Greetings. Welcome to Energy Recovery third quarter 2021 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.

Also please note, the company's prepared remarks can be found on the company's website, ir.energyrecovery.com 15 minutes after the hour. I will now turn the conference over to your host, Jim Siccardi, Vice President of Investor Relations. You may begin..

Good afternoon everyone. And welcome to Energy Recovery's 2021 third quarter conference call. My name is Jim Siccardi, Vice President of Investor Relations at Energy Recovery. 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, November 4, 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..

First, we have developed a roadmap of our PX G development to address the total TAM and beyond. This includes varying sizes of our PX G, which will allow us to deploy in different sized systems than we are targeting today. We will also invest in making our PX G even more efficient and more cost effective, as we expand.

Second, starting in 2022, we will build out our commercial team, starting with sales and technical support to work with our OEM partners, engineer contractors and end customers. Finally, we will continue to invest in our marketing outreach to educate the industry on the value of the PX G and drive industry interest.

We have made solid progress and look forward to updating you further next year. Now, onto VorTeq. As we have stated over the last several quarters, while we have proven the VorTeq can effectively perform without interrupting or impeding normal frac, we must extend cartridge life to commercialize.

We are actively testing potential solutions, but we have no progress updates at this time. We will refrain from further comment until we are ready to definitively commercialize or halt investment in this product. In the meantime, while we have not ceased activities, we are further reducing investments, which Josh will address.

In conclusion, climate disruption is an ongoing reality. It faces us in the news every day. And we are embracing the challenge this reality poses. Our technology is not tackling just one area, but now multiple aspects of the environmental impact the change is causing.

We started as a means to help millions of people worldwide access more affordable drinking water has evolved into removing toxins from industrial wastewater and now providing the world a more economical means to transition from harmful HFCs to more climate-friendly natural refrigerants.

Addressing these global environmental concerns head-on is driving our growth and is the backbone behind our updated revenue outlook. We are opening up new markets where the PX is delivering value similar to what we have done in desalination.

With that, I will turn the call over to Josh to discuss the financial section and our revenue targets for the next five years.

Josh?.

First, we can provide more flexibility in shipping to our customers to manage delays that could be caused by port congestion or lack of containers. And second, we are better protected against disruption in the event of a COVID outbreak at one of our plants.

To be clear, we have not experienced a COVID outbreak at any of our facilities due to strong safety protocols, a generally well-spaced manufacturing plant and high vaccination rates among employees.

I should note that we are experiencing labor and energy-related inflation like everyone else and that is having some downward effects on margin, which you are seeing reflected in our guidance. We are actively working today to mitigate future inflationary effects as we look out to 2023 and will continue to update you. With that, we can move to Q&A.

Thank you..

[Operator Instructions]. Our first question is from Wally Walker with Hana Road Capital. Please proceed with your question..

Yes. Thanks for taking my question and thanks for also giving aggressive guidelines for future revenue with a roadmap on how you going to get there. That's very helpful and much appreciated. It wasn't that long ago you guys were talking about commercializing your wastewater business for the first time we heard about.

And then partnering with DuPont who, best I can tell, became a real good advocate for your PX products.

As now you are looking it another huge TAM with your refrigeration, you anticipate another partnership with other large household name that will help you educate the public as you stated?.

Wally, thank you. This is Bob. Yes, as you said, this is a large industry with many players. We are in discussions with potential partners at both the contactors level and OEM level. And we have a funnel of potential partners in discussions. And we are excited about this new market..

Yes. And Bob, thank you.

Anything you can add to just the recent announcement about your first installation in California?.

Okay. As I said in my remarks as well as Josh's that the switch came out of HFC, there is no choice. We have the same results. But switching to natural refrigerants, particularly the most obvious best on CO2 for lots of considerations is painful in that it burns more electricity. And here comes out PX to save the day.

And that's why we are not surprised that the most enthusiastic response we get from the market place is the end customers as this first contract shows..

Thank you. Continued good luck..

Thank you..

Thanks Wally..

[Operator Instructions]. Our next question is from Paul Sonz with Sonz Partners. Please proceed with your question..

