Welcome to the Energy Recovery Q3 2014 Earnings Conference Call. (Operator Instructions). At this time, I would like to turn the conference over to Joel Gay. Please go ahead, sir.

Good morning, everyone. Welcome to the Energy Recovery's earnings conference call for the third quarter of 2014. My name is Joel Gay, CFO of Energy Recovery and I'm here today with our President and Chief Executive Officer, Tom Rooney. In today's call, we will provide you with information about our financial performance in the third quarter of 2014 as well as provide an update on our growth strategy. To begin, some of our comments and 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 forward-looking statements are based on current expectations about future events and are subject to the Safe Harbor provisions in 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 from those discussed. A detailed discussion of these factors and uncertainties is contained in the reports that the company files with the U.S. Securities and Exchange Commission. The company assumes no obligation to update any forward-looking statements made during the call, except as required by law. With that, let's open with an interpretation of the third quarter of 2014's financial results. Beginning with the top line, net revenues of $5.3 million were largely in-line with management's expectations in the context of market lumpiness and project timing risk. While this quarter's revenue performance represents a 10% increase over the prior year period, it also represents a 17% decline sequentially, that is to say as compared to the second quarter of 2014, both the current quarter and prior year lack mega project revenues and as such the aforementioned 10% increase over the third quarter of 2013 is attributable to higher…

Thanks, Joel. Good morning, everyone. I would like to discuss our outlook in the coming months and also outline where Energy Recovery is today in terms of our ongoing growth initiatives. As we've discussed with many of you in the past, we have sought methods of leveraging our industry leading technology and capital position, to both strengthen the markets where we lead and seek new applications for our technology. The global desalination market remains lumpy. While we're encouraged by strong, continued sales in our OEM segment, the macroeconomic factors that Joel mentioned earlier are not abating at present thus it makes this market difficult to predict. The majority of these projects originate in a diverse group of markets across the globe with the vast majority of our company's historical revenue being international. In last year's fourth quarter, we had a record period in desalination as a result of a number of factors. We still feel that we have a strong pipeline of projects throughout several markets, but our challenge has and will continue to remain, predictability. We’ve the market share, the capacity and the best product in the industry, but we remain dependent on the global market. Throughout 2014, we’ve continued to reinvest in our business through new industrial markets, where our fluid flow technology would provide compelling returns. Focusing on these markets will both provide the best use of our capital by maximizing the upside potential from our existing technology. The premise is that the investments made in these markets may make time to develop, but the sales potential vastly exceeds what we can concurrently achieve in desalination and we have the operational leverage and proprietary technology to see the strategy through to fruition. Examples of this are emerging fluid flow markets, such as oil and gas and ammonia,…

(Operator Instructions). We will take our first question from Laurence Alexander with Jefferies. George D'Angelo – Jefferies: This is actually George D'Angelo on for Laurence, just a broader question. On a five year horizon where do you see the mix of product revenue coming from? How much from de-sal? How much oil and gas? And then how much from new opportunities?

So five years from now, I think you would probably see less than a third of our business coming from desalination and 2/3rds or more of our business from industries other than desalination. George D'Angelo – Jefferies: And then just with the oil and gas sales force, how far along would you guys say are you in building it out? How large do you see it becoming eventually?

I believe we’ve seven dedicated people in oil and gas right now. We recently hired, in the last few months, we hired someone to lead oil and gas sales in China. We also, at the same time, hired someone in the Middle East. If I am not mistaken we’ve seven right now, we're actually actively recruiting an eighth. As we build the business, we intend to sequentially and progressively build that sales force as well.

We will go next to David Rose with Wedbush Securities.

This is actually James calling in for David. Just wanted to start out with a question on inventory, compared to last year, I see that you guys have increased inventory levels. During last year, you had the utmost confidence that Carlsbad and a couple of our projects would ship in Q4 and it did. This year, your comments suggest greater uncertainty in the de-salt market and slower-than-expected demand from the oil and gas market. I was just curious as to why we're seeing an increase in inventory levels? Then following to that, if you can talk about reason for the increase in obsolete in inventory?

Sure. In terms of inventory, there are a few causal factors to the increase over the prior year quarter and also sequentially. First of all, our shift in sales mix towards pumps and turbo will inflate inventory which is to say that our pumps and turbo charger products have a higher average unit cost, so that's one. Two, I made mention of a large project that has been delayed for a few quarters now, so that is also sitting in inventory and inflating it. And then three, from an inventory-valuation standpoint, we're on a FIFO standard. So on a quarterly basis, we revalue our inventory based on our standard costs. Given that, production is down as compared to the prior year. You’re going to capitalize a higher percentage of your overhead into inventory.

Okay. Following on that, a question on this quarter's product mix, obviously, the unfavorable mix negatively impacted the gross margins, but it seems like we're seeing lower volume of PX device sales. It looks like the lowest in three years or so. If you could provide any color on the shift in the product mix? And then if you could touch upon gross margins going forward? I know you had talked about 60%, previously being the achievable and sustainable level, based on past two, three quarters of performance. Is that something that you would reconsider and maybe reset your expectations for what gross margins will be?

