Ladies and gentlemen, thank you for standing. Welcome to the ERI Second Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. Following the presentation, we will conduct a question-and-answer session and instructions will be provided at that time. (Operator Instructions). I would like to remind everyone that this conference call is being recorded today, August 1, 2013. I will now turn the conference over to Mr. Tom Rooney, President and Chief Executive Officer. Please go ahead, sir.

Good morning, everyone and welcome to Energy Recovery’s second quarter 2013 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 second quarter of 2013, however, some of our comments in responses to questions may contain forward-looking statements about market trends, future revenue, growth expectations, cost structure, gross profit margins, new products, and business strategy. Such statements are predictions based on current expectations about future events, and are subject to 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 the Company files with the U.S. Securities and Exchange Commission. The company assumes no obligation of updating any forward-looking statements made during this call, except as required by law. Okay, good morning. We are pleased with the results achieved in the second quarter of 2013. Revenues were light at $8.6 million but that is exactly in line with what we expected for the quarter due to the timing of MPD projects this year. Net income came in at a loss of $0.03 per share, well ahead of analysts’ expectations as a direct result of strong gross margins in the quarter. In the second quarter, we continue to make progress with our oil and gas field trials. These are important field trials that will position Energy Recovery extremely well within the oil and gas industry. Entering the oil and gas industry with revolutionary new energy recovery devices is and has taken longer than we…

(Operator Instructions) and your first question comes from the line of Laurence Alexander from Jefferies. Please go ahead.

Good morning. I guess a couple of questions. First, a longer-term question. As you look at the projected sort of ramp in volumes over the next few years, are you going to hit a certain point where you will need to have a step up in your staffing levels for you to accommodate the increased activity?

No, we have tremendous operating leverage so our manufacturing plant can take several years of, may be as much as five years of significant growth before we would require much of CapEx and your question was about people, our sales force around the world would not like the change much at all. So no, not really. In fact we are eagerly awaiting that revenue growth.

So within the upside case, the incremental realized margin should be fairly close to your gross margin?

The way to think about it we talked in the past that our contribution margin is about 82%, that's a pure variable cost. And so as reported this quarter in very round figures 60%. So as revenues, if everything else was held constant, as revenues move from where they are today to much higher you get the pull effect from the current gross margins up to an asymptote at about 82% but we never reach 82%. But what that means is that we got a lot of lift in the 60% to 70% range.

And second, as we think about the bridge into 2014, do you have any sort of visibility yet as to the likely cadence of the year as you look at different platforms or is there any marketing spending bulges or any sort of timing issues that you can flag that, certainly I know it's always been bit of a back end loaded year but anything unusual?

No, in terms of time, it was a good question. You made me think about that. No, where we sit today roughly six months before the start of the year, we don't see any skewing of the revenues or the expenditures in the year. So no, I wouldn't guide you in terms of any lumpiness in that regard.

And can you give a little bit more detail on progress to be made on the oil and gas and industrial applications?

So on the oil and gas area, as was mentioned in the last call, the deals trial process has many more stages, hurdles and logistics to it than we knew when we first entered it. So I have to take the blame for searching the pace that we would be moving at. But we're making the progress, we're getting very good feedback from all three of our beta site clients and in fact they have energetically engaged with us in conversations about additional applications inside of their own oil and gas space. So the mid and long range outlook is as good as better than we have seen it before, but we have had to accept the facts that these field trials don't happen over the course of several months, they can take one or two years. And so we've gotten well into that process with them.

And the next question comes from the line of Patrick Jobin from Credit Suisse. Please go ahead. Patrick Jobin – Credit Suisse: So a few questions. First I guess just on the Q4, obviously should be a good quarter. Can you help us assess the risk of projects slipping into '14, just maybe the number of projects you are expecting, how many have been contracted et cetera?

Yeah the slippage is always a big deal or big risk for us. And as even before we started the year, we were calibrating a significant pile up of these individual large MPD projects in the fourth quarter. The year is playing out to be exactly that way, and in any given year we could have $2 million, $3 million, $4 million projects scheduled to deliver in October, November, December and we are exposed to clients calling us up and because it rained in the location or construction or concrete went slowly they need to take delivery a month or two later. So we're always exposed to that and we are clearly exposed to that this year. We have a number of those MPD projects that we have either negotiated successfully or negotiated successfully and are getting ready to ink contracts. We fully expect to be announcing projects such as the Carlsbad project over the ensuing weeks and months. So the first clear impression that you all will get is those press releases in the next weeks and months. But even I won’t know the actual outcome until we’re all the way through November and December. Unfortunately, it’s just one of those aspects to this business that we don’t really control.

