Ladies and gentlemen welcome to the Energy Recovery year-end 2013 earnings call held on the March 6, 2014. (Operator Instructions). I would like to remind everyone that this conference call is being recorded today, November 7, 2013. I would now like to turn the conference over to Mr. Alex Buehler, Chief Financial Officer. Please go ahead, sir.

Good morning everyone and welcome to Energy Recovery’s earnings conference call for the fourth quarter and full year of 2013. My name is Alex Buehler, 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 fourth quarter and full year of 2013, as well as provide an update on the progress that we are achieving in relation to our growth strategy. Consequently, 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 of 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 this call, except as required by law. Let’s start with an interpretation of the financial results for the fourth quarter of 2013. I do not intend to convey a methodical point by point analysis of the results as this was described in sufficient detail in the press release. Rather my objective is to provide some additional context on these results from both a quarterly and annual perspective and reflect on the trend for the previous three years of operation. Starting first with the quarterly results we’re pleased to discern the earnings power of the company…

Thank you Alex. Good morning everyone. Looking back on the fourth quarter and 2013 as a whole, I’m extremely happy with the results. The financial results that you just reported are very much in-line with management’s expectations for the year and a very closely mirror of the actual business plan that we laid out for ourselves at the beginning in 2013. The results that we achieved in 2013 is a direct result of sound planning and three years of very hard work by a dedicated group of people at Energy Recovery. A great deal has been accomplished over the past three years and as a result the company is in a very strong position moving forward. In fact the company has never been stronger. We have now proven our ability to drive dominating market share while maintaining pricing power and we have streamlined our cost structure so as to allow us to generate very appealing gross margins and cash flow. I’m proud to say that Energy Recovery is now a company that can operate from a position of strength. Looking to the future, we must always begin with an assessment of our core desalination business. I fully realize that everyone would like for me to provide short term guidance for our desalination business. But I’m afraid that I just can’t do that. Unfortunately the nature of this global desalination market is such that given short term revenue guidance is difficult at best and frankly borders on just educated guessing. Given the circumstances I would prefer to tell you what I know and leave out the guesswork. Here is what we know, over the past 18 months we have seen a significant buildup of projects in desalination pipeline. To be specific our project pipeline has more than doubled over the past…

(Operator Instructions). The first question comes from Laurence Alexander from the company Jefferies. Please go ahead. George D'Angelo - Jefferies & Company: This is actually George D'Angelo sitting in for Laurence today. Are you guys happy with your footprint in the oil and gas area or would it be worth looking for built on acquisitions to help accelerate sales cycle?

Yes to both. We’re happy with our footprint that we’re being opportunistic and we are aggressively and have had a corporate development effort for the last eight months or so looking for intelligent acquisitions in the oil and gas space. The problem with that George is that the oil and gas industry is so hot right now that valuations are virtually unrealistic. So as much as we might like to find a bolt on acquisitions to accelerate ourselves the cost of such an acquisition is somewhat irrational. George D'Angelo - Jefferies & Company: And would you say competitive pressure for desal applications is increasing or stable?

Competitive pressure I mean competitors against ourselves? George D'Angelo - Jefferies & Company: Or just industry dynamics yeah.

So I guess I will interpret your question, it mean is Energy Recovery have more fierce competition today than ever before? Yeah every day we get more and more competitors that enter the industry. The challenge is that our technologies are disruptive they are advantaged and they are recognized as such. And even in the area of pumps and turbos we have invested so heavily in the last two years to advance our technologies in pumps and turbos but we’re actually more competitive in pumps and turbos today than we were a year ago. So I think like any industry we see more and more competition every day. I guess that’s the bad news, the good news is we’re far more competitive today than even we were a year ago. So it hasn’t had any effect on us

Thank you. And the next question comes from Jim McIlree from the company Chardan Capital. Please go ahead.

You talked about spending millions of dollars in R&D in the prior years and it sounds like a major portion of the product development is now behind you. Does that mean that R&D is going to come down or if you keep R&D at current levels and just invest in new projects?

No R&D is not going to go down. We are investing in new products. We’ve what I would argue are couple of blockbuster technologies that we’re working on right now that we will invest several million in them that represent tremendous opportunity for us. One of the comments that I had made was that our marketing department in 2013 investigated other verticals and other markets where our core technologies and platforms to be applicable. That has led us to recognize a few incredible upside potential for us and so we’re now investing very heavily in those areas in and around oil and gas. I don’t want to comment much more on that but we have no shortage of fantastic places to take our technologies and we don’t see pulling back from our R&D spend anytime soon. We have created, I guess I would say we have reignited an innovation engine at the company and it's throwing off tremendous technologies and advancements and patents for us and given our focus of creating value over the next 2 to 3 years there is no reason for us to back off on the R&D spend.

