Ladies and gentlemen, thank you for standing by and welcome to the ERI Third Quarter 2012 Earnings Conference Call on the 8th of November, 2012. During today’s presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. (Operator Instruction) I will now hand over the conference over to Mr. Thomas Rooney, please go ahead sir.

Good morning everyone and welcome to Energy Recovery’s Third Quarter 2012 Conference Call. My name is Tom Rooney, and I’m here today with our Chief Financial Officer, Alex Buehler. The primary purpose of today’s call is to provide you with information about our financial performance in the third quarter of 2012. However, some of our comments and responses to questions may contain forward-looking statements about market trends, future revenue, growth expectations, cost structure, gross profit margin, new products and business strategy. Such statements are predictions based on current expectations about future events and are subject to the Safe Harbor provisions of the U.S Private Securities Litigation Reform Act. Forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and other factors that could cause actual results to differ materially. A detailed discussion of these factors and uncertainties is contained in the reports of company file with the US Securities and Exchange Commission. The company assumes no obligation to update any forward-looking statements made during this call, except as required by law. So again, good morning. Now that we just formally reported third quarter results and we are effectively halfway through our fourth quarter I’m pleased to report that 2012 is playing out very much as our management team had expected. We are in fact meeting or exceeding our internal 2012 business plan on every important metric. The third quarter results showed dramatic improvement over the same period a year ago and continue to demonstrate that we have put the company on the right track. Two areas of particular interest are our market share and our gross profit margin. Quite often, company has accomplished one of these goals at the expense of the other. But in our case, we are enjoying solid improvement in both market…

Thank you, sir. (Operator Instruction). And the first question comes from Laurence Alexander from Jefferies. Please go ahead with your question. Lucy Watson – Jefferies: Good morning. This is Lucy Watson on for Laurence today. On the oil and gas business, congratulations on shipping two units this quarter. Did you record any revenue associated with those units?

The revenue was de minimis and it was not in this quarter. It was in the second quarter, I believe. I’m sorry, second and third quarter. Lucy Watson – Jefferies: Okay and in general, how should we think about the oil and gas selling cycle as compared to your more traditional desalination business.

It will be – the selling cycle will be analogous to our large project selling cycle, our MPD as opposed to our OEM. So we would typically get a contract that would have roughly six months of manufacturing and a month or two to ship. Lucy Watson – Jefferies: Okay, thank you. And you were a little bit more specific on market share commentary last quarter. I’m just wondering if you’ve seen any noticeable shift in bidding activity or signings during Q3.

We don’t typically report on backlog. But we continue to see project activity and we actually anticipate – we’re focused right now on finishing up 2012. We anticipate giving some revenue guidance in the first quarter for next year. Lucy Watson – Jefferies: Thank you.

Thank you. The next question comes from Dale Pfau from Cantor Fitzgerald. Please go ahead with your question. Dale Pfau – Cantor Fitzgerald: Yes, good morning gentlemen. And couple of questions here. You said in the fourth quarter, we’re looking for strong revenues, but you also mentioned R&D up and margins down. Could you give us a little bit more color on that? How much do you expect those R&D revenues to be up sequentially and should that be a new sustainable rate once you hit that?

We are seeing particularly high R&D spending in the third and fourth quarter pertaining to if the five prototypes that we have been manufacturing and sending out. So the R&D spending in the third and fourth quarter would not necessarily be a long-range run rate. So we’ll see a modest increase in R&D spending into the fourth quarter and the mix shift that would include more pumps and turbos in the fourth quarter has an overall effect on the gross margins. Dale Pfau – Cantor Fitzgerald: And could you give us a little bit of thought here as we head into next year. Again sustainable model, where do you expect to reach cash flow breakeven and what revenues do you expect to reach earnings profitability?

Right. So from an earnings profitability standpoint that number is on the order of $50 million of revenue and the cash flow breakeven point is in the $42 million to $45 million range depending on how much we’re spending in area like R&D. Dale Pfau – Cantor Fitzgerald: The cash flow breakeven is on the order of, what again, I missed that.

Previously we have been saying about $44 million but it’s really anywhere from $42 million to $45 million depending on how much we’re spending in the area of R&D. Dale Pfau – Cantor Fitzgerald: And that’s on an annualized number.

