Good day, ladies and gentlemen, and welcome to the Energy Recovery Third Quarter Earnings Call. Our host for today's call is Lionel McBee. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions]. I would like to now turn the call over to your host, Mr. McBee.

Good afternoon, everyone. Welcome to Energy Recovery's 2024 third quarter earnings conference call. We appreciate you joining us. I'm Lionel McBee, Director of Investor Relations at Energy Recovery, and I'm joined here today by our President and Chief Executive Officer, David Moon; and our Chief Financial Officer, Mike Mancini. The prerecorded remarks from today's call are available on the Investors section of our website and are meant to accompany the third quarter earnings news release, which is posted in the same location. 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 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 and 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, October 30th, 2024, 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. And lastly, for your planning purposes, please note that our fourth quarter and full-year earnings conference call is scheduled for Wednesday, February 26, 2025. And with that, I will turn the call over to David.

Thanks, Lionel, and thank you for joining us today. As Lionel mentioned, we are joined today for the first time on our quarterly earnings call by Energy Recovery's new CFO, Mike Mancini, who started on August 5th. I want to say how grateful I am for Mike's partnership and the work he has already done. As I mentioned last quarter, Mike brings a wealth of experience in high-growth engineering and technology companies. He has had executive leadership roles in finance, where he demonstrated his ability to drive financial strategy and performance across the entire enterprise. Additionally, his background with the institutional investment community provides him with a deep understanding of capital markets, which makes him a valuable asset to our leadership team. Now before I get into the third quarter financial results, I will make a brief comment on our strategic planning process, or the Playbook as we call it. Although we won't be getting into any of the specifics of the playbook on this call, we are hosting a live investor webinar on November 18th, where members of my senior leadership team will present our Playbook, including growth plans for desalination, wastewater and CO2. We will also provide guidance for 2025 and 2026, as well as provide long-term 2029 financial targets. The webinar will take place at 10 a.m. Eastern Time and will last approximately 2 hours, including a live Q&A session. The event will be accessible virtually via the link located on the IR calendar section of Energy Recovery's IR website, and a replay of the event will also be archived there. Additional details can be found in our press release issued on October 21st. Now, let's move into the third quarter update. First, let me start by saying thank you to our employees for helping deliver another…

Thank you, David. And let me start by saying thanks to you and to the Board for your trust and confidence in me to lead the finance function here at Energy Recovery. Before arriving, I was excited about the company's core business prospects, the exciting opportunities to grow and expand the reach of the PX technology, and the opportunity to drive profitability and cash flow. After almost three months on the job, I'm now confident in the company's ability to create value for its shareholders, and I look forward to working with the team on driving financial results. I'd like to begin by discussing our revenue, gross margin and product mix. Then I'll discuss our operating expense, net income and cash position, as well as our expectations for the full-year 2024. As David mentioned, we had a solid quarter of revenue, generating $38.6 million at the upper end of our guidance. The project-driven lumpy nature of our mega project channel has become quite evident to me even in the short time I have been here. Q4 revenue is expected to be between $62 million and $72 million, which will represent over 45% of our full year revenue at the midpoint. In the fourth quarter alone, 5 projects represent approximately 50% of the revenue, with a single project representing over 20%. Any delays in shipment dates on those projects would have an impact on our full year revenue, although there would be a minimal impact to the intrinsic value of the business of such delays. Moving to margins. Our gross margin improved 50 basis points when compared to the second quarter of the year, with the third quarter coming in at 65.1%, above our previously guided range of 62% to 64% for the third quarter. We believe we've turned the corner…

Thank you, Mike. To sum up, we delivered a record third quarter, and while there is still work ahead of us to execute the fourth quarter, we remain confident in our full year revenue guidance of $140 million to $150. We remain on track to generate $12 million to $15 million in revenue from our wastewater business, although we anticipate this will come in towards the lower end of that range. We are on track to deliver the low end of 30 to 50 sites with our second generation PX G installed by the end of the year. We are maintaining our gross margin guidance of 64% to 67%, and we are reducing our operating expense guidance from -- to $76 million to $78 million. With that, now let's move to Q&A.

