Greetings and welcome to Energy Recovery’s Q4 Earnings Conference Call. [Operator Instructions] Please note this conference is being recorded. I would now like to turn the conference over to your host, Jim Siccardi, Vice President of Investor Relations. Thank you. You may begin.

Good afternoon, everyone and welcome to Energy Recovery’s 2020 fourth quarter and full year earnings conference call. My name is Jim Siccardi, Vice President of Investor Relations at Energy Recovery. And 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 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, March 11, 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. I want to start today’s call as I did last quarter, [indiscernible] pandemic started with the sincere hope that everyone listening and your families are safe and healthy. Although the past year has been challenging for everyone, I am happy to report that the Energy Recovery team and our business remains healthy and strong. Our goals has always been to protect the lives and livelihood of our team. We have robust testing and monitoring protocol in place for all our manufacturing sites. To our knowledge, there has been no spread of COVID-19 at our facilities. It is a testament to our team that we were able to keep everyone safe, even while producing and selling a record number of PXs. Beyond these achievements, our continued evolution as a company is exciting. We have settled into our long-term strategy, which is expanding the operating range of our pressure exchange strategy and introduced it to new industries outside of desalination. As an example, we diversified our water product offering with the introduction of our Ultra PX Energy Recovery device for use in industrial wastewater treatment. We are now partnering with a leading global membrane manufacturer, DuPont Water Solutions, to market our product in this space. We also issued our first ESG report, formalizing the focus we have always had on environmental sustainability. Our efforts around this path led to an A rating by Morgan Stanley MSCI. We know there is more we can do to be a good global corporate citizen and we will continue to update you on our ESG efforts in 2021. Finally, in recognition of our achievements, Forbes named Energy Recovery as number 16 in its list of top 100 small-cap companies and IR Magazine short-listed us for…

Thank you, Bob. The dynamics in our revenue that I described last quarter, with mega projects leading growth in OEM and aftermarket showing weakness, played out through the end of the year as expected. Mega project sales grew 75% in 2020, while OEM and aftermarket ended the year having decreased 31% and 18% respectively. As I mentioned last quarter, the weakness in the OEM and aftermarket channels was entirely due to the impacts of COVID-19, which especially affected our travel and hospitality markets. As we look forward to this fiscal year’s revenue, we expect a different set of dynamics in 2021. We expect NPD will continue to grow, but the growth will likely be more tempered this year in the range of 6% to 12%, before likely accelerating in 2022. Due to the ongoing pandemic, it is unclear whether our OEM and aftermarket channels will return to their highs in 2019, but we do not expect them to continue to decline. Our revenue will also likely be recognized in a different quarterly cadence this year, whereas in 2020, revenue was more heavily weighted to the final two quarters. In 2021, we expect more of a dumbbell result. Q1 and Q4 should be very strong, accounting for as much as 60% to 65% of revenue, while the remaining 35% to 40% of revenue will be split between two considerably smaller second and third quarters. This cadence is entirely being driven by the timing of mega project shipments and is another example of the lack of seasonality in our business. We are pleased that we ended 2020 at 69% gross margin, which is in the middle of the guidance we provided for the year. Despite losses due to manufacturing slowdowns early in the pandemic, we were able to claw back a good…

[Operator Instructions] Our first question comes from the line of Jason Bandel with Evercore ISI. Please proceed with your question.

Thanks. Hello, Bob, Joshua and Jim. My first question, can you talk more about your partnership with DuPont? How has the partnership formed? How do you see yourself going about marketing your combined expertise to customers? And are there other opportunities to partner in your wastewater initiatives to drive faster adoption?

Okay, thank you. The partnership is this it takes two to do a dance. You need a PX that can place higher pressures, but you also need a membrane that can withstand this higher pressure. So we come up with the ultra-high pressure PX and DuPont comes up with the next-generation membranes. So it’s a natural team. So, we do – we did join a webinar yesterday, and we will do more co-marketing everywhere that we can do. And we would also share our pipeline.

