At first, a water separator is used to remove the big drops out of the system. Then the air will go through the compressed air dryer which will, with a dewpoint of about 3 degrees Celsius, remove the leftover moisture. You can compare this to a refrigerator.
The compressed air now has a humidity level that is 100% saturated at a certain temperature (pressure dew point). If the temperature throughout the compressed air system decreases, for example when the compressed air line runs outside of the system, condensation can occur again.