Right. Dale Pfau – Cantor Fitzgerald: And so with the increase in the December quarter could we reach profitability or cash flow breakeven in the December quarter?

Yeah, it depends on the mix shift and the R&D spending. Dale Pfau – Cantor Fitzgerald: So at this point, do you expect next year to be, for the full year roughly in cash flow breakeven range?

As I said, we’re going to be giving guidance on that in the first quarter of this year, as we compile our business plan. Dale Pfau – Cantor Fitzgerald: Okay. Thank you.

Thank you. The next question comes from Patrick Jobin of Credit Suisse. Please go ahead with your question. Patrick Jobin – Credit Suisse: Hi, good morning. Thanks for taking the question guys.

Sure. Good morning. Patrick Jobin – Credit Suisse: So a few questions. First, 2013 being a transition year, I’m assuming that means limited revenue growth and obviously with the new markets starting to kick in tell me if that’s wrong? And then also, in ‘14, starting to see the earnings power, is that a positive earnings year for ERI or how should we think about that component?

So the way we’re looking at 2013 is the modest revenue growth and definitely a contribution coming from oil and gas, but we’re not pressing for high gross margins in the oil and gas industry in 2013. What we’re pressing for is the market penetration in oil and gas, where we’re enjoying some unique successes with the prototypes that we have right now and we are going to be ramping up the expenses in terms of sales and marketing in the oil and gas area, in addition to the R&D, so modest revenue growth in 2013 combined with hitting oil and gas very heavily. Right now 2014 is looking to be a remarkable year coming. Patrick Jobin – Credit Suisse: Okay. And then on your comments over the 20-foot long devices and 20,000 pounds, if you look at the gross margin, what you are expecting, assuming your pricing that on value that you’re creating for these facilities.

Yeah. Patrick Jobin – Credit Suisse: Should we be thinking about that as more of a gross margin target of what we see in pumps and turbochargers or is this more of a PXI type of gross margin?

Yes. That’s much closer to PX with recurring revenues associated with it as well. So it’s the best of two worlds, it’s got the gross margin characteristics of the pressure exchanger and because of the intensity levels, recurring revenues in the ensuing years. Patrick Jobin – Credit Suisse: Got it. Last question from me and I’ll go back to queue. But the competitors have seem to falling off the radar to a certain extent. Do you expect any of them to become more aggressive just as they stay relevant in the “lead tables”.

Yeah, you must – I think you’re referring to the desalination sector right. Patrick Jobin – Credit Suisse: Yeah, sorry. It’s a whole new world for ERI with multiple markets but the oil, gas, desal business.

Yeah so – well of course, you mean our largest competitor in the desalination industry is a multi-billion dollar organization and we don’t think they – by any means. But the last 15 months have been rather interesting as it relates to the competitive dynamic. So we’re not naive and we don’t think that competition is going home, but where we fit right now, we haven’t seen any noticeable tactical or strategic changes on anybody’s part. Patrick Jobin – Credit Suisse: Thank you.

Sure.

Thank you. The next question comes from Michael Legg from Roth Capital. Please go ahead with your questions. Michael Legg – Roth Capital: Thanks. When you look at this new device worth 20,000 pounds, can you give us an idea of what type of price point that is, how lumpy the sales you think it may be and how it fits into your manufacturing capabilities now and if it will need some major CapEx or anything of nature to retrofit the facilities?

Yes. So the last question is probably the easiest, we don’t anticipate large CapEx in order to implement manufacturing. The reason that I had mentioned that the devices are just radically different in characterization or in characteristics is that we now have the devices in our manufacturing facility and everyone from our Board of Directors to consultants who come to see us are shocked at the visual differences in terms of what we’re doing in the IP opportunities that we have and the precision and functions. The price point I guess I would tell you this – and so it is price points and lumpiness, I think were the other two aspects. In the oil and gas – pardon me, in the desalination industry, one of the things that’s made it incredibly lumpy is that we have to wait for new large desalination plants to be budgeted by governance and then we fit into that timeframe. And so you have to wait until a gigantic plant get started or not get started. In the oil and gas industry, it is different. For us it’s a large installed base of locations where we can implement ourselves without a large project having to be done and so we will – there are new gas processing plants being built around the world to process our gas but there are an incredible number of installed plants, all of those installed plants represent opportunities for us. So we don’t think that it’s going to be anywhere near as lumpy because we have the installed base to attack first and frankly new plants were also an opportunity for us but we don’t have to wait for them because there is 20 times as many plants installed, if you will. As the price points, the level of…

