Greetings. And welcome to Energy Recovery Second Quarter 2022 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. I would now like to turn the conference over to your host, James Siccardi, Vice President, Investor Relations. Please go ahead, sir.

Hello, everyone. And welcome to Energy Recovery’s 2022 second quarter earnings 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, growth expectations, new products and the 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, August 3, 2022, 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 will turn the call over to our Chairman, President and Chief Executive Officer, Bob Mao.

Thank you, Jim, and thank you everyone for joining us. We are all hearing a lot of negative global and domestic economic use. Inflation is high. There is war in Europe and we may already be in recession. I could even show a little better recently have followed [inaudible] then any time in decades. Yet here at Energy Recovery, we continue to make substantial progress in all streams of our business markets despite this noise around us. Our growth targets remain intact and our operations are [ph] resilient. I will remind you that regardless of the domestic economic headwinds, more than 98% of our business is overseas. Despite high inflation, our profitability remains robust, owing to the strengths of our margins reflected by the reputation and value creation of our PX technology. Despite supply chain disruptions, we continue manufacturing [inaudible], because our team’s foresight to build inventories well before supply chains were an issue. Despite the turmoil in the financial markets, we maintain ample cash reserve and despite the rise in interest rates, our business, we certainly have -- which currently has no reliance on debt, has not been directly impacted. Our core market of desalination, we have provided water to millions of people worldwide. We believe this basic human need will largely weather current global economic uncertainties as it has in past years. The need for water in the increasingly water scarce world remain a strong motivator for investments in this sector. As of today, we believe we remain on track in our desalination and industrial wastewater market to meet our guidance of 25% revenue growth for 2022. Our mega project channel remained strong and we are seeing a resurgence in our smaller OEM desalination projects from the COVID-related pent-up demand. In addition, increased global water scarcity is leading…

Good afternoon, everyone. We generated $20 million in revenue this quarter, as guided during the Q1 call relatively flat against Q2 2021. We launched for this quarter’s revenue was driven by the timing of mega project shipments, which this year are weighted into the third and fourth quarters as communicated in May. For example, while year-to-date mega project revenues are down 9%, based on our contracted backlog, we are anticipating a strong second half highlighted by a very robust fourth quarter. By year-end, we expect full year mega-project growth in the 10% to 15% range. Notably, OEM revenues are up 75% year-to-date. Total OEM revenue for the year includes $1.6 million in industrial wastewater sales, which as Bob mentioned is on pace to achieve our full year guidance. OEM desalination revenues have grown closer to 50% year-to-date, which we currently expect to hold through the end of the fiscal year. Overall, we continue to finally see our post-COVID return of desalination OEM and aftermarket revenues due to pent-up demand, which as of today is expected to continue through the end of the year. We have no change to our revenue forecast for the year, although we continue to keep an eye on end-of-year shipments in a very large fourth quarter. As I mentioned last quarter, we expect gross margin to moderate this year, we have begun to see this in the second quarter. There are two things at play here. First, our product mix changed in the second quarter, reflecting an increase in sales of non-PX products, which naturally puts pressure on our topline blended margin. We have seen this occur several times over the years. Second, while we are not yet reflecting inflationary increases in our pressure exchange of costs this year, we are experiencing some inflationary pressure on…

Thank you very much. [Operator Instructions] Our first question comes from Neil Thompsons with Family Securities. Please go ahead.

Good afternoon. I was just hoping to get some additional color on capital allocation going forward. If you could share anything on, for example, CapEx requirements for more capacity and what’s potentially you need to build in working capital, so we can have our own thoughts around future potential shareholder distributions?

Sure. This is Joshua. I will take. Hey, Neil. How are you doing? This year our CapEx and is pretty much in line with last year, not any major changes. As we look forward, what is going to drive increases in CapEx or working capital will -- any large degree, any material degree would be CO2 refrigeration. And so as, as we start to talk about that potential ramp ups in future quarters, we will be able to define that a little better, right? So, depending on how far CO2 refrigerant -- how quickly and how far we go, we really push our CapEx into building facility or increase capacity of existing facilities, that will -- that’s what I will drive that in the coming future, that makes sense, as well as working capital. Otherwise, our current cash flows can easily cover some of our operating cash flow, we are spending in order to desalination and industrial wastewater.

But at this point is there any reason to believe that a new CO2 refrigeration construction site would be more expensive than the last one you constructed for desal?

No. I think the open questions will be where we build it. So if we don’t expand an existing facility. For example, we have decided to build closer to where other refrigeration manufacturers are or if we had customers in Europe, who want to go close to whatever they -- whatever that may be that could entail a little more cost or because volumes will be increasing so much if we look at more automation and so forth in our manufacturing process. Those things could define up or down, but either way. I don’t think it’s going to be dramatically higher than what you have seen in the past and what we have talked about.

Okay. Thank you.

Thank you. [Operator Instructions] Our next question comes from Wally Walker with Hana Road Capital. Please go ahead.

Yeah. Good afternoon, guys. Hey. It’s just been one more time on your CO2 business and testing it. Do you have any updates as you think about it on the TAM for that business? And also as you are spending the time in testing, any adjacencies that have come forward that you haven’t considered just as you start to look at that new business?

Thank you, Wally. In terms of TAM, quite a few earning calls ago, we said, the refrigeration TAM in -- by the end of the decade could be one thing. That’s probably still is a good number to work with. But of course you are going to say, yeah, tell me closer than one of -- at the end of [inaudible]. We think it’s quite large, Wally. And in November, we have more explicit quantitative numbers for you. The TAM in parallel will depends on how much -- how good which we consider pretty good is our value proposition and the temperature range that we can serve very effectively, both with our testing results and early results on the actual real-world tests are very encouraging. So, Wally, the next time we will give you very specific numbers. But I can say that from [inaudible] we expect the TAM is large. In terms of adjacencies, again, we will talk next time. The flip side of refrigeration is hitting and it is in the first-degree approximation. It is mirror side -- mirror image of refrigeration and we are evaluating that, in fact we are discussing with some OEMs on this other side. Again more specific to come next time, Wally.

Okay. I will wait. Thank you. Good luck.

Thank you.

Thank you. [Operator Instructions] As there are no further questions, I would now like to hand the call back to Mr. James Siccardi for closing remarks.

Thank you, Peter. As a reminder, our prepared remarks can be found on the Investors section of our website. With that, I’d like to thank everyone for joining us this evening and we look forward to talking to you again in early November. Thank you.

This concludes today’s conference. You may now disconnect your lines at this time. Thank you for your participation.