Let me answer the first question. Specific to what we're witnessing in our product. Our marketing mix, given the fact that we’ve yet to generate MP revenue will of course skew your product mix away from Pus towards pumps and turbo chargers. As you compare this year versus the prior year period in which we did have MP revenue at this point in the year that is one of the primary causal factors. We’ve also seen, at least on a quarterly basis a shift away from PXs towards pumps and turbochargers within both our OEM and aftermarket sales channels. In terms of what we see in the pipeline, we certainly would not submit that this is a permanent shift in product mix. We believe that the product mix will return to historically normal levels. As it relates to gross margins, in the high 50%s, low 60%s, we stand by that statement. Given the proper amount of volume in which we can leverage our fixed costs, operating leverage we absolutely can achieve those gross margins and then some.

Okay. And lastly on oil and gas, I think last quarter you guys mentioned you had signed a new contract in oil and gas that you weren't able to publish any information on. Obviously, we're not seeing that in the revenues. I was just curious what – if any status on that? If we expect to see any revenues coming out of that and any details you can provide? That would be helpful. Thank you.

Actually, I think what we said in the last call was that for the new market that we're going to be announcing on December 8th. We actually have signed a contract with our first client there. In that regard, that client was as yet unnamed. The name of that client and the name of that industry and the name of that product will be front and center during our analyst event on December 8th.

What about on sales or revenues, is that something that we should expect in the near future or?

In regards to?

Would you say that is too far away?

For oil and gas itself, yes. We intend to elaborate much more on that on the analyst event on December 8th.

We will go next to Patrick Jobin with Credit Suisse. Patrick Jobin – Credit Suisse: First question and then I have a few follow ups. But first question, just thinking about the event and the launch of this new technology maybe any sense on commercialization timing? With a contract in hand, revenue would be relatively around the corner, just how should we think about timing of revenue for this new product launch? Thanks.

Patrick, it is a radically new deployment of our technology. We signed a contract with our first client for that industry several months ago which includes both extensive trial periods and then I think it goes all the way out five years, in terms of commercial deployment. It is slightly more complex than simply saying we signed a contract and revenues will come at a certain date. Obviously, we'll have a great deal more detail, that client, we think will even be in attendance on December 8th. So as to give first-hand perspective on the strength of the value proposition and the likely industry trends that could come from that. There clearly will become revenue from this client, but there is a high collaboration going on between our firms right now and then that moves into field trials, early next year. We will have much more on that. I wouldn't try to pin down revenue numbers quite yet. Patrick Jobin – Credit Suisse: It makes sense, potential five-year and a field-trial period. Last question is just more simple ones. In Q4 would you anticipate any mega project revenue or is it too tough to tell at this stage? The second question was on oil and gas; do you think 2015 would have meaningful or material revenue beyond the rental revenue?

I think, Joel, the first question was MPD revenue into the fourth quarter. I think Joel alluded to that in his comments when he said that we've got a significant MPD project that has been delayed now two quarters. Where we sit right now, we do think that that project will ship this quarter. I think you can assume that since it has delayed already two quarters, it fits in the category of – we won't know until it goes out the door. To answer your question, yes, I think we expect MPD revenue in the fourth quarter. This is an industry where that kind of thing slips all the time, so we will have to wait and see. And then meaningful revenue on oil and gas next year, I think where we stand right now is that we see a whole wall of client activity going on and proposal activity, that give us a very wide spectrum in terms of what potential revenue could come from oil and gas next year. We're positioning for significant revenue in 2015, but really what we’ve accepted is that a significant run-up of revenue for us in oil and gas is inevitable. Is it going to happen in the first quarter, in the fourth quarter, is it going to happen in 2016? We're taking it one step at a time. The word internally now is that this oil and gas industry and revenue there for us is inevitable. The strength of our value proposition has gone up dramatically through some studies that are being done by some of our clients that will beget white papers and industry conferences so the level of attention on our products is going up dramatically, creating this inevitability. Significant revenue in 2015? I would like to think so, but really what we're more focused on is moving significant numbers of projects into the pipeline into this inevitable future for us.

We will go next to Cynthia Motz with Edison Investment Research. Cynthia Motz – Edison Investment Research: First just on the de-sal market and I know that, obviously, maybe the shift is moving away and it is hard to tell. Tom, can you give us any more color just in terms of why there are so many delays? Obviously, you said it not specific markets. Is it approvals? Is it the costs in certain areas where are you? And then just following up on Patrick's and David's question, so most of the guidance is going to come at the meeting on December 8th to the extent we can get it, obviously. Just in the oil and gas marks are you more focused on the U.S. or is it going to be – I know it is global but is it going to be – I guess the de-sal markets have been more global. Just curious if you can give any more information right now on that market? Thanks.