Got it. Okay. And then on the water side of the business, it sounds like you reiterated your growth targets for ‘21 and ‘22. Where do you see potential upside in ‘21 for water growth? I know Josh had talked about in his comments that OEM and aftermarket just at least stopped its decline. As the world starts to open up, do you see opportunities in OEM channel for growth? And I guess further to that point, we’ve seen many stimulus plans announced of course over the globe. Have you seen any that actually addressed water infrastructure that could possibly add to your underlying positive growth trends?

Josh?

Sure. So we are seeing – I mean, we’re unsure what will happen this year, obviously, due to COVID, how the OEM and aftermarkets will play out. We are seeing a stronger resurgence of aftermarket currently. So we think we’ve got some good potential to claw that back to more 2019 levels or so. OEM is a little less certain. We don’t think it’s going to fall anymore by any means, whether to grow or not is up to question for sure. And what was the second half of your question?

Yes. The second part was the – we’ve seen many stimulus plans actually be announced globally over the past year. Have you seen any specifically address water infrastructure?

Yes. I don’t think we’ve seen anything that specifically touches our business globally that I’m aware of at any right. I mean, with the exception of the fact that when you look at the large mega projects, obviously, those are being supported regardless of any of the economic downturns that may be occurring. Water is needed, and those projects are moving ahead as they were planned for the most part.

Yes. Makes sense. And then my last question I guess, for Josh, why do you feel like the timing is right here to start the share repurchase program? And I know you touched on it a little bit, but do you see yourself likely to use the authorization opportunistically all at once or maybe more likely over time? And maybe I missed this but is there an expiration for the authorization?

There is no expiration. We’ll do this over time. And the reason why we’re doing it today is because we see more certainty in our cash flows than we have in prior years, right. We have got a better sense of where we are headed. We are coming out of COVID. And so we’re more comfortable making this kind of commitment. And with a share buyback, we can manage through our day-to-day cash flow, right. So we are not – we can kind of handle that over the coming period if that makes sense.

Great, thanks for the help. I will turn it back.

Our next question comes from the line of Pavel Molchanov with Raymond James. Please proceed with your question.

Thanks for taking the question and congrats on the live well deployment. You talked throughout last year about making a final decision on VorTeq by the middle of 2021, so 3 months from now. Is that still the timetable that you are working towards in terms of yes or no on commercialization?

Yes. And we’ll give you much more clarity in 8 weeks at the next earnings call. Yes, we absolutely stick to that time line.

Okay. That’s clear. The timing of this first well deployment in early March, was that related at all to the recovery in the oil market that we have seen in the last 60 days or so?

Not really, no.

So what drove the timing?

The timing, you remember, a year ago, March, we were literally on a pad and hours from oil flow. And yes, market change stopped that. And in April, we did that again. But what we have learned, maybe the most difficult part of introducing a technology is to get somebody willing to try in the live well where they are pumping real commercial oil. And that has proven to be more difficult than we thought. But as we continue to work at it, continue to connect with customers, it finally clicked. So that’s the story.

Understood. And finally, when you talked about renaming the oil and gas segment to emerging technologies, should we assume that there will be other products, other adjacent industries included within that, not just oil and gas, in other words?

Well, actually, even in today’s call, we said in the emerging technology include the ultra-high pressure PX for water – wastewater treatment although financially we would report that as part of the water revenue. And we also talked about the new ability, we have proven that PX can push gas, and that opens up a lot of new markets and the first of which we are addressing is refrigeration market. They all come under the emerging technology. Of course, over time, when any one of the emerging technologies grow and into substantial revenue, we would separate out as another business unit to report. And hopefully, we have more emerging technology applications to take the place of the graduations, if you will.

Understood. Thank you very much.

[Operator Instructions] Our next question comes from the line of Nils Thommesen with Fearnley Securities. Please proceed with your question.

