Greetings, and welcome to the Energy Recovery Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce to you, James Siccardi, VP of Investor Relations. Thank you, James. You may begin.

Hello everyone, and welcome to Energy Recovery’s 2023 second quarter 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, 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, August 2, 2023, 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 today. First, as usual, let me start with our core Water business. Within desalination, we have now signed all mega projects that we targeted to ship this year and are now filling out our OEM and aftermarket channels, which happen closer to their shipment date. We are well-positioned for the remainder of this year, and Josh will give you more specifics on these numbers. In wastewater, our overall signed contracts and pipelines remain robust, and we now believe we should land at the mid to high end of our $6 million to $8 million guidance by the end of the year. The team is most importantly focused on where we need to invest to deliver another doubling of revenue in 2024. We have discussed our intent to build out this team in the regions in which we operate, and this effort continues at a quickening pace as we enter the second half of 2023. In June, we announced our expanded Ultra PX product series in a broad range from smaller flows as low as 10 gallons per minute, up to 250 gallons per minute under operating pressures as high as 120 bar, or 1740 PSI. Additionally, our Low Pressure PX enables us to provide pressure exchanger technologies in all trains of a plant – from low pressures to ultra-high pressures. We will update you more on our plans for wastewater at our next earnings call in November, but our progress continues to yield confidence in not only achieving our 2023 wastewater guidance, but also our 2026 revenue targets in this segment. As we look further out, we continue to pay attention to specific regions globally that may have potential for Energy Recovery in the coming years. Last quarter, we spoke…

Good afternoon, everyone. We generated revenue of $20.7 million this quarter, which was within our guidance of $20 million to $25 million. Note that we actually shipped out over $26 million in product during the quarter, but due to GAAP revenue recognition rules nearly $6 million of revenue of from a specific mega project shipment will be recognized early in the third quarter. Therefore, we had a strong quarter based on our expectations, which helps provide confidence that we will continue to meet our revenue targets this year. However, this delay in recognizing that mega project did cause an operating loss in the second quarter of about $2.5 million. We are confident that our overall profitability will remain in line for the year as we begin to realize a larger number of mega project shipments in the third and fourth quarters. We recognized $600,000 in wastewater revenue, for a total of $2 million year to date. While we have only achieved a portion of our target for the year, between signed contracts and our pipeline we are comfortable that we will achieve our wastewater targets this year as Bob described. In addition, we recognized roughly $100,000 in CO2 revenue this quarter. Although we are showing a negative margin in our emerging technology segment, this is related to the timing of the GAAP recognition of expenses related to this revenue, and we should see this normalize in the third quarter. The balance of revenue in the emerging technology segment was in oil & gas, largely related to replacement parts of projects already in operation from several years ago. As we look towards the third quarter, you can expect to see growth continue to rise but with some short-term risk. Our current revenue target range for the third quarter is quite wide,…

Thank you. [Operator Instructions] And the first question comes from the line of Ryan Pfingst with B. Riley Securities. Please proceed with your question.

Hey, good afternoon, guys.

Hi, Ryan Pfingst.

So the risk to 2024 that we spoke about on the last call, can you give an update on the potential tendering delays there? I think it was three or four projects that you called out on the 1Q call?

Yes, in 2024, we’re really looking at it as we did last quarter. So it’s a little early for us to really give any definitive numbers for next year, but we’re seeing similar risk in those projects that we discussed last quarter, haven’t worked themselves out yet.

Okay. And then on the CO2 training center in California, is that something that you’re creating with an OEM or an existing place that you’re just going to be able to show – showcase the technology?

Our understanding it is a new location opened – to be opened soon by our OEM partner and since PX G is part of the newer generation refrigeration rack offer, so we are a partner in that new training center.

Okay, got it. And maybe just to look a little further out, can you remind us what the timeline might be to build another manufacturing site and what the initial thoughts on a capital outlay could look like?