Effectively we’re not replacing – well I take that back, what we’re replacing is a very dumb, if you will, pressure reducing valve, which are commodity low priced products. So the simple answer is we’re sort of replacing nothing or nobody, therefore there isn’t – we’re not stepping on someone else’s turf in order to carve out our turf. So there’s not an incumbent, I guess is want I’m trying to say. Having said that, the return on investment characteristics for our clients is strong. We’re dealing with some of the world’s largest oil and gas companies and they’ve never conceived of this before, so we’re – that would lead us to believe that there is no one else working in this space and – but having said that, what we’re doing, we are doing with a great deal of care and caution to develop a lot of intellectual properties so that not only are we first movers but upon establishing ourselves, it’s much more difficult for others to follow us into the space. The fact that we own the pressure exchanger which is the core of the device, we have a disproportionate advantage. Some of the competitors that we have in the desalination industry simply cannot be in the oil and gas industry because of reliability issues and things like that or one of our key competitors in the desalination spaces has to occupy 10 times as much space to do exactly the same thing and that’s doesn’t exist in a complex oil and gas plant. So I’m not going to sit here and tell you that no one will follow us and no competitive forces will enter because they definitely will. The total addressable market here we believe is substantial and appealing but we definitely are several years ahead in terms of the first-mover advantage. We will be filing numerous but have and will continue to file numerous patents in this area, which will give us more barriers to entry and then ultimately someone would have to come up with something analogous to a pressure exchanger with a super high energy efficiency that is apropos of a highly complex industrial plant. And right now, no such thing exists. So, we think we are going to get a fair distance before we have any real competitor. Michael Legg – Roth Capital: And then just last question. On the couple of products that you have out in this field, can you give us any idea of what type of tweaks you’ve had to make or what type of your work is going on as far as how effective it’s been – just how it’s been working on the prototypes?

Sure. Well, in the mean processing arena, you have dissolved gases and you have to understand how to handle dissolved gases in a liquid which doesn’t exist in desal. You’ve got certain degrees of debris that exist when you’re taking a natural gas out of the ground, so you have to be able to withstand debris things like that. You also have to be able to our devices in the past have in effect and dumb and by dumb I mean they simply sit there and they run themselves without any instructions and they can’t give any instructions to anything else. This next generation of devices have to be smart. They have to interact in real-time with other functions in the plant and so we’ve learned an enormous amount in the last year about everything from handling higher viscosity fluid flows such as a mean gas, debris in the fluid flow which affects bearings and things like that, dissolved gases and interaction with plants. I could give you a whole list of things that we’ve done in some cases we’ve put devices in plants and then have the client ask us to make amendments to them to handle higher degrees of debris and things like that. So it’s been an intuitive process. Michael Legg – Roth Capital: Okay and then just last question, sort of so many. But from a working capital perspective these devices seem to be pretty large and obviously are going to tie up some working capital. If the orders come in substantially fast, obviously a nice problem to have. I’m assuming the cash on hand, obviously a strong balance sheet and you have plenty of cash to handle that?

Yeah. We don’t see a big cash flow drain from these products. I mean obviously if you get hockey stick growth then you have normal operating cash flow issues. But where we sit today that’s not a great concern of ours. Michael Legg – Roth Capital: Okay.

We see interesting revenue, as I’ve mentioned, several million dollars from oil and gas in 2013 and the alignment with the enormous surge in our desalination coming in 2014, we should be still heavily cash flow and income positive in 2014 that when we enjoy, what I’ll call, hockey stick growth in oil and gas that the synergies there are absolutely perfect for us. Michael Legg – Roth Capital: Okay, great. Good luck. Thanks.

Thanks.

