Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Energy Recovery Third 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] Please note this conference is being recorded. I will now turn the conference over to your host, James Siccardi, Vice President of Investor Relations for Energy Recovery. Thank you, you may begin.

Good afternoon everyone, and welcome to Energy Recovery’s 2020 third 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, October 29, 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. 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 sincere hope that everyone listening and your families are safe and healthy. Once again, I am happy to report that the Energy Recovery team and our business remain healthy and strong. Energy Recovery is evolving well into a COVID inspired new normal, where we continue to steadily achieve growth those in our base business as well as in our new business initiatives. The disciplined finance financial and time bounded approach to our new initiatives as recorded in our last call is being strictly executed, which should translate to a greater bottom-line results and increase returns for our investors. Following the format of my previous earnings call report, I will provide you updates to our Water business and VorTeq development in our Oil & Gas business. In addition, in our last earnings call, we committed to provide more details on our intubation effort for the PX technology platform, which was started at the end of the first quarter of this year. Today, we are happy to report our one of the efforts ZLD, Zero Liquid Discharge, which has just graduated into commercialization with receipt of the first purchase order. Let's begin with our water business, which continues to be healthy and strong, riding on incredibly strong global desalination grows even amidst the COVID pandemic. This third quarter was ERII's biggest water revenue generating quarter, eclipsing last year higher quarter record by 26%. At this time, we feel competent increasing our previously projected 20% to 25% of water's revenue growth for fiscal year 2020, up to 25%. We also feel confident in increasing our 2021 growth outlook to 10% from the flat to 5% gross we communicated last quarter.…

Thank you, Bob. As you saw last quarter, each channel in the water business continues to experience different dynamics. Mega-projects remain dominant, growing 70% year-on-year in the quarter and an impressive 48% year-to-date. As expected both the OEM and aftermarket channels remain weak as compared to 2019, falling 22% and 40% respectively in the quarter from a year ago. Based on Bob's affirmation of at least 25% growth in our Water business this year, you should expect a very strong fourth quarter. I've mentioned in the past calls that it's hard to pinpoint quarterly trends in our business. In both 2018 and '19, we experienced the drop off in sales in the fourth quarter. However, this year, our fourth quarter sales should be comparable to that of the third quarter. As we looked at '21, and '22, we do expect to see our OEM and aftermarket channels recover; however, the extent of that recovery will largely depend on the global effects of COVID over this winter and next spring. While some industries will remain weak within these channels regardless, most notably travel and hospitality. At this time, we believe pent up demand and other industries may help return the OEM and aftermarket channels to more normalized levels, which is leaning toward increased confidence in projections for next year. I should also note that revenue from our new ZLD market is not yet included in these projections, as we build our pipeline and grow more comfortable, will provide more clarity. That being said, it's probably fair to assume that our initial revenue will be in the single digit millions the first couple of years, with considerably more growth in the future. Also note that these projects will be of a different nature than the larger Mega-project desalination plant driving our water…

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Pavel Molchanov with Raymond James.

I want to just review the guidance targets that you gave, make sure we all heard them right. Following 25% water revenue growth this year, it should slow to 10% growth next year, but then reaccelerate to 25% in '22. Is that correct?

Correct. Yes, that is correct.

So what gives you the confidence that '22 will -- that will see the acceleration in the growth rate? Is it specific projects, specific geographies, specific customers?

Actually, all of the above specific projects, specific geographies, and in fact, we already have some backlog going into 2022. So, it's not depending on macro market trends only, it is underground actually project by project, customer by customer.

And does it include retrofits of legacy plants? Or is it or are you only looking at greenfield new builds?

Both.

My final question was about your comment about an industry that is being transformed by government regulation. And I'm sorry, if this is a silly question, but are you referring to the Oil & Gas industry or something else?

We will clarify that next call as we are in the technical feasibility phase.

Our next question is from Ryan Pfingst with B. Riley Securities.

In terms of your inventory of VorTeq equipment for the new single cartridge skin design, if the opportunity presented itself, could you simultaneously execute one well with Liberty and another with a different pressure pumper? If not, are you prioritizing the first attempted well with Liberty above all other options? Or if another interested party wanted to conduct the live well test before Liberty customers ready, would you move forward with that opportunity?

We have enough inventories to those. So that pleasant opportunity always.

Okay. That's helpful. And then for hurdle numbers three on the path to commercialization, the buying of frac sand that the cartridge can process before needs to be repaired or replaced. How far along are you now towards your target? I know that by year-end, you aim to be at 50% with clear visibility, on raising a hundred percent. Could you give some insight on maybe what percentage you're at now or where you exited the third quarter?

We are on track to reach those targets.

Okay. So on track for 100% visibility by your end.

Yes.

Great. And then turning to the new PX derivative product developments, could you give some other examples of potential end users that you're investigating now?

We shared particularly with zero mixing and that will open up additional end user into chemicals industry where no mixing is allowed at all.

All right. Thank you. And then maybe just one last one for Josh, could you please provide the third quarter breakdown for Water revenue by segments?

Sure. It's 76% for the Mega-Projects, 15% for OEM and about 10% for aftermarket.

[Operator Instructions] Our next question is from Ken Hirschberg, Private Investor.

Congratulations on the excellent quarter and all the progress you’re making. Could you please give us an update on the commercialization of the IsoGen and IsoBoost? Thank you.

On that one, we are in discussion with potential customers to deploy our standard product. And of course, our first project is fully in operation and the very happily accepted by our customers. So, what we look for here is for a standard product applicable to a larger base of customers rather doing individual almost custom-made projects. So, we're making progress. We expect to report more at the next earning call.

Is it for IsoGen and IsoBoost?

Yes, both IsoGen and IsoBoost. Did I answer your question?

Yes, you did. Thank you very much. I appreciate that.

Thank you.

Ladies and gentlemen, we have reached the end of the question-and-answer session. Now, I'd like to turn the call back to James Siccardi for closing remarks.

I want to thank everyone for joining us today. For your convenience, we've decided for our prepared remarks up on our website, you can access when you chance to get in. Thank you very much for joining us and we look forward to speaking with you again in March. Please be safe. Thank you.

This concludes today's conference. We thank you for your participation. You may disconnect your lines at this time.

Goodbye.