Energy Recovery, Inc. (ERII) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Energy Recovery Inc.'s 2021 Annual Stockholders' Meeting. I would like to introduce you to Robert Mao, Chairman of the Board and President and Chief Executive Officer of Energy Recovery, Inc. Mr. Mao, you may begin.

I want to welcome you to Energy Recovery's 2021 Annual Meeting of Shareholders. We are pleased that you are with us. I will act as Chairperson of the meeting. William Yeung, our Chief Legal Officer, will act as Secretary of the meeting. At this time, I call the meeting to order. There are 5 items on today's agenda: one, to approve an amendment to the company's Amended and Restated Certificate of Incorporation to declassify our Board over a 3-year phaseout period; two, to elect 1 Class I directors to the company's Board of Directors; three, to ratify the appointment of Deloitte & Touche LLP as the independent registered public accounting firm for the company for the current fiscal year ending December 31, 2021; four, to hold an advisory vote on the 2020 compensation of the executive officers named in the summary compensation table of our 2021 proxy statement; and five, to transact such business as may be properly come before the meeting. After the conclusion of this stockholders' meeting, I will provide a brief report on the company. Before we begin, I would like to introduce guests who are present today. Our Board of Directors joining our meeting today include: Pam Tondreau, our Lead Independent Director; Alex Buehler; Olav Fjell; Sherif Foda; and Arve Hanstveit. Also present at today's meeting are Jean-Denis Ncho-Oguie and Bradley Poole of the Deloitte & Touche LLP, auditors of the company; Andrew Thorpe of Mintz, Levin, our outside legal counsel to the company; and [ Cassie Weedon ], the Independent Elections Inspector appointed by our Board and retained through Broadridge Investor Communications Solutions, Inc. In advance of the meeting, Ms. Weedon took the oath as Inspector of the Election. At this time, I will turn the meeting to William to begin the formal matters to be addressed at the meeting.

Thank you, Bob. Before we begin, we want to state that we are excited, our annual stockholder meeting is being conducted virtually through a live audio webcast. By holding a virtual meeting, we are enabling stockholders from around the world to attend and participate in our annual meeting, which allows for increased access and participation at no cost, regardless of a stockholder's size, resources or physical location. We have also adopted a series of safeguards that we believe provide all stockholders the same rights and opportunities to participate in this meeting as they would at an in-person meeting. Stockholders logged into the meeting website will be able to submit questions by typing them into the text box on the meeting website through the end of the meeting. The company will post all of the questions and answers to those questions on our Investor Relations site as soon as practicable after the meeting. We are conducting this meeting in accordance with our bylaws and the meeting's rules of conduct and procedures. The meeting rules and agenda are available on the meeting website. As a reminder, stockholders attending the virtual meeting can vote their shares online through the closing of the polls by logging into the meeting website as a stockholder and clicking the Vote Here button on their screen. If you have previously voted by proxy and do not wish to change your vote, your vote will be cast as you previously instructed and no further action is required. Finally, please note that the meeting is being recorded and will be available for replay on the meeting website for a period of 90 days. The Board of Directors set April 12, 2021, as date of record for the stockholder meeting. A copy of our stock register as of April 12, 2021, is available on the meeting website. We have received the affidavit of distribution of Broadridge Financial Solutions, which indicates that the notice of meeting and accompanying proxy materials and annual report were mailed to stockholders of record on the record date for this meeting. In addition, I have been advised by Ms. Weedon, the Inspector of Elections, that at least a majority of the issued and outstanding shares entitled to vote is represented in person or by proxy at today's meeting. Since the majority of the shares are represented here today, a quorum is present, the meeting is duly constituted and the business of the meeting may proceed. The polls are currently open. The polls will close after all proposals are introduced. [Voting]

There are 4 items of business to be voted at this meeting. The first proposal concerns the proposal to amend the company's Amended and Restated Certificate of Incorporation to affect a phased declassification of the Board of Directors over the next 3 years. The second proposal concerns the election of directors. The Board of Directors have nominated Olav Fjell for election to the Board of Directors to serve until the Annual Meeting of Stockholders in 2024 or, if proposal #1 is approved, the Annual Meeting of Stockholders in 2022. The third proposal concerns the ratification of the appointment of Deloitte & Touche LLP as the independent registered public accounting firm for the company for our current fiscal year ending December 31, 2021. Proposal #4 is an advisory vote on the compensation of executive officers named in the summary compensation table of our proxy statement. That concludes the presentation of the items of business that you've been asked to vote on at today's meetings. The polls are now closed. Before this meeting, I have received the preliminary voting results from the Inspector of Elections based on proxies received immediately prior to today's meeting. The preliminary voting results are as follows: Proposal #1, the proposal to amend the company's Amended and Restated Certificate of Incorporation has been approved. Proposal #2, Mr. Fjell has been duly elected as a Director of the company. Proposal #3, the appointment of Deloitte & Touche LLP as our independent auditor for 2021 has been ratified. Proposal #4, the compensation of our named executive officers has been approved by an advisory vote. All votes are subject to final count and will be certified by the Inspector of Elections. We will report the final vote results on a Form 8-K filed with the SEC within 4 business days from today's meeting. There being no further business to come before this meeting, this 2021 Annual Meeting of Stockholders of Energy Recovery, Inc. is now adjourned. Mr. Mao will now provide a brief report on the company. As a reminder, today's presentation may contain forward-looking statements that are based on our current expectations, forecasts and assumptions that involve risks and uncertainties. Actual results may differ materially from these forward-looking statements due to various risks and uncertainties about our business, which are described in our filings with the Securities and Exchange Commission, which includes our annual report on Form 10-K and subsequently quarterly reports on Form 10-Q. We assume no obligation to update any forward-looking statements. And with that, let me turn the call over back to Bob.