And so that touches on my next question, you mentioned that you were addressing in your diversification comments you’re talking about additional markets besides oil and gas that you’re going after and then you identify ammonia as one of them. But I’m assuming that there are one or two or three others that you’ve identified that you’re working on product development as well as market development is that correct?

That’s right. Yes.

And then this year 2014, I just want to make sure I understand what you’re saying about the oil and gas market. You think you’re going to have some initial sales in that market but 2015 is the real big year for that market. Is that right?

That’s right. There is no question we will have revenues this year. We actually have at least one executed contract that I’m aware of and actually received payment from one client. So I don’t think there is any doubt at all, we will have revenue in the oil and gas industry this year. How much revenue we have from oil and gas this year is considerably less important to us than piling up wins that will drive revenue for us in 2015 and ’16 and so as has been pointed out in the past the lead time for our delivery of our technologies can be on the order of 6-7 months. We’re overwhelmed right now with commercial requests for proposals and contacts in the industry. So I would say without question we will have oil and gas revenue this year. It may be an unimpressive amount but that really doesn’t matter what we’re really focusing on is stacking up contracts this year that will drive important revenues for us in 2015, 2016 and beyond.

You talked about lengthy sales cycle in oil and gas, can you just kind of go through what that might be the initial contact is to which group and then you’ve to do testing or prototypes or trials and then there is valuations. Can you just kind of like break it down into some simple steps and timeframe on that sales cycle.

Yeah so the oil and gas industry has certain clients that are early adopters and like to try technologies early. Others are incredibly conservative and want to see stuff these technology working elsewhere. So what we’re seeing right now is where we sit today we can literally take a client to a plant location and show them an operating plant with exactly the technology that we’re referring to the very happy client and that is a very convincing moment. We actually have that right now; we have clients who are extremely happy with what we have done. The device has been operating for a lengthy period of time and they are powerful endorsement. We have even produce white papers and presented those white papers at conferences. So now that we have that and our technology is evolved the fastest I think we will see the sales cycle would be from an early conversation, we can be taking a commercial proposal in 30 days, the fastest movers might make decisions, 90 days thereafter and we would be six months thereafter to deliver product and begin to see revenue recognition. Interestingly enough, if the assignment is large enough and the acquisition is put into a capital budget some clients will wait for their annual funding cycle which would mean that we would have to wait till the annual turnover. So because of that you see the cycle time going anywhere from 6 to 9 months to two years. This is how I would describe it to you.

Thank you. The next question comes from JinMing Liu from Ardour Capital. Please go ahead.

First a follow-up on the R&D expense into next year and into the future. Can you share with us what you're upsides on the R&D front whether you are trying to get more application into volume gas [ph] or improve your current pressure exchanger or get some other applications like the osmotic power.

JinMing most of what we're spending on will be breakthrough noon new technologies that enable us to penetrate market verticals that we’re not currently in. But of course there will be some monies spent on refining our technologies. So I would give you as an example we have IsoBoost, IsoGen and IsoPro. IsoBoost is now a proven technology and it's one that's very appealing to the oil and gas industry. It's at the core, there is the turbocharger. IsoGen is a device that generates electricity also at the core it uses turbine. IsoPro is the stallion if you will, the very, very high efficiency device. The core of which is the pressure exchanger. It's performance is so extreme that it requires specialized operating protocols at a plant because it knocks out so much of the energy requirements at the plant that it causes the plant to change its operating protocols. So we're working to refine and develop that technology to merry up well with these plants. So we will indeed over the next 24 months continue to invest in the development of that technology but I would say that the majority of the spending we have one project right now that we may spend $2 million on an incredibly advanced disruptive technology that opens a $1 billion market to us that it is a brand new technology. We haven't talked about it and it's altogether new. And it is the result of two things. One is the marketing study last year highlighted a very special market for us to enter and at the same time one of the top engineers that we hired had specific expertise in that area. So between our R&D acumen and an identified market, we made the decision in the fourth quarter of last year to invest very heavily to attack that new market and so that's an example of where we are not refining an existing technology but advancing a brand new disruptive technology and by the way we would seek to have 2 or 3 of those opportunities every single year.

Okay that’s good, what is your current mix in your pressure exchanger sales? Whether your newer model like PX-300 Q is the predominant in the mix?

So I would say that the Q Technology has been so rapidly adopted by the industry we almost always felt the Q version of all the other devices. Alex you want to take a stab on the size model?

Well let’s step back and speak about mix broadly first. For the year it was 80% PX devices and 20% pumps and turbos and that was largely in-line with 2012. JinMing if you look at Q4 it was 86% PX devices, 14% pumps and turbos. If I unpack the 80% about 50% of that is PX-300 so that model is being around for a couple of years and it's very quickly becoming our highest volume product. Moreover if I unpack the MPG sales revenue, almost a 100% of that PX-300 or more specifically Q300s. So that product line has really take off over the last few years.