No, I understand. And congrats on the Carlsbad contract, I know at least I’ve been following it for last five years and so it’s nice to see it come to prolusion. Turning over to oil and gas just briefly, you mentioned the field trials few more hurdles than you had originally anticipated something that comes up sometimes in our conversations is API certification. Is that a hurdle or what’s being done there or can you certify each individual component to address that? And then maybe just from an investor standpoint, what should we be looking at as far as conversion of these field trials to actual deployment contracts and what’s the timeframe of that? Thanks.

Sure. So on the API subject, we are, for the most part selling to our clients retrofit skids if you will, which is an assembly of different components that gets dropped into an operating gas treatment plant. So, on that skid are a number of individual components but one of which and several of which are our components that we manufacture here. There is no such thing as an Energy Recovery device in the petroleum industry. Therefore, there is no API standard for and ERD or an Energy Recovery device. There are for pumps and other components. So, where we sit today is we carefully select components that are API compliant and then we assemble a skid that is acceptable to our clients. So by virtue of the fact that we’ve created a new category in the oil and gas industry, someday there will be an Energy Recovery category for API certification but it doesn’t exist today. But to the extent that we buy a pump or what have you it may well have to be an API pump that is on our skid. How do we model, what we’re doing with our current clients, what’s interesting is the oil and gas clients that we’re working with are for the most part gigantic. And they play across their own oil and gas industry from gas processing, midstream, upstream, downstream. And so once we penetrate a large oil and gas client in one element of their business and heretofore it has been the sour gas processing area all of a sudden I start to open. And so, we end up marching down this one to two year path with one division of one oil company but it tends to open up conversations all over the place inside of that oil and…

Would you still expect potential contracting following the field trials that have already been underway in early 2014 or is it more mid or late 2014 is when those field trials would conclude?

Yes, so I would expect contracting to be in the first half of the year with revenue recognition in the second half of the year.

And then the last question for me just on 2014 outlook from the 30% to 40% growth, can you maybe just walk us through the different markets that is giving you comfort over that growth materializing? Thanks.

The China is the big ex-factor, the industry is tracking we’re as well the significant number of projects in china and even some of the largest project, so China I think when we look back certainly five years from now we would recognize China brought about many projects and some of the largest projects in the world and we happen to enjoy a great reputation and strong market share in China so we see a lot of life there. We are and continue to expect to see growth coming from India and then our tried-and-true market of the Middle East North Africa had a lot of tremendous amount of growth potential out over the next several. The markets we don’t necessarily expect to see a lot of revenue coming from that we’ve seen in the past would include Spain and Australia but there is a lot of new markets that just continued to search like Chili and then finally to come to the notion of Carlsbad. Carlsbad as one individual project is interesting, several million dollars for us which is great but the United States, in the United States we’re tracking dozens of substantial projects that have been held up in the queue where developers chose not to forward until Carlsbad, so made its way through the May. Carlsbad has been something like 14 years in the making with that couple of years when I would mention Carlsbad everybody would roll their eye back in their head, it was the ultimate pipedream that may or may not ever happen, well a lot of water project developers saw that way too and they weren’t going to banks to seek money, they weren’t going through the entitlement process but now they are and so when Carlsbad went from a pipedream that would never happen to groundbreaking and to reality, it is signaling the awakening of the U.S. reverse osmosis market, a lot of brackish applications in the United States but not a lot of reverse osmosis see what are desalination. Significant potential in the United States over the next 1, 2, 3, 4 years. I won’t sit here and tell I can perfectly forecast which quarter or even which year but that’s another powerful driver for us in the next three years.

And your next question comes from the line of JinMing Liu from Ardour Capital. Please go ahead.

Tom, you mentioned the strong ASP in your pre-remark. I would like to dig deeper on that. Given what your expectation of strong growth in 2014 and beyond and you mentioned strong ASP. So what is your pricing strategy for the years going forward and also can you clarify what that strong ASP means? Meaning you increase your price or you just keep your price steady?

