for energy recovery for us to achieve our targets. In that regard, a few concrete actions have taken place this quarter. First, we have begun to see repeat orders from our partners as they build their own pipeline of PXG demand. Both European partners, Fuel Cool Technique and APTA Group, have identified their next installations in major chains in Eastern and Western Europe. We will keep you updated on their progress as they are commissioned. Second, our PXG is scheduled to be installed in a Canadian supermarket chain this quarter to help support refrigeration systems under stress from the historical temperature spikes happening today. Food loss due to refrigeration is a major problem in the supermarket industry, costing millions of dollars annually and affect the bottom lines of both supermarkets and the OEMs themselves. Our PXG has shown that it can allow existing CO2 refrigeration systems to operate at temperatures up to 10 degrees Fahrenheit over their current capabilities. With average global temperature reaching their highest on record, we are well positioned to help solve a growing challenge as supermarkets move to CO2 refrigeration. Third, our partner, Viata Supermarkets, has ordered a PXG for installation at a second store in California. We recently presented the results of our PXG at the Boyata supermarket in Indio, California, at the EDMO conference in June, together with Boyata. We showcase an independent assessor's finding that shows under certain conditions, our PXG helped Vieta achieve a significant reduction in its CO2 refrigeration system's energy consumption. Specifically, the study showed that at temperatures of 95 to 105 degrees Fahrenheit, The PXG reduces the system's total energy workload by approximately 30%. These tremendous savings are comparable to those that we have saw earlier this year with EPTA in Europe. And lastly, as previously discussed, regional distributors in Europe are an integral part of our strategy to approach the market in the region. As such, we continue to move forward in discussions with additional distributors with the hope of signing more of them in the coming months. Such agreements are important in helping us penetrate markets in an expeditious manner. Last quarter, we announced our plans to hire and train the field engineering and technical staff we need to support our rollout. This quarter, we're taking this a step further. We'll soon announce a partnership with a major U.S. OEM to open new training facilities here in the U.S., This new facility will incorporate our PXG technology and help familiarize external service technicians with the operation of the PXG. We have already begun inviting industry participants to that opening event and look forward to formally announce it in the coming weeks. Our hope is to replicate such facilities elsewhere with other partners to ensure that demand for the PSG is not only met by product, but with the technical support needed as well. As you can see, we have had an eventful quarter and first half of the year. And I am also pleased to report that in the second quarter, MSGI MSCI assigned energy recovery its highest ESG rating of AAA. In fact, we actually earned the top rating within our industry sector. This is quite an accomplishment for a company that only commenced on its ESG journey four years ago, and it is a tremendous testimony not only for our strategy and product, but also for the hard work and dedication of our ESG team and that of our entire company. Next quarter, we will talk about our plans and projections for 2024 in both the CO2 and water businesses as we continue to push forward our 2026 targets With that, let me hand over the call to Josh.