Good afternoon, gentlemen. I have a question on the DuPont partnership. You previously highlighted the total addressable market of $100 million in China and India. I was just wondering if this partnership has since highlighted some other markets outside of this or are these the markets you plan to approach together with DuPont now?

We – together, in fact, we are learning this market, as we just reported that the industrial wastewater market is emerging, evolving, partly driven by regulations, which basically forbid people to dump dirty water and damage the environment. So what we have said previously is we identified $100 million onetime market. It was just one of the initial subverticals within that vertical, if you will. But as I mentioned in my any projects now that waste industrial water actually covers from metals mining, to textile to tanning that’s measure from [indiscernible] and etcetera. And we continue to identify, to measure this market. For example, our first order from India was in the chemical industry and our first order from China was in the natural gas industry. So we don’t have a lot of data on how large this market is. And why we pushed to pick China and India is at the moment, the regulations are tightest in China and India, but we expect the rest of the world to follow.

Okay, great. And then just another question, on the last quarterly call, you mentioned some progress on your zero mix PX. Is this any way related to the PX you can apply for gas purposes or is this a different vertical?

Zero mix is not a vertical. Zero mix is enlarging the sandbox we can play in, where you must not have liquid seeping back and forth. And we will have new vertical applications as your mixing technology is complete. But for the moment, you know.

Okay, great. Thank you.

Although I’ve said it, pushing gas is also enlarging the sandbox, which we said it covers many sectors, but refrigeration and air conditioning are the initial new verticals that we can now address.

And our next question comes from the line of Tom Curran with B. Riley Securities. Please proceed with your question.

Hi, Bob. A few follow-ups on the VorTeq. First, is this multi-well pad where you are currently utilizing the VorTeq with one of the biggest independent oil producers, it sounds like it’s in the New Mexico side of the Delaware. Is it with Liberty?

Yes.

And then are you counting this as the first of the 2 to 3 live well fracs or the second? And do you already have the next one lined up? And if you do, is there anything about the outcome of this current job that will be determined if and when the next one moves forward?

Actually, we can’t just the New Mexico one as second. But as I mentioned, it is a multi-well pad. In fact, we move from pad to pad, and we expect to go by the time we finish maybe 50 to 100 stages. So that in itself is a multi life brand. We’re not staying on one on top of one fold and continue to pump. By the way, as of the end of day yesterday, we have done 25 stages. So in a way, we are fortunate with the tremendous interest shown by this largest independent oil producer that we are actually on motive fact, if you will.

Great. And then does the key technical challenge when it comes to getting the cartridge durability and lifespan to where you need it to be, does it remain – the total volume of frac sand that the cartridge can process before it needs to be repaired or replaced? And to the extent that does remain the defining technical issue, could you give us a rough estimate of how far along you think you are to solving, are you 50% of the way, 75%?

Actually, this is a new technology. So in some ways time until you – when you get into something entirely new, it’s not just for new for us, for our suppliers. Until you finish, you don’t know what is 100%. So it’s hard for me to say it’s 30% or 50%. We may be literally at 95%, but when you don’t finish that 5%, you could be just as well at 5% as 95% to go. But in 8 weeks, I can give you much more clarity. The cartridge life is the most important part of our costs. As I mentioned before, what is needed is to have validation on the value proposition, that is what the savings, not only savings, but the improvement in – on frac safeties, etcetera. That is what I call X but then what is the cost for us to provide the equipment as well as the service to allow the VorTeq to be part of the frac, that is why and X minus Y equal to Z that is the net contribution. And that we will give you a much better report in 8 weeks from now.

Understood. It makes sense. Thanks for doing the best you can as of now with those questions.

Thank you.

And with that, we reached the end of our question-and-answer session. And I would like to turn the call back over to Mr. Ballard for any closing comments.

Everyone thank you for joining us today. If helpful, you can find our prepared remarks on our Investor Relations website, and we look forward to speaking with you in 8 weeks’ time. Thank you.

This concludes today’s teleconference. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.