Okay. Good. So if I remember correctly you have to produce the ceramic for the Q300 in-house right?

Well we produce all ceramic in-house for all of our PX models now, including the Q300 and the PX-300.

Okay, lastly for me just Tom can you comment on the mining industry in South America? I saw quite a few projects in that region and also regarding the U.S. market, what do you see going forward in here whether it's more for you it's more mega project sales or just smaller OEM sales in the U.S.?

And specifically as relates to mining?

No for U.S. that’s actually those are two separate questions. Mining for the U.S. whether it's OEM or mega project in the U.S and what going on in the mining industry in South America?

Okay so let me take the second half of that question first that is to say the U.S. market. This past year as you know we saw the first mega shipment in probably forever for our company in North America. That was the Carlsbad project. So it stands out on its own as unique data point. If you set that aside the U.S. market from a water standpoint, a desalination standpoint has been historically essentially unimportant to us. Our North American, I don't want to say it's unimportant but from a revenue standpoint it's just not one of our most significant markets and it's been all small very small devices and small applications. It's not likely going to change in that regard. The key issue is when will the large projects in North America light up. I think it's worth noting that Benjamin Netanyahu was in here in the Bay Area yesterday essentially lecturing the Governor of California on why Israel doesn't have water problems and I relegated to being an almost embarrassing episode where California can’t get out of its own way in terms of water. Having said that I can opine on what California and West Coast in the United States needs to do but from where I sit in my chair the U.S. market is something we’re going to watch and scratch our head about and I couldn’t give you any thoughts in terms of when California or the U.S. becomes a market of important revenue for us. So unfortunately we’re a U.S. company and U.S. market for many companies is a big portion of their business, for us it's statistically unimportant to us. So the first part of your question though is about mining in South America. The mining industry down in South America most notably…

Thank you. And the next question comes from David Rose from Wedbush Securities. Please go ahead.

I was hoping a follow-up on a couple of other questions and then maybe kind of dwell on ONG side [ph] but particularly as it relates to guidance last quarter in the conference call you stated you had 10 months of visibility and you've got to have some visibility for quarter or two. So I was hoping maybe you can provide what’s your expectations are for this quarter up or down versus last year and then if you can give us a range handicap the bottom end of the range and the top end of the revenue range for this year in terms of up or down. Could you be down 20%? Could you be up 20%? Based on what I'm looking at in terms of mega projects. I'm looking at about 800,000 cubic meters in desal [ph] capacity for 2013. So if I kind of think about that what sort capacity have you been awarded for 2014 to get you to the bottom end or the top end of the range? So I guess you kind of incorporate those into the guidance range for the next two quarters and for the year, top and low end and then lastly if you could give us an idea of how you’re going to build out inventory starting in Q1 and will you start to level load your factories so you can get those margins that you got in 2013.

Yes so let me answer the last question first. We've been level loading for 18 months or so in our factory. That's the only way to run an efficient factory. If you look at the last four quarters you see tremendous lumpiness obviously Q3, Q4 of last year represents that in its entirety. So we do level loading. It's only way to run an efficient factory. But the first part of your question is really just driving at trying to get us to give guidance. The way I look at it is this, we give guidance if we think we can do so intelligently without guessing, without much uncertainty. If we give that guidance we destroy shareholder value. We have to give good to perfect guidance to create benefit for our shareholders and unless or until I think we can do that we simply won't give guidance. I've come to the conclusion and frankly I look back at how things played out last year. We gave very high level broad guidance at the beginning of 2013. We gave guidance as to what the revenue levels would be. We gave guidance that it was all going to be back ended, very, very heavily in the fourth quarter and then we got beaten up all year long. Our stock price got pounded when the lumpy revenues that we knew were going to happen came in and what that really signals to me is that giving guidance tends only to create a negative effect in terms of shareholder value. The truth to be told for our company, investors are investing in our company for the potential that we have over the next 2 to 3 years. The potential that we have over the next 2 to 3 years is very significant. The entire management team has an Outlook the 24 to 36 month Outlook. We’re very fortunate to have an incredibly supportive Board in that regard. We’re also very fortunate to have some very strong balance sheet and our core business is operating perfectly. So we’re one of the few companies that has opportunity to aim at the 2 to 3 year horizon. We focus every single day on running efficiently, so we never lose track of the short-term. But David to sit and give guidance on a quarterly basis as you're suggesting or even a yearly basis is just destructive and a lot of companies frankly are moving away from giving guidance. So we're very clearly doing that. I'm happy that we’re doing that. I know that doesn't make analyst happy but the fact is if all I’m doing is giving educated guessing I'm not sure what that value is any way.