[Operator Instructions]. Your first question comes from Ryan Pfingst with B. Riley. Your line is open.

Hey guys. Thanks for taking my questions.

Hey, Ryan.

Not to get ahead of the webinar, but I was wondering if you could talk about the competitive landscape in CO2. Is anyone else attempting to do what you guys are doing with the PX G?

No, no other pressure exchanger competition that we see today. Now as you know, we compete against other technologies or applications in the space, but no one with the pressure exchanger.

Got it. That's helpful, David. And then I guess for my second question, on your capital allocation strategy, wondering how you're thinking about the potential for share repurchases with the strong cash balance you have now? And maybe if you could remind us of the capital requirements needed for the CO2 opportunity. I know it's still early stage, but is there any meaningful cash needed as that opportunity ramps?

Hey Ryan, this is Mike. So, I think we're going to get into that on the webinar. We'll lay out all of our growth strategy plans, capital needs, and roll out a capital allocation policy. So we will be talking about that on November 18th.

Understood. Thanks for taking my questions.

Thanks Ryan.

Your next question comes from Pavel Molchanov with Raymond James. Your line is open.

Yes, thanks for taking the question. Let me start with kind of a high level one about desal. Are you observing any geographic diversification of your customer mix away from the Middle East and towards newer desal markets?

Hi, Pavel, this is David. Nice to talk to you. No, still -- the concentration still is favoring Middle East, Africa in the third quarter as it's done really all of this year, we're up over 70% of our revenue for the quarter came from the MEA and then about 60% came from -- for the first nine months of the year came from MEA. So we're still very reliant on that part of the world, and we'll look to continue to be that. As you'll hear in the webinar, the Middle East and Africa will continue to play a very important part of our mix over the next five years.

On the refrigeration side, I remember, this is now a couple of years ago, you signed a strategic partnership in the Netherlands with [indiscernible]?

Yes, still going strong.

Yes. And in Italy, with Aetna Group, have there been any other European partners that you've signed up?

No, that's -- we've got a number of new faces that we're talking to, Pavel, at the moment. But in terms of official sort of partnerships, it's Epta and it's few at the moment in Europe.

And is the -- I guess, the go-to-market strategy for refrigeration, I'm sure you'll touch on that in a few weeks here, but is it going to remain kind of centered around a select list of partners? Or is there a better approach to getting the word out about this product?

OEMs are still in this super market phase. OEMs is still the path to get to the -- ultimately to get to the end users. It doesn't mean we're not talking to end users directly. But ultimately, the OEMs is where we have to get our PX G integrated into their systems and thus get ourselves specked -- officially specked within a supermarket. And so to do that, we've got to go through the OEMs.

All right. We'll save the rest until November 18th. Looking forward to it.

Thank you. Thanks Pavel.

Your next question comes from Jason Bandel with Evercore ISI. Your line is open.

Great. Thanks for taking my question. My first one is for Mike. You've been in the CFO seat now for almost three months, like you said. And in the prepared remarks, you touched on what attracted you to the company. Just curious, what were some of your initial impressions being inside the company so far? And what are some of the initiatives that you've been focusing on, of course, in addition to the Playbook work?

Yes. Thanks for the question, Jason. So you've been here almost three months now. And I think largely what I expected coming in has been true. And that really is -- I think the key word for me is opportunity. There is opportunity for efficiency in manufacturing. There's opportunity for efficiency and cost. There's opportunity for growth. There's opportunity for capital, and how we allocate it, and just a lot of things where we can bring my expertise in finance to the team, along with the other new executives here to really focus on profitable growth going forward.

Got it. Makes sense. I'm looking forward to working with you. Next in refrigeration, David, I'm just curious, in the white paper, was the performance of the PX G consistent across the six sites that were monitored by DC Engineering?