Your middle question was about guidance at the Analyst Day. You're right, we intend to provide as much information as possible on December 8th and we're obviously preparing to do so. In terms of the third part of your question, oil and gas is very global. The majority or a very large portion of the pipeline that we’ve is outside the United States. We also have a number of projects inside North America and the United States, but we're addressing the oil and gas industry, right from the start as a global industry. I think we have proposals and clients on four or five continents that we're working with right now. Obviously a bunch in the Middle East and Asia and North and South America, Europe and North Africa obviously, so very global, because Energy Recovery, through its desalination work is already very global with global sales force, it is not hard for us. So, we are not starting in the United States and expanding overseas, we're right out of the gates, very international in that regard. On the MPD and why things are, in desalination, why things are holding back, it is not so much that it is approvals and what not, it is that there have been a number of developments, geopolitically and economically around the world that seem to line up against, if you will, desalination. I will run through some of those. Historically, the most potent geographic market for desalination in the world has been the Middle East. The Middle East, historically has been and even as we look out into the future. The Middle East has the most number and the most significant projects in desalination. I probably don't have to explain what is going on in the Middle East right now whether it is…

Yes, and a lot of the political headwinds that we described don't really have the same impact on how the oil and gas industry would receive our technology. Part of that is because the slowdown in all of those geographic areas that I referred to in de-sal is with regards to initiating new Greenfield desalination projects. And by the way they are controlled by governments and what have you. In the case of oil and gas, the vast majority of our value proposition is going into existing facilities and making incremental improvements to existing facilities, so as to make them more profitable. Now I can't say that that would happen in an area that is war-torn with regards to ISIL, but in China and everywhere well else, in the United States. A value proposition on economic return to a plant that is already existing is not going to see the same kind of headwinds. By the way, the reduction in crude oil prices, a barrel of oil dropping from $100 to $80, one at first might think well now maybe the oil and gas industry is sick, well it is not. In fact, what it creates is a profit squeeze and so they have installed facilities and they simply need to be more profitable. We've actually seen an increased interest in our technology because we help the oil and gas industry be more profitable. The irony there is that a slightly lower price of oil may actually have a slightly positive impact on us.

(Operator Instructions). We will go next to Robert Smith with Center for Performance Investing. Robert Smith – Center for Performance Investing: Most of my questions have been answered or spoken to. Tom, can you just give us perhaps, a discussion or a little more color on the parameters of the value proposition in oil and gas, perhaps in payback periods and?

I will give you a two stage answer to that, Robert. When we launched into the oil and gas industry 3.5 years ago, we had what I would call the simple or most obvious value proposition which was someone would – and I will give you literal numbers here. Someone would purchase one of our technologies, one of our IsoBoost technologies for $3 million install it and then get about $1.4 to $1.5 million per year of energy savings. The device goes in. It keeps energy in the system. Therefore, you don't have to – you can take some pumps offline and so on, two-year payback period. In point of fact, we would see a spectrum of 1 to 3 year payback with the scale of the device dictating the economic payback. We maneuvered to really get to a price point where we could achieve a three-year payback in the worst case situation, that's how we’ve been propositioning or positioning it to our clients. Obviously, most CFOs would accept a 6 to 7 year payback period if it was completely and correctly risk adjusted. What we recognized that coming in we're asking people to consider a new piece of complex technology in their plant and that they would have a certain risk aversion and that risk aversion would cause us to have to give them a stronger economic value proposition, down around three-year payback so as to enable them to consider it risk adjusted. What we found in the last six months or so frankly, in collaboration with Aramco is that the value proposition, being the 2 to 3 year economic payback based on energy savings, is just the starting point. As we started to study the risk of deploying our technology in the plant, it became obvious to Aramco…

Actually let me clarify. I think it might have been Patrick that may have, Patrick Jobin may have misinterpreted what I said. We're not into five years of trials on this new technology. We will commence field trials in the first quarter. We fully expect that the field trials should last much less than a year, it could be six months. But our agreement, our contract with our first client contemplates commercial sales all the way out to five years. And so assuming that the field trials go well, we could be and it's still early at this stage, but we could be seeing revenue from that new vector late next year, early 2016. Speculating on what the shift or percentage is between desalination and other stuff five years out is some very broad-brush speculation. I would have to try to figure in my head where de-sal will be in five years. I'm having a hard time figuring out where de-sal is in five months and then the advent of a number of new exciting industries. So desalination is going to be 1/3rd or less of our business and I wouldn't try to build a model on where we're headed in terms of that 1/3rd, 2/3rds ratio five years from now. I think if we're and we're dedicated to being, successful in all of these markets outside of desalination, it could be 90:10. It could be 95:5 or it could be 1/3rd, 2/3rds. There is a lot of variables at play here and over a five-year period it will be interesting to see how it all plays out. But the company is very clearly – has already moved away from being a pure desalination company. By the way, I would like to think that had we not made the decision 3.5 years ago to expand beyond desalination, our options would be pretty rough right now. And so the future now looks very bright and the decision that we made 3.5 years ago to diversify, obviously is paying huge dividends for us. Robert Smith – Center for Performance Investing: Thanks for that clarity. I look forward to joining you on the 8th.

Absolutely, that looks like the end of our call. So we will wrap up the call now and I thank everybody. Certainly, look forward to seeing you a lot on the Analyst Day on December 8 in New York City. Obviously, you should be looking forward to that as well. Thanks, everyone.

And that concludes today's conference. We thank you for your participation.