Okay, so I think the best way to think about this is when Flowserve entered the Energy Recovery market through the DWEER device by virtue of the Calder acquisition. And they brought about a great deal of pricing pressure and it had happened at a time when the market was contracting. And so if you track us from say 2009 through 2011, at least internally we saw that we had to fight pricing battles. Our devices or applications were in many ways becoming commoditized and the sales were turning on first cost pricing. So we saw the ugly combination of market share and pricing going down and that’s an ugly combination for a company that has high operating leverage. Almost exactly two years ago in the summer of 2011 we spent a significant amount of time assessing and understanding what our real value proposition in the marketplace was. And our real value proposition in the marketplace has to do with total lifecycle costs and I could go into great detail and depth on that but what it means is we well maybe the most expensive device on day zero when the CapEx consideration is there. But when one of our client takes into account the energy savings plus the maintenance cost, plus the plant’s uptime, we have a very convincing value proposition, which completely overwhelms any price premium that somebody may take. Well, as and when we have very, very clear about that and when we made several stubble improvements to our actual devices, we were able to drive significant market share gains for the company from a low point of about 50% market share to in market share now that’s routinely in the 90% range. So our market share was able to move up significantly and dramatically while at…

In your recent few announcements, contract announcements, I noticed most of those contracts are for your newer model TR300 models. I understand you can only produce the ceramic parts for those models in-house. Do you have any capacity constraint there?

No, we will produce in very round figures about, 1,400 or so this year. We could produce two to three times that without any significant changes in our manufacturing. But no, I would love to see orders for twice as many as we are selling right now. You might not even be able to detect in our cost structure.

(Operator Instructions). And your next question comes from the line of Mr. David Rose from Wedbush. Please go ahead sir.

A couple of follow-up questions. Maybe starting on Carlsbad. Carlsbad as I look at the construction schedule, the project breaks ground, it has broken ground, but a bulk of the work is done really in 2015 and 2014, late 2014 according to their website. So, can you help me understand the timing and delivery and what are the expectations for the fourth quarter? Is it just a small shipment? Is it big shipment? And is this something that you have set in stone with IDE or is this just sort of for your conversations in terms of expectations of timing?

Sure. Well, all of our contracts would include delivery schedules, in large measure because our clients that are running these billion dollar construction projects don’t want to be waiting for our components. Having said that when it rains or when construction activities are slowed down, we then get delayed. So I would tell you that virtually every one of our contracts, large or small has a delivery schedule in it and where we sit right now, we have full expectations to deliver our devices in the fourth quarter of this year. Some clients by the way seek to get our devices on-site early because they control their own destiny by virtue of having their construction products sitting on-sites. Conversely some clients time their cash flows such that they plug our devices and our devices are pretty close to plug and play, but they will plug our devices in as late as possible. So different clients have different wants and needs but yes, our expectation our Carlsbad is a delivery in the fourth quarter of this year.

Okay, then on the margin side, the incrementals were extraordinary. Were there any other offsets other than mix improvement on material costs? Did you have any reduction in warranty reserves, less scrap, can you provide a little bit more granularity in terms of some of the factors that drove the margins other than mix?

This is Alex. If I could step back, think about four primary margin drivers for our business and those four price product mix volume that determine their operating leverage and then manufacturing efficiencies. I would tell you price and mix are stable and representative of future years. Operating leverage didn’t change all that much from 2012 to 2013. So that really does little to explain the margin variance quarter over quarter. The real story here is about manufacturing efficiencies as we drive down average unit costs across all product lines.

Sequentially there was a big change; I think I was expecting year-over-year is understood. But sequentially was there any benefit from any of the other items?

Yes there was some noise. There is always puts and takes on the margin side, but I won't bore you with all the details of those puts and takes. If you are looking at eight points of margin expansion quarter-over-quarter, most of those eight points come from manufacturing efficiencies, not from operating leverage, price mix or again the puts and takes.

And then last question or follow up, a question about API specs versus really kind of understanding. My understanding is your products in the oil and gas is more than simply assembly? You’re using your own product in there as opposed to just various components?