Yes, consistent depending on temperature variation, right, whether Canada versus Southern California. So there's a bit of that variation. But what was consistent was the energy savings and the capacity increase. Now it differed the amount of energy savings and capacity increase differed depending on location. But we got both of those out of all the locations that we've been tracking.

In terms of the remaining sites for the year, now that you have the performance data in hand in this white paper, how are you prioritizing the deployment there for the remaining sites?

Yes. So the remaining sites are going to be a combination of Europe, U.S., existing OEM customers versus new OEM customers. And so, we've got a site selection tool that we use to ensure that we optimize the sites that we work with the OEMs on selecting. And so, we're ensuring that we're using that site selection tool for optimization to make sure we get the right sites early on. So we'll continue to use that process. But otherwise, it's -- we've got the capacity to do these other 20 sites or so for the remainder of the year.

Understood. And just one last quick one for me here on OpEx, good cost control there. Was there anything in particular that kind of drove the performance in the third quarter? And how much is left to spend at this point of the one-time costs?

Yes. This is Mike. So I'd say the largest driver of cost coming in was more of a cost avoidance of not growing in certain non-core growth areas that was planned for. So some cost cutting, but also just, I'd say, cost avoidance. And then the one-time costs, we expect to do $7 million in total for the year, and we have about $6 million of that in cash and non-cash already done. So about $1 million left.

Perfect. Sounds good. Looking forward to the webinar. Thanks guys.

Thank you.

Your next question comes from Jeffrey Campbell with Seaport Research Partners. Your line is open.

Thank you for taking my questions. My first one is a white paper question. Your recent white paper noted that the PX G1300 transcritical system energy savings and increased cooling capacity did not require any water cooling. So I was wondering if this suggested that a system using the PX G might be able to avoid an adiabatic cooler and choose a dry cooler instead?

Yes, it's a good. So hi, this is David. It's a good question. So there are a number of sites across -- what that refers to is, there are a number of sites across Europe and even in certain parts of the U.S., especially Southern California, that require adiabatic cooling or -- for high heat load days. And so what the PX G does is that given its increased cooling capacity, depending on the location can either replace the adiabatic cooler as a best case or a worst case can reduce the amount of adiabatic cooling that goes on during high heat load days, thus reducing water usage, thus reducing energy savings and so on. And so what this means is that, if you're putting in a greenfield site where you've got an adiabatic, you would have put an adiabatic cooler before, you no longer -- if you're going to put in the PX G, you no longer require that. You don't have to go through the expense of putting in the $20,000 to $50,000 of putting in the adiabatic cooler nor do you have to, you can forego the $5,000 to $10,000 a year of operating costs as well. So we're a nice replacement for that adiabatic cooling system.

Yes. That stuck out as a pretty good argument for the PX G from...

We hope so. We hope that's the case as others read it, especially end users. So...

And we can get rid of the expander at the same time. So that's or the ejector -- excuse me, at the same time. So it's a pretty good argument.

That's right.

I wanted to ask you one other kind of think a real question. The recent EPA's SNAP decision in June allows continued use of HFO and HFO, HFC blends in new equipment designed for these refrigerants in the U.S. Just wondering what are your thoughts or maybe what you're hearing or what are the animal spirits on continued competition between HFO and CO2 refrigeration, particularly with PX G's ability to strengthen the CO2 case as we just discussed.

Yes. I think CO2 is still the outright winner. You might have some outliers that will choose the HFO blends, and maybe even in stand-alone cases that you can move around the store freely. But everything that we're hearing in the U.S. from our OEMs, our OEM customers that we've been working with is that, it's full speed ahead on CO2, full speed ahead.

Okay. Great. Thank you. Appreciate that.

You're welcome.

[Operator Instructions]. Your next question comes from Miriam Martin [ph] with BMO Capital. Your line is open. Mr. Martin your line is open. It appears there are no further questions at this time. I'd like to turn the call back to our presenters for any further remarks.

All right. Thank you, everyone, for joining us this time.

This concludes today's Energy Recovery third quarter earnings call. Thank you for attending and have a wonderful rest of your day.