Hi. I have one housekeeping question and then two questions to go to through the new refrigeration business. The housekeeping question is, after the stock buybacks, could you tell me what the current fully diluted share count is including our issues and options..

We roughly repurchase accumulatively just shy of, this is Josh by the way, a million shares. And so throughout the year, we are still in the high, I don't have the exact number in front of me, but we are probably around 58 million shares, give or take..

Good. And the second part on the CO 2 system. Obviously, before the contractors and the OEMs get involved, the chain itself, the grocery store chains must see the benefit of that product. And so what I wondered is, is two things.

One is, how long do you think it will take before a grocery store management feels comfortable in changing the refrigeration system? And the second part of that question is, once they decide that, yes, they want to go ahead with this, does it require them to put in new totally change out their refrigeration system or is this something that they can be sort of post buy it and can you just we rehab the system that they have by bolting your system, putting your system on to their current refrigeration system?.

Well, first of all, I will answer it this way. To switch from HFC to CO2, there is major changes because you are dealing with a much higher pressure. And that is why the CapEx and OpEx, both have impacts, okay. And these higher pressures drops, burns more energy and that's where our PX saving the energy can reduce that pain.

But because of regulations which is fine as they are trying to save the earth from further warming, acceleration of warming. And so switching to natural refrigerants and most prominently CO2 is not a choice. It's something that must be done.

And it is being done, particularly in Europe and now we think with the new EPA mandates will also accelerate in the U.S. So for those systems that's already switched over to CO2, we can just bolt-on our system to existing ones. However that is not what we call PX eccentric.

In other words, when our system is designed from the beginning, the fact that we save energy we should impact the other parts of the refrigeration system. For example, we should not need as big volume of compressors. We are impacting the evaporation stage and we are impacting their valve stage.

So a PC centric system, as we just said, will render both CapEx and OpEx savings for the end user. And also, even in this first contract, we are talking with the contractors because it is the contractors who design the system for the end user. Of course, at the end of the day we save money for the en user..

And how long do you think it would take up? Once you put a demonstration project in for a chain how long do you think it takes before management feels comfortable in going ahead with this, with your product and this change?.

First of all, the first contract we have, we just mentioned, it is a commercial contract. So for that one, the management already decided to go forward..

I see. I thought it was a demonstration project..

No. It is a commercial contract..

Okay..

But we are going to accumulate solid data and the management agrees with us that we will present these data to the industry. And we expect the pace to accelerate as more end users, contractors realize the savings. And so it is a commercial contract. It is not a demonstration. It is not a beta test..

Great. All right. Thank you very much..

Thanks Paul. Paul, we have got a quick update on the shares. As of the end of October with the share buyback, we have 58.8 million fully diluted shares in September and round about 56.7 million currently, give or take. Hope that's helpful..

Our next question is from Robert Smith with Center for Performance Investing. Please proceed with your question..

Good afternoon. Thanks for taking my question.

Bob, is it still your intention to enter new areas every two years with a new product? So that would imply through 2026, two additional areas?.

Robert, what we said is not that we enter new areas every two years, okay. Actually of course we hope we enter new areas quite regularly quite often.

What we have said is that we are bringing a financial discipline to our new development efforts which is, I repeat, that we start a project we must clear all technical hurdles within the first 12 months of release and then within the next 12 months we must commercialize that and within the third 12 months we must at least [indiscernible].

And also we said we would only embark on projects that can gain at least 50% of gross margin, protest our brand equity as being a high margin business..

Thanks for the clarification..

Look, we have commercialized the industrial wastewater in fact in about six months after we started the project. And this refrigeration we started about March, April the year before, which means we are well ahead of the March, April 2022 timeline for commercialization. We have this commercialized..

But again, in projecting, call it, to 2026, there's no accounting for potential new product development?.

No. Josh has specifically mentioned today, we are talking about desalination, we are talking about industrial wastewater and we are talking about the refrigeration only..

Thank you again..

Thank you Robert..

We have reached the end of the question-and-answer session and I will now turn the call the call over to Jim Siccardi for closing remarks..

Thank you everyone for joining us today. Please have a good evening..

This concludes today's conference and you may disconnect your lines at this time. Thank you..