That’s true. Actually, the segment of the oil and gas market that we’re focused on right now is gas processing so taking down our gas to the suiting process it’s a midstream application inside of oil and gas and it is one sliver. It’s been our strategy to enter and penetrate the oil and gas industries there making a name for ourselves. So when we look at the gas processing industry, by the way, we see, given natural gas ponds, fracing everything else that’s going on around the world, that’s a very exciting portion of the oil and gas industry. But it’s also interesting because there are roughly 1,800 installed built natural gas processing plants around the world, roughly 1,200 of which are applicable target for us. And in addition to that there are Greenfield applications. In other words as new gas ponds happen around the world new gas processing plants are being built. One of the things that has and painful for us in the water industry is that we’ve had to wait for individual plants to be constructed, such as Carlsbad. And the waiting game and then the lumpiness of that is painful. The beauty of the oil and gas industry is a huge installed base. Now, coming back to the devices that you’re referring to, one of our current Greenfield or one of our current field trials is actually a new plant that has been constructed. And in that case we’ve sold to them significant individual energy recovery components that go in there. But in almost all other cases certainly the two other field trials they are retrofits of existing operating gas plants. Therefore, rather than sell somebody an individual component and asking them to figure out how to hardwire it into their plant and it’s very…

And your next question comes from the line of Mr. Robert Smith from Center for Performance Investing. Please go ahead.

So I just wanted to clarify a couple of statements that were made. So the 30% to 40% gain includes nothing from oil and gas I guess?

Correct.

Okay and you still feel that you may have some revenues in the latter half of 2014?

Yes, oil and gas I think is what you meant.

Yes. So Tom, you mentioned that you were speaking to several other oil and gas companies. Are they of considerable size as well?

Yes.

Okay. So you are working with three and you have several more, which is three or more, coming on top of that?

Right and I would point out to you that at this time last year we avoided engaging in any additional conversations with oil and gas clients because we were investing heavily and we wanted to stay focused on the three that we were working with. Eight, nine months ago we decided to increase that number and we have gotten a high degree of interest.

I remind you that you had also said that after the initial penetration, you felt that the area itself would rival that of de-sell (ph). So you have also said today that you are now even more optimistic mid and long range in oil and gas. So is it fair to say that that market would now exceed in time that you have for de-sell (ph)?

Well I think that’s a fair statement.

Would you say easily? What are we talking about? Would it be twice that or how big can this be?

We have done a number of studies assessing the total addressable market throughout the oil and gas industry and we are even beginning to analyze other industries that would be similar in terms of industrial fluid flows. But at this stage we are choosing not to be more transparent than that, partially because we are learning everyday as we go and partially because there are competitive advantages in not disclosing more information than that. So I hope you will bear with me in that regard but the total addressable market in the oil and gas industry does in fact exceed what we expect can take place in the water industry for sure.

Okay and just the item on the balance sheet, the long term investment, what is this?

We invest excess cash in marketable debt securities, most of which is corporate bonds.

Are you guys long-term or short term?

No, our average maturity is about a year and half?

Okay that’s about long term okay, I'm more comfortable. I thought you would go on out on the curve and there is lot of concern about that.

Typically, stated within two years.

And your next question comes from the line of Zana Rosenberg from Lawson Water Partners. Please go ahead.

Actually the last respondent on the call asked most of my questions. So I guess, Tom or Alex, I would ask you perhaps your thoughts on the oil and gas initiative. You said you are having some more discussions. Could you give us any timeframe as to when as investors we might know a little bit more about this, other types of uses or how you are performing in this area?

Well as I mentioned, we are analyzing the full breadth and depth of addressable markets across essentially all industries and as a subset of that across the oil and gas industry. I am going to hold back from trying to make any significant or give any significant granularity around that. I will say this. We’re confident that we’re going to be producing revenue in 2014 and that based on the tempo of field trials and the level of interest from our current clients and from the perspective clients that we have begun to engage but I think if I was to be more precise and explicit than that, I would be suggesting a level of knowledge that we simply have to go through a learning curve before we can become that specific. So hopefully that make some sense.

Okay great. Well thank you everybody. I think the key messages from this quarter are that the company continues to focus on the three-pronged strategy that we laid out in the beginning which was to effect some cost reductions and increase our efficiencies. We’re very comfortable looking at our gross margins today with that. The second was to regain the dominant position in our market. We’ve done that and we continue to do that and the third was to diversify to enable growth than we’re well along the path. I think as I look forward as a CEO of the company, I am buoyed by the very strong gross margins that we know we are capable of producing, plus the revenue increases that we see coming. The two of those give me a great deal of comfort in regards our ability to drive positive cash flow next year and net income and that’s very exciting for us to be able to transition back into the black and to drive growth and value going forward. So I appreciate everybody being involved with the call today. Thank you very much.

Ladies and gentlemen, this concludes the conference call for today. Thank you participating. Please disconnect your lines.