I would like to begin my remarks by thanking O. P. Lorentzen, who is retiring from the Board of Directors effective today. O. P. has spent much of the past decade as our single largest shareholder and Board member. O. P.'s long-standing presence on the Board will be missed. We wish O. P. well and look forward to communicating with him in the future in his capacity as a shareholder. When I spoke with you at our last AGM, we were adjusting to our new normal in the pandemic. We then proceeded to set a record new annual revenue record in 2020 in our missile business; launched our inaugural ESG report, which led to an A rating with MSCI, and ultimately, inclusion into MSCI ESG's [ forecast ] Leaders Index. Additionally, we were recognized by Forbes IR Magazine and the Corporate Register Reporting Awards for our efforts in a variety of areas. And we more than doubled our valuation to over $1 billion. We also instilled new discipline into our R&D efforts, successfully launched our Ultra PX for industrial wastewater market, made substantive progress with the VorTeq, and expanded the PX platform with the successful validation of our PX G1300 for refrigeration and the processing of CO2 gas. I will say that we adjusted to the new normal well. So as we look forward, what are we trying to achieve at ERI? Our desalination business is strong today, but it is important that we diversify and grow ERI in new ways. We're targeting significant growth through this decade from our base business while adding to this space, with the introduction of new sustainable technology based on our Pressure Exchanger platform technology. First, increasing global water demand due to climate change, combined with the technological conversion, is driving a secular shift in seawater reverse osmosis desalination demand. Second, industrial wastewater, where we are receiving our third purchasing order in yet a third industry, offers the potential to provide additional material revenue stream within the next few years. Third, made significant progress with the VorTeq, proving our technology at multiple live well tests. And finally, we believe our new PX G1300 can make existing CO2 refrigeration solution vastly more efficient as the industry transitions away from refrigerants harmful to our climate due to increased regulation. All of these new markets hold great potential. And frankly, our PX can be applied to many new industries. Our [ vasetope ] and sustainable technology can play a critical role in reducing the carbon footprint of industrial companies globally at this critical time for our world. With the technology as valuable and unique as the PX, the question we must answer is, how can we best leverage our IP to create value for our stakeholders in the least amount of time and in a disciplined manner? As a small company, we know we cannot go in alone in every industry. In some industries, we will find partners, explore joint ventures or perhaps may simply look to license our PX IP. As we look to the future, we must settle on a strategy that accelerates our growth, increase ERI's value and offer more industries the opportunity to avail themselves of our PX. As we accelerate growth, we are committed to doing so in a disciplined manner while still providing our new business the support they need to be successful. Our gross margin are such that we shall be able to invest in the right people and activities to grow our businesses while also reducing our PX -- OpEx, reducing our OpEx as a percentage of revenue. We must focus on financial hurdles and margin, but also adhere to strict timing of technology viability and commercial royalty. This, too, is part of our evolution as a company. We have much value yet to uncover at Energy Recovery. It is an exciting time to be here and exactly the potential that I saw when I accepted the permanent CEO position last spring. As I said last year, we are not a water company, not a oil and gas company. We are a PX company. Our PX platform offers our shareholders a disciplined growth platform from which we can provide benefits to both the environment and the wallet. I am proud of what we accomplished this past year, but also laser-focused on continuing our evolution and delivering the results that you, our shareholders, should expect from Energy Recovery. Let me now turn to VorTeq. Last year, we committed to making and communicating our decision to commercialize or shut down VorTeq by mid-2021. Since then, we face challenges like testing the VorTeq due to the pandemic. But regardless, we made significant progress along the way. We have proven the technology works. Today, the final gating factor to commercialization is the cartridge life itself, which drives our profitability as a firm. While we have not cleared our hurdle on cartridge life, as of this call, we optimistically believe that we will be able to do so and that there is a path to commercializing the VorTeq. We have also received positive commentary from the market as to the strong ESG aspect of our technology, its ability to increase safety in operations and reduce considerable waste, all of which drive value above and beyond that of reducing repairs and maintenance, which had solely defined our value proposition in prior years. We are at another frac site as we speak and have another scheduled in July to test cartridge live enhancements. In parallel, we are in discussion with our partners on how to effectively scale commercialization efforts through a variety of models. We will be in a better position at our next earnings call in early August to discuss our go-to-market strategy and timing.

That concludes the Energy Recovery 2021 Annual Meeting of Stockholders. Thank you, and you have a nice day.