Greetings and welcome to Energy Recovery Second Quarter 2021 Earnings 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. I would now like to turn the conference over to your host, Jim Siccardi, Vice President of Investor Relations.

Good afternoon, everyone. And welcome to Energy Recovery's 2021 second quarter conference call. My name is Jim Siccardi, Vice President of Investor Relations at Energy Recovery. I am 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 May 6, 2021 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 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. During the second quarter, our evolution as a PX space platform company continue to gain steam. We're seeing momentum for our new water solutions outside of seawater desalination, and we made progress with VorTeq and substantial strides in your refrigeration. Today, I will describe to you in greater detail, our activities in each of our new lines of business, including technical challenges, as well as new insights into our go-to market strategies. Each new industry will present its own unique challenges, but we're ready. Let me start with desalination. Our desalination business is performing in line with expectations. The dumbbell shape of our water revenue that Josh mentioned last quarter is playing out as expected. While our second quarter revenue of $21 million was lower than the first quarter, we expect strong annual product revenue results. Our backlog is strong. Our growth outlook remains robust at 10% this year and 25% in 2022. The Middle East remains our most active region and we do not foresee that changing in the near term. However, we are encouraged by other regions that are appearing in our pipeline; most notably, Asia where we have been generating only nominal revenues the past few years. China's recent action plan, which caused for a 75% increase in desalination capacity could lead to desalination on a far greater scale in the region. We remain very bullish potential of dissemination, not only for the next two years, but for many years to come. Lets now turn to our growing industrial wastewater business. As we announced earlier this week, we recently secured additional three awards, all in China, related to landfill, chemical and lithium battery industries. Over the past nine months, we have secured five awards in four…

Thank you, Bob. Product revenue slowed to 7% growth in the second quarter as expected, but our outlook remains intact. As a reminder, our revenue this year is dumbbell shaped with our first and fourth quarters being the highest revenue quarters and the second third being the lowest. You should expect a similar level of revenue in Q3 as in Q2, roughly between $19 million and $21 million. Given that last year's third quarter was our largest, the year-over-year comparison will show a decrease in Q3, however, barring any unforeseen circumstances, our fourth quarter should be the largest one this year, allowing us to achieve our 10% guided growth. You should also note that we are beginning to experience growth in OEM sales. The second quarter in 2020 was the first fully impacted COVID-19 quarter and the 6% growth in OEM reflects our first increase since the onset of the pandemic. We are currently seeing a rebound in OEM activity across most territories and industry sectors, including hospitality. While aftermarket sales fell this quarter, the overall trend for the year is beginning to feel positive. We feel a similar optimism about our OEM sales, which may lead to upside to our 10% guidance for this year. However, we are hesitant to change our outlook at this time until we have a better sense of where COVID-19 is headed. As a final note to revenue, this is the last quarter we will show year-on-year quarterly comparison that include GAAP recognized revenue from the old Schlumberger contract, which terminated in June 2020. In Q2 2020, we recognize the remaining revenue associated with that contract, which created a large bump of non-cash revenue. On a quarterly basis, this will no longer be a factor. Our gross margin came in lower than our annual…

Thank you. At this time, we will conduct a question and answer session. [Operator instructions] Our first question comes from Pavel Molchanov with Raymond James. Please proceed.

Thanks for taking the question and appreciate the technical update on board tracking and the cartridge. Going forward, should we assume that you will be providing these technical updates essentially every three months on a recurring basis as you continue to move along the development process?

Simple answer is yes to varying degrees of depth. Yes.

Okay. And is there, I suppose when you give the plan, the blueprint, so to speak, to your prospective customers, will you be selling them? Is there going to be a cost associated with that, that you will generate revenue from or is that on a pre-purchase basis? How is that going to work for them to get the information?

Pavel, as I said, we provide this information free of charge. You can think a comparable situation in another industry for years. When Intel comes out with a new generation of CPU, they gave every PC manufacturer a reference design, and they can simply use that and produce the next generation PCs. They could also of course, for optimize even more. So this is very analogous to the Intel CPU use since we are the central part of this energy savings construct, but we do not produce the total system. What is VorTeq and also in refrigeration, we give the reference design free of charge and when they deploy the reference design, of course they buy the most important central part from us, which is the PX. Intel never charged anybody for reference design, neither does Qualcomm.

Okay. Good comparison. And then finally, do you see any reason at this stage to be testing VorTeq outside the Permian basin, perhaps in other shale production areas like the Bakken or even outside the United States, maybe in Argentina,

We do not see a need because there is no difference. A fracking site is a fracking site and there's no substantial difference that we can discern that will make one side so uniquely different that will affect our equipment design. No.

Okay. Thank you very much guys.

Our next question comes from Neil Tseng with Friendly Securities. Please proceed.

Bob, just to clarify in your statements regarding the expected revenues for 2022, is it -- did I hear you correctly like you say that you are now expecting revenues growth in 2022 to come into the higher end of the range at 25%?

Yes. Correct.

And then I have a question on the PX G1300 because it seems like within the industrial wastewater industries, you have a bit of a need to have some commercial beta tested different industries within the broader industrial wastewater switch. But is that less of an issue or is there less of that need when it comes to commercial refrigeration? So I guess, are these systems much more standardized so that you're able to test this on your own? And then you can go to market with a bit more finished products or at least have that data more comparable to what your clients are experiencing?

Refrigeration is more of a standard design. We will, of course our initial deployments you could also look at it as is testing out the system. We think as we have demonstrated in the industrial wastewater case, that there is a pent-up market demand for what we can offer, so that the customer and us actually is shrinking the time that traditionally you would go for a beta test and you do announce a product. So we are -- we will be repeating pretty much what we are doing in the industrial wastewater as the duration in our initial deployments, is a commercial deployment, but at the same time accumulate even more data to refine our product and our system. This is a continued iterative process.

I would add. We also have a full refrigeration test loop downstairs. So we're doing full testing here in San Leandro as well.

Yeah, because that was my thought that those refrigeration systems are more easy to build on your own rather than having to go out to the field for protesting within different wastewater industries. But, I think that answered my question. So thank you.

Thank you, ladies and gentlemen. At this time, there are no further questions in queue. I would like to turn the call back over to management for closing comments.

Well, thanks everybody for coming. We look forward to talking to you next quarter at the end of October and our prepared remarks will be published on our website, well already are in case you want to grab them here early. So appreciate your time. Thank you.

Thank you, ladies and gentlemen, you may disconnect your lines at this time and thank you for your participation and have a great day.