Greetings and welcome to the Energy Recovery Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, James Siccardi, Vice President of Investor Relations. Thank you, Mr. Siccardi, you may begin.

Good afternoon, everyone and welcome to Energy Recovery’s 2020 second quarter earnings conference call. My name is Jim Siccardi, Vice President of Investor Relations at Energy Recovery. 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 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, the company’s ability to commercialize VorTeq, 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 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 forward-looking statements. All statements made during this call are made only as of today, July 30th, 2020, and the company expressly disclaims any intent or obligations to update any forward-looking statements made during this call to reflect subsequent events or circumstances, unless otherwise required by law. In addition, we may make some references to non-GAAP financial measures during this call. You will find supplemental data in the company’s earnings press release, which was released to newswires and furnished to the SEC earlier today. The press release includes reconciliations of non-GAAP measures to comparable GAAP results. 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 today. I want to start today’s call as I did last quarter, with the sincere hope that everyone listening and your families are safe and healthy. I am happy to report that the Energy Recovery team and our business remains healthy, well and strong. The COVID-19 pandemic has not abated as hoped and it has changed how the world and we at Energy Recovery must operate. To-date, both the water industry as a whole and Energy Recovery have managed well through this pandemic. We are optimistic on the future. We remain focused on balancing first, the health and safety of all our employees, but also on protecting our employees’ livelihoods and shareholders’ investments. Energy Recovery is at a key inflection point. First, like everyone, we are working through the challenges of our new normal during this pandemic and adjusting accordingly. Second, our base water business continues to grow and show long-term resilience, and we continue to support the industry and the millions of people who rely on the fresh water created with the help of our technology. Third, the VorTeq is at a point where we must, in the near-term, deliver value to our shareholders, either by monetizing the technology or by bringing an end to our spend. Finally, in addition to those clear challenges before us, we must think about the future. When I took – when I look at Energy Recovery, I do not see a water company, nor do I see an oil & gas company. What I see is a PX company. In fact, Energy Recovery is the PX company. Over the years, including the time spent on VorTeq, significant investment has been made to build our PX technology platform. Let’s turn to our Water business,…

Thank you, Bob. You know, not many companies can say that they maintained steady revenues during arguably the worst quarter economically since the Great Depression. But that is exactly what we did. We are in a fortunate position, and I couldn’t be prouder of not only our sales team, but also our manufacturing and support teams that delivered this product during such challenging times. We do see differing dynamics within each of our channels given the recent economic uncertainty. Mega projects continue to show strength with revenue growing 19% year-on-year. The global economy, however, is affecting our OEM channel, which was down 38% for the quarter and 31% for the first half of 2020 as compared to the same period last year. We expect this weakness in our OEM channel to continue with near-term project delays in industries we serve, owing to the current economic challenges. For example, a portion of our OEM revenue historically has come from the travel and hospitality industries which we do not expect to recover in the near-term. Other industries are also affected. Overall, we expect our OEM channel to be down between 25% to 35% this year. However, despite the softening in our OEM channel, we believe we will reach our water revenue guidance of 20% to 25% growth for the year. As we look to 2021, the basis of our flatter outlook is specifically due to this weakness in the OEM market. Unlike in our mega project channel where we typically close projects 12 months to 18 months out and have visibility up to 36 months out, our smaller OEM channel is less clear with visibility only six months out on average. Now, if the global economy recovers, it’s possible that we will see some upside to that forecast due to a strengthening…

Thank you. We will now be conducting the question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Pavel Molchanov with Raymond James. Please proceed with your question.

Thanks for taking the question. Lots of new information today. First about this 12-month timetable for VorTeq. So confirm if this is correct. Within the next 12 months, you will make a final decision either commercialize the product or you’re cancelling the program permanently. Is that right?

Yes.

And will that hinge on the 3 – 2 to 3 live well fracs with Liberty or are there additional kind of operational milestones beyond those well fracs to inform your decision?

No there’s no additional ones. And yes, it’d be great if we do the 2 to 3 with Liberty, but we – now we can contact everybody. And as I said in my earlier remarks, we are also contacting others, but Liberty is our primary partner.