Okay. I appreciate that and last year you provided kind of a forward guidance of two years of over 20% growth and this last year you put up 1% growth. So can we still say that you’re on that two year track?

We’re simply not going to give guidance as we have suggested David and with all due respect you can ask me the questions 10 different ways and that’s the answer.

Okay. I appreciate that and maybe we can shift to the oil and gas side. In your press release you had said that you expected meaningful awards in 2014. I think that implied that that would be 2015 revenues. Can you give us some sort of guidance or maybe clarity around what meaningful means? Is it greater than 5 million? Is it greater than 10 million? Just so we have an idea of what the growth outlook is for two years out in 2015.

All right. So let me say this. I'll give you the full range. In the last several weeks we proposed on deals that range in size from $800,000 to $20 million, okay? And the contract terms and conditions on those range from a one off sale to performance contracting which means that we provide the technology for free and we get paid on energy savings. The revenue recognition from a performance contract would stretch out over years as much as a decade. So hopefully you can digest what I'm saying which is the scale of the deals that we’re looking at, as I say range from 800,000 to 20 million and the revenue recognition side could come quickly if there was a capital sale or could come in powerful recurring revenue over a decade. So with all of that in play it's, you have to sort of define [ph] what that means in terms of revenue recognition which I think is what you’re trying to get after. Is that helpful at all for you?

That does help actually. I appreciate it and with that said in the fourth quarter, your comment suggested that we should see some announcements in the first quarter of awards. You commented on the call that you’ve one award. Should we start to see some announcements in March or is that pushed out a little bit?

I would just say that you’re going to see a stream of announcements over the next six months and exactly when the timing comes I don’t know.

Okay. So over the next six months. Okay, well thank you very much.

Sure. Thank you.

(Operator Instructions) Moving on to the next question comes from Robert Smith from Center For Performance Investing. Please go ahead.

Congratulations on the quarter and thanks for the wow profile of the business. Most of my questions have been answered and thanks for the additional color on the word meaningful. So my question is when you mentioned Israel's, they said that they would, offering to assist California. Do you have any inkling or color on that what is meant by that?

I can give you the politically correct answer or I could.

I mean as far as product goes and where you might come in.

Okay. So let me just say this, several of the most successful developers desalination projects in the world actually come from Israel and to put a finer point on that the Carlsbad project that we’re operating under or that we’re helping to build is actually being built up IDE Technologies out of Israel. And IDE is one of our very strong partners. We have done a significant number of projects in Israel with Israeli players and those same Israeli players are successful and operate all over the world. So as to what technologies Mr. Netanyahu or support and advice are giving, I think maybe he would be thinking more along the lines of drip irrigation and water recycling. His commentary was in three areas, drip irrigation, recycling of water and desalination. California is already, from the desalination standpoint, California is already benefiting from the technologies in desal. My sort of half kidding comment about political correctness is that in my opinion the best help that Israel could give to California is around policy. And so if Prime Minister Netanyahu can advise California and California policy makers that’s going to be the greatest help. California is essentially dysfunctional right now in terms of water policy and so I was very pleased to see Israeli leadership helping California leadership figure out water issues and so I think it's less about bringing technology to California I think it's more about bringing enlightened water policy.

When you say a $1 billion market, say in oil and gas, is that market opportunity in your specific product areas?

That $1 billion is exactly and exclusively our specific product area.

And you said it was an annually recurring?

Yes.

And you spoke of a new materials, is one of the new materials that you are beginning to work with is graphene?

No.

No? Okay.

Graphene is very interesting but our assessment of graphene as it relates to are industry is that it's still years away. But no, we’re not, it's really advanced material science at the core of our products.

And you made a comment about India being, the political scene there been short term limitations but long term promise. Can you just give me a little clarification of that?

Well India, it has major National Elections coming up and some of the pundits would suggest that one party may win over another and I’m not going to get into that but some of the candidates that are running or seen as incredibly business friendly and some of the candidates are seen as more or less corrupt than others and so a lot of that which ails India today is lack of power. They have intermittent power, they don't have enough power and the reason that that’s relevant to us is that with every new power plant in India they have to use desalinated water to cool them and so that’s a tremendous business opportunity for us. So if a pragmatic government takes place in India you will see more power, more water, and therefore big lift for us as a company. We don’t get a say in who gets to rule countries but we’re carefully watching what happens there.

And if I went to your website would the three ISOs be explained and is it profiled on the website already?

Yes.

Okay great. Well congratulations again and thanks for the exciting times. It's wonderful. Good luck.

Great. I think that brings us to the end of the questions. So thanks again everybody for participating in the call. We feel very good about where the company is positioned and where we’re headed going forward. So thanks again for participating.

Thank you. Ladies and gentlemen that does conclude the conference call for today. Thank you for your participation and you may now disconnect.