Thank you. The next question comes from Jinming Liu from Ardour Capital. Please go ahead with your question. Jinming Liu – Ardour Capital: Good morning. Thanks for taking my question.

Sure. Good morning. Jinming Liu – Ardour Capital: Now, first just want to clarify a statement you made. Tom, you mentioned that the fourth quarter revenue could to be the best for the whole year, did I hear right that you also mentioned it could be the best quarter on your company’s history.

It – unless something goes wrong this will be the biggest quarter for this year. And looking back over the last six or eight years, it will be one of the highest revenue quarters in the company’s history. Jinming Liu – Ardour Capital: Okay, I got scared they’re up for a moment.

No, because we did $21 million several years ago in one particular quarter. So I’m certainly not, nothing that. Jinming Liu – Ardour Capital: Okay. And you mentioned that you will see higher turbo and pump sales in the fourth quarter, is there anything particular we should pay attention to or you’ve just simply due to seasonality?

No, we are – we’ve launched improved products in the area of pumps and turbos and that’s beginning to get some traction for us and so, one thing that is quite positive by the way, I’ll tell you is that we anticipate much higher gross margins coming from our pumps and turbos in this coming year – then and we’ll see – we’re seeing the beginnings of success. We’ve been working very hard for the last 18 months to improve our pumps and turbo line to both be more competitive in the marketplace, but also more profitable and so we’re starting to enjoy a little bit more success in terms of winning pump and turbo projects. Having said that, in a peak performance world, pumps and turbos will never get the gross margins that pumps and turbos do, just that they are once more commoditized than the other. So what we’re seeing in the fourth quarter is a slight increase in the percentage of our business that will come from pumps and turbos and that therefore has a mathematical reduction in gross margins. It’s not severe or steep in the fourth quarter, I’m just identifying that always has an effect along with of heavy R&D spending. Jinming Liu – Ardour Capital: Okay, got it. Lastly, you mentioned that in five years, we will see a higher sales into the osmotic power industry and then there may be two commercial power station using that technology. Can you give share with us your insight into that and also give us – can you give us a sense of what kind of sales potential you can get into that application? For example, how many precision drillers maybe use for a megawatt of generation capacity.

Sure. So first of all as background, our pressure exchangers have been operating in an osmotic power plant for three years, so we’re not talking hypothetical. They have been operating flawlessly for three years now. The other answer – the other part of the question that you had asked is really about the addressable market (inaudible). And so the partner with whom we have been working for the last three years is ready to make the move to the next stage in terms of scale around osmotic power. And so what’s interesting is the scale associated with power plant is different than the scale associated with say desalination plant. So the number of PXs that are deployed in an osmotic plant are incredible. First of all nobody builds a one megawatt power plant, but pay it would only take say it 2 to 3 megawatt power plant to be the same as the largest desal plant in terms of PXs consumed and realistically power plants are going to be built in the 25 to 250 megawatt range. So this is a technology that is quite fascinating and industry conferences are now emerging discussing this as a very real power production mode. I think several years ago people thought this was 15 or 20 years ago and like algae and sort of futuristic but it turns out that advancements made in membranes and in other areas are really going to bring Osmotic Power to life in the 3 to 7 to 8 year timeframe. Jinming Liu – Ardour Capital: Okay, got that. Thanks.

Sure.

Thank you. (Operator Instruction). And the next question comes from Robert Smith from Center for Performance Investing. Please go ahead with your question. Robert Smith – Center for Performing Investing: Thank you for taking my call. My question was very similar to the last callers but I will retrace back to the oil and gas market when you spoke of the potential hockey stick in 2014. Can you give me some frame of references to market size and potential timeframe to penetrate that market and also the number of units that you’re speaking about to that would appear in that kind of a hockey stick scenario?