Okay. And, Josh, if I can ask about the comments about water in ‘21. You said that current backlog supports revenue flat to up 5%. Does that imply that you’re guiding to revenue flat to up 5% or is it pretty mature since obviously you can build up backlog presumably in the next six months?

Yeah, no, I think, you know today, that’s certainly where we’re comfortable. So I think that you should feel comfortable using that and we’ll certainly update you as well next quarter, without a doubt, because what will change that number, as we mentioned is the OEM business which, you know, we can’t see that far out. So, but otherwise, we’re pretty comfortable with that number right now.

That should be kind of a minimum baseline for ‘21. Hopefully, we’re upside.

That’s how we’re looking at it and that’s right.

Okay. Thank you very much.

Thank you. Our next question comes from the line of Ryan Pfingst with B. Riley. Please proceed with your question.

Hi. Good evening, guys. Josh, please provide the 2Q breakdown for water revenue by segment MPD, OEM and aftermarket?

You bet. It is, for mega project at 62%. For OEM, it’s 21% and aftermarket is 17% for the quarter.

Okay, thank you. And Bob coming out of the simulated well field test you contracted with Liberty. Could you expound upon the nature of the latest technical improvements you’ve made to the new VorTeqs skid?

You mean the technical improvements that allowed us to have the successful simulated test?

Correct.

Well, the most important one is, we switched to this simple, the single PX skid, which made the product easier to control, to change, to manage. And looking back you could see that 10, 12 PX in huge missile was imposing for lack of a better word. So the most important change was that since last October we start moving to this new and core elegant, single PX configuration.

Great. Then just last one for me. How’s the thermal conversion opportunity set evolved since the last call? And what are your expectations worldwide over the balance of 2020?

Worldwide for our water business we hope for that they will represent uptick, because much of the world is doing better in terms of the pandemic. And even though during the pandemic, there was no, we did not experience any shutdown of our projects. But some of the future project bidding process were delayed, and OEM definitely was affected. So we’re hopeful of that the balance of 2020 will show improvement. And that is why Josh had mentioned that the number of, you know, modest, I mean flat plus through up to 5% from the next year and can be represented as currently our minimum.

Ryan, I would add to, it’s probably going to be as high as roughly 20% of revenue this year. That’s pretty significant. We’ve announced most of those now.

Great, that’s helpful. Thanks for taking my questions, guys.

Thank you. [Operator Instructions] Thank you. We do have a question coming from the line of Pavel excuse me, [Oliva] [ph], a private investor. Please proceed with your question. It appears they may have placed us on hold, I apologize about that. [Operator Instructions] We do have a follow up question coming from the line of Pavel Molchanov with Raymond James. Pleased proceed with your question.

Thanks. I wanted to ask about the new production facility in Tracy. Is this going to be eventually replacing the original PX facility in San Leandro? Or are you going to be running both of these simultaneously?

This is in addition, so we’ll be running both.

Right. And how much capacity does this add relative to San Leandro?

Josh?

It adds. Yeah, I can jump in. It adds about 20%, 25%.

Okay, very clear. Thank you guys.

And it does have, I’d just add, it does have you know space that we can add capacity in the future you know much less – much like our current facility does as well, our headquarter facility.

Understood, appreciate it.

Thank you. [Operator Instructions] Our next question comes from the line of Pavel Oliva, a private investor. Please proceed with your question. Pavel Oliva, it appears that your line is playing hold music, I apologize but we would be unable to take your question while there is music coming from your line. [Operator Instructions] Ladies and gentlemen, this does conclude our question-and-answer session. So I’d like to pass the floor back over to management for any additional closing comments.

Well, again thank you, everyone for joining us. And we look forward to reporting to you and discussion at our next earnings call. Thank you. Stay safe and stay well.

Ladies and gentlemen –

This concludes – yeah, go ahead.

Thank you, Mr. Mao. This does conclude our teleconference. We thank you for your participation and you may disconnect your lines at this time.