16/06/2023 - ERI - Energy Recovery Inc.: Prepared Remarks Q2 2022

ENERGY RECOVERY

Second Quarter 2022

Earnings Call

August 3, 2022

Opening Remarks - James Siccardi

Hello everyone, and welcome to Energy Recovery's 2022 second-quarter earnings 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, August 3, 2022 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.

Strategic and Commercial Update - Bob Mao

Introduction

Thank you, Jim, and thank you everyone for joining us.

We are all hearing a lot of negative global and domestic economic news. Inflation is high, there is war in Europe, and we may already be in a recession. Equity markets, though a little better recently, have fallen swifter than any time in decades. Yet, here at Energy Recovery, we continue to make substantial progress in all three of our business markets, despite this noise around us. Our growth targets remain intact and our optimism resilient.

I will remind you that, regardless of the domestic economic headwinds, more than 98% of our business is overseas. Despite high inflation, our profitability remains robust owing to the strength of our margins, reflected by the reputation and value creation of our PX technology. Despite supply chain disruptions, we continue manufacturing without pause because of our team's

forethought to build inventories well before supply chains were an issue. Despite turmoil in the financial markets, we maintain ample cash reserves. And, despite the rise in interest rates, our business, which currently has no reliance on debt, has not been directly impacted.

In our core market of desalination, we help provide water to millions of people worldwide. We believe this basic human need will largely weather current global economic uncertainty as it has in past years. The need for water in an increasingly water scarce world remains a strong motivator for investments in this sector.

As of today, we believe we remain on track in our desalination and industrial wastewater markets to meet our guidance of 25% revenue growth for 2022. Our mega project channel remains strong, and we are seeing a resurgence in our smaller OEM desalination projects from the Covid-related pent- up demand. In addition, increased global water scarcity is leading to a regulatory environment that is pushing filtration requirements of industrial wastewater.

In short, we feel we are well positioned today and are poised to execute on the strategy we have laid out ahead of us. Today, I will focus our discussion on industrial wastewater and CO2, and Josh will provide you some more specific updates about how the desalination business is evolving this year.

Industrial Wastewater

With that let me move on to industrial wastewater. As of the end of the second quarter, we have already exceeded 2021 revenue by 60% and are well on

our way to meeting our forecast of three million dollars in industrial wastewater revenue for fiscal year 2022.

I mentioned on our last call that we were collecting performance data from our first commissioned industrial wastewater plants. Results from the field show that our new Ultra PX is achieving efficiencies of at least 93% and we are generating the savings for our customers that we promised.

For example, at one lithium battery plant, our technology is saving the facility roughly $150 thousand in electricity costs per year, based on 2021 electricity cost levels, with an estimated one-year payback. At a textile plant in India, a $500 thousand investment in our technologies is netting an estimated $500 thousand per year in savings, again based on 2021 electricity costs. This translates into value creation of 10-15x the initial investment over the life of these wastewater plants. We expect to see similar savings results in other wastewater verticals as well. With rising energy costs, we expect these savings to increase and accelerate in the coming years. We believe these real-world savings will help further prove the value proposition of reverse osmosis processes in industrial wastewater, which of course are driven by the energy savings provided by our products.

We are now able to use this data to educate and further penetrate the markets where we have a presence. For example, we received our first award within the lithium battery recycling market in China during the second quarter.

This installation will give us our first reference site in this lithium sub-vertical. We have now penetrated three sub-verticals of the lithium-ion battery value chain - namely: lithium mining, battery manufacturing, and now recycling. This is a

significant milestone for us as we continue to build volume in this space, especially given the significant position China plays in this global market.

We have previously spoken about the potential of the overall lithium market and our estimated TAM of likely more than $200 million this decade. Because of the global urgency to expand lithium capacity, our teams will continue to prioritize this market; and have already identified numerous projects in various stages of planning, between now and 2030.

Another industry where we have had early success is Textiles. Water is used in multiple stages of the textile manufacturing process and the industry overall generates nearly 5 billion tons of wastewater per year. Textiles is one of the top three water-wasting industries in both China and India. Combined, the two countries discharge over 2.5 billion tons of wastewater every year.

Today, the Textile industry is looking for ways to reduce waste effluent and to re-use as much wastewater as possible for a variety of reasons including regulatory pressures, rising costs and limited availability of fresh water in an increasingly more water scarce world, and the fact that many chemicals in the textiles process can be recycled and re-used or sold.

We have had initial success in textiles, with approximately 15% of our early sales occurring within this industry. We currently estimate a potential TAM, in China and India alone, of about $75 million today, growing to over $100 million by 2026 and $140 million by the end of the decade. Importantly, India has announced intentions to double the size of their textile output by 2026 and is investing in textile hubs with centralized wastewater treatment centers. This