Okay. So the way to think about this is that we’ve spent the last year, year-and-a-half getting prototypes into the field and getting into the hands of some of the most prominent oil and gas players in the world on three different continents. And as we roll through the end of this calendar year, we will have these devices in the field working and basically what the – the normal algorithm in the oil industry is they’ll test in the field. New devices, new technologies for something like 6 months at the end of that 6 month period you approved for normal purchasing cycles and then you see revenue growth. So where we see things is that as the devices are installed and brought on line. The 6 month trial periods are consumed, if you will, the first half of 2013. And we’ve actually had indications from some of the prominent players that value proposition here is so strong and even shortcut that’s just 3 months. Nonetheless, if you assume 6 months of trial periods and then purchase orders and procurement taking place in the third and fourth quarter, you start to see revenue growth for us into first, second, third, fourth quarter of 2014. Having said we also are, as we seek hiring sales force into oil and gas and so we’ll be selling more prototypes and more commercial terms in 2013. Two additional prominent Oil and Gas clients around the world, and now that we have proven what we can do with the prototypes, we think that the number of that we will do to first generation oil and gas companies will be rather interesting in 2013. But the sales cycle, pretty much follows try it once for six months then move into procurement and purchasing where you’re talking about numerous sales in one case one prominent clients actually has already published for us a spreadsheet on all of the locations in the world that they have intentions to try this technology. Total addressable market, very large. Where we’re still getting our arms around it and measured in the 5-year increments. It’s hundreds and hundreds of millions dollars for power devices. Robert Smith – Center for Performing Investing: Yeah has number are mistaken – I think in the prior call, you said that the oil and gas market itself, would be in excess of the current diesel.

It’s true. As I assured if you calibrate that 5 years out because we have to penetrate. But if you measure it 5 years out. Yeah, it would be of the total addressable market the oil and gas that’s the diesel represents. Robert Smith – Center for Performing Investing: And just going back to as moderate power source essentially you’re talking about tied and wave energy.

No. Osmotic power the absolute simplest way to think about it is, this isn’t quite true with that ways to think about, if you take a sea and you split it in half into drinkable water in brine through a membrane that that’s called reverse osmosis and that’s how we (inaudible) water all around the world have for 20 years. Robert Smith – Center for Performing Investing: Well.

What you have to do though is put energy in, so the mental map of what osmotic power is just reversed that cycle. It’s not true that not exactly how is done, but mentally what that would suggest that you take the salt water and put it together with fresh water, use of specialized membrane and that hypothetically in that allows you to actually extract energy or generate energy and in point of fact, we’ve been doing that I say we have, but our devices have been in a plant doing exactly that for the last three years. So it’s, it’s not hypothetically possible it actually possible to do. And like any other technology whether it’s wind or others, you come down the price curve and so with the extreme development around membranes that price curve is starting to look very appealing. And so people are going to be moving to more real production levels, much faster than people thought and because we’ve been operating going for three years quietly in a private plant, we were very much in the thick of how this is going to evolve. Robert Smith – Center for Performing Investing: Got it, and closings, want to thank you for in bringing the company along into the New Year.

Great. Robert Smith – Center for Performing Investing: I wish you all the best.

Great, thank you. Robert Smith – Center for Performing Investing: Thank you

Thank you. We have a follow-up question from the line of John Rosenberg – I do to apologize, a new question from John Rosenberg from Loughlin Water Partners. Please go ahead. John Rosenberg – Loughlin Water Partners: Thank you. Good morning.

Good morning. John Rosenberg – Loughlin Water Partners: Most, my questions have been answered, thank you very much for your detailed commentary. I’m just wondering at what point, are you going to let us know who your customers in this new oil and gas initiative are.

Okay. So but clients that we’ve chosen to work with a very high profile three different continents and they have so worst case is they have agreed to co-present white papers and industry conference in April, but be due to the obvious who we’re dealing with. But having said that, we will likely issue press releases in the first quarter of this year, coming up John Rosenberg – Loughlin Water Partners: Okay, great track, I understand how you. I mean I well understand, it’s the same thing. You said before for can – that is reasons you can’t it now you would but I’m just curious about the timing.

Sure. John Rosenberg – Loughlin Water Partners: Thank you very much and best of luck on that.

Great, Thank you. Well I think that’s brings us to the end of the Q&A session. I don’t know that we have any other questions. So with that, I’ll thank everybody for listening the call this morning and I look forward to future calls. Thank you very much.

Thank you ladies and gentle men that does conclude the conference for today. Thank you for participating. You may now disconnect.