Yes, Ryan, when we think about a manufacturing site, we’re actually looking to first maximize everything we can produce out of our two existing facilities in California. If we hit the low end of our CO2 range, the 100 million, call it sub 200 million range of CO2. We think we can probably produce most of that out of our existing facilities and just add incremental new CapEx [indiscernible] and so forth to support that. So that CapEx wouldn’t be so great either if we hit toward the upper end call $200 million or above, give or take, or as we look a couple years out past 2026 is when we would certainly need to build a new facility. And we’ve spoken generally about for a new facility to add call it somewhere between 7,000 to 10,000 PX G units of capacity is roughly around $20 million, $15 million to $25 million is usually the range I give depending how much extra space we build out and so forth, and where we do it. So it’s not a huge outlay of cash. But it’ll be later in the cycle than what we originally planned, which is good news.

Also, I might add is this pushing out of the need to add CapEx is also a result of our continued manufacturing process improvement and optimization. So we can push through more products through the same capacity.

Okay. Got it. And then maybe just one final one to touch on the second half here. I understand it, it’s a timing issue for 3Q in terms of when you might be shipping out for some of the mega projects but you’re confident in the full year. Can you just talk about what the main risks are? Are you actually seeing delays in the projects? Is it just your customers waiting on other pieces? Can you just give a little more color around kind of the risks to 3Q and then especially 4Q?

Yes. I’d say, well, for 3Q, it is very specifically a few of these projects and it’s just – it is typical operational issues we deal with whether it’s getting paperwork signed or getting witness testing completed. Sometimes folks like to come witness test and see the quality of the products. Those kind of just kind of operational give and takes that occur during the usual process. As we look out at the whole year, there’s nothing in particular that’s telling us we’re going to have delays. I’m highlighting the risk because when you’re talking about $60 million in three months, it’s just a lot. It’s in the last couple – few months of the year. And so if you have any delays such as we’re talking about in Q3 that pushes it out to the next year, it’s entirely unconcerning to us. It doesn’t mean anything more cash flow perspective. We don’t expect anything to be canceled this year like occurred last year. None of that’s going on, it’s just a heavy quarter. It’s a lot of mega projects. Mega projects are over $40 million of that $60 million, which is good. So we feel pretty confident, but there’s risk when you load that much in the three months.

Got it. That’s helpful. Thanks for the answers, guys.

You bet.

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

Thanks for taking the question. I was fascinated that you started the remarks with Latin America. When I look at your 10-K for 2022, the entire Western Hemisphere was only $8 million of revenue. And you guys got $8 million of desalination contracts from Chile alone this past March. So is there kind of momentum in the Latin American market that you guys are observing and anything outside of Chile that you can point to?

We already mentioned – yes, we do see new momentum coming out in that area, specifically, we mentioned here in Mexico and as well as Argentina. So we think this whole region is moving and will constitute percentage wise, a larger percentage in 24.

Yes. And we’re seeing about this year, last year we did in Americas, roughly $8.5 million or so. And we’re seeing not quite a doubling of that potentially this year, if all those projects deliver as we’re expecting. So it’s a pretty significant increase. It’s still a smaller part of our overall revenue, but growing for sure.

Okay. On the CO2 $100,000 in Q1 that built up to $300,000 in Q2, are you close to a point where you might begin to have kind of decent visibility and perhaps start getting financial guidance for that revenue line?

We’ll do that, as we said, we’ll do that in the November earning call.

Right. But for, I guess, in 2023, should we assume what $1 million total for that for the year?

Probably none.

Okay. Okay. Last question. It’s been a while since we’ve talked about kind of M&A opportunities you still have about a $100 million of cash on the balance sheet. I’m curious if there are any kind of adjacencies that perhaps you can look to fill through a bolt-on acquisition?

We always look for M&A opportunities, but we – as we also touched upon before that we also want to protect our high margin brand equity. So that puts a – you would say a floor on what kind of M&A when may be looking at. As of this moment, while we are always on the watch out, we don’t really have anything close enough to even mention about it. At that two development, we’re pretty focused on delivering what we’ve got, so we’re not spending a lot of time on that. We got a lot on our plate currently making sure we get CO2 and wastewater up and running real fast.

Understood. Thank you guys.

Thanks, Pavel.

[Operator Instructions] At this time, I’m not seeing any questions. I’d like to pass it back over to James for any closing remarks.

Thank you everyone for joining us this evening. We look forward to speaking with you on November 1. Take care.

Ladies and gentlemen, that does conclude today’s teleconference. You may disconnect your line at your time. Thank you for your participation and have a great day.