Consolidated Water Co. Ltd. (NASDAQ:CWCO) Q3 2022 Earnings Call Transcript
Consolidated Water Co. Ltd. (NASDAQ:CWCO) Q3 2022 Earnings Call Transcript November 15, 2022
Consolidated Water Co. Ltd. misses on earnings expectations. Reported EPS is $0.02 EPS, expectations were $0.17.
Operator: Good morning, and thank you for joining us today to discuss Consolidated Water Company's Third Quarter 2022 Results. Hosting the call today is the Chief Executive Officer of Consolidated Water Company, Rick McTaggart; and the company's Chief Financial Officer, David Sasnett. Following their remarks, we will open the call to your questions. Before we conclude today's call, I'll provide some important cautions regarding the forward-looking statements made by management during the call. I'd like to remind everyone that today's call is being recorded, and it will be made available for telecom replay per the instructions in yesterday's press release, which is available in the Investor Relations section of the company's website. Now I'd like to turn the call over to Consolidated Water Company's CEO, Rick McTaggart. Sir, please go ahead.
Photo by RephiLe water on Unsplash
Rick McTaggart: Thank you, Joe. Good morning, everyone. Thanks for joining us today. As you saw in our earnings release issued yesterday, we reported a 53% increase in our revenues for the third quarter of 2022, reflecting revenue increases in all four of our business segments. However, certain G&A expenses increased last quarter, which impacted our net income. We believe that last quarter's higher G&A expenses and flat net income performance are not indicative of what investors should expect in upcoming quarters. David will provide an explanation of these G&A expenses later in the call. Our retail water revenues benefited from a 14% increase in the volume of water sold in Grand Cayman due to the continued return of tourist activity to the Cayman Islands.
Our Services segment revenue increased by $5.5 million with most of the increase resulting from progress on PERC Water's previously announced contract for the construction of an $82 million advanced water treatment plant in Goodyear, Arizona. This Arizona project is now well underway and progressing as expected and we anticipate recognizing significant additional revenue from this project in the fourth quarter and in 2023. Also in Q3, we completed the design and preliminary permitting activities for the new desalination plant we are constructing on Grand Cayman pursuant to the 10-year design-build-operate contract that we signed with the Water Authority of the Cayman Islands. The revenue we recognized on this contract was minimal in Q3 during the design and permitting phase of the project, but construction activity is now underway so we will recognize significant additional revenue on this contract beginning in Q4.
Before getting into our progress with these major projects and our outlook for the rest of the year and into 2023, I would like to turn the call over to our CFO, David Sasnett, who will take us through the financial details for the quarter. Mr. Sasnett?
David Sasnett : Thanks, Rick, and good morning, everyone. Yesterday, we issued our earnings release for the third quarter of 2022, and you can find it in the Investors section of our website. As Rick mentioned, we reported revenue of $25.1 million in the third quarter, which is an increase of 53% from the third quarter of last year. This growth reflects increases of $1 million in our Retail segment revenue, $1.8 million in our Bulk segment revenue, $5.5 million in our Services segment revenue and $291,000 in additional manufacturing segment revenue. The increase in our retail revenue was due to the improvement in tourist activity in the Cayman Islands. We're up 14% in the volume of orders we sold for the third quarter of this year compared to last year.
And our retail revenue also increased as a result of higher energy costs that increased the energy pass-through component of our water rates as well as a more favorable rate mix. As much of the increase in sales volume for Cayman Water was generated by tourist-related properties, and these such properties pay a higher per gallon rate than our residential customers. Our bulk segment revenue increased and this increase was attributable to an energy -- increase in the energy cost for CW-Bahamas. These energy costs increased the pass-through component of CW-Bahamas rates. The increase in our Services segment revenue was due to increases in both plant design and construction revenue and operating and maintenance revenue. Most of our services revenue increase in the quarter resulted from PERC's new contract with Liberty Utilities design and constructed an advanced water treatment plant in Goodyear, Arizona.
But I would like to point out that even though we started work on this contract this quarter, the amount of revenue that we recognized on the Liberty Utilities contract was really small relative to what we expect to recognize in future quarters. The increase in manufacturing segment revenue was due to slightly higher project activity. Our gross profit for the third quarter of 2022 increased 20% to $6.8 million from the same period last year, while gross margin decreased 7.4 percentage points to 27.3% due to a change in the relative segment revenue mix. Net income from continuing operations attributable to Consolidated Water stockholders for the third quarter of 2022 totaled $824,000 or $0.05 per share. This compares to net income of $1.4 million or $0.09 per basic and diluted share for the third quarter of last year.
This decrease in our net income from continuing operations this quarter as compared to the same quarter last year was attributable to three primary factors: Number one, higher repairs and maintenance expenses for our Bahamas operations. These were up about $361,000. We incurred these types of expenses intermittently. So they can have a significant impact on any one quarter's results as they had in this quarter. We also recognized a $247,000 loss on the revaluation of the put/call options that we issued or acquired in connection with the acquisition of PERC years ago. It's important to note that we exercised our call option to purchase the other 39% of PERC's shares in October of this year. And the third factor that created a decrease in our net income were increased G&A expenses in various categories.
Most notably, increased bonus accruals arising from the improved financial performance year-to-date for the company as compared to last year, higher employee salaries due to the need to give pay raises and bank charges related to the transfer of some of our profits from our Bahamas subsidiary to the Cayman Islands. I want to point out that our bonus accruals for our management are based upon fiscal year financial performance metrics for the company. For the first six months of this year, we accrued bonuses at lower amounts based upon our initial expectations of year-end results. Once we obtain the Liberty Utilities and Red Gate contracts, our projected financial results for 2022 increased substantially. Thus, we were required to record a cumulative catch-up bonus accrual.
And I want to point out that we also incurred higher business development expenses in professional fees this quarter relating to our pursuit of new business. And in general, inflation has increased most of our G&A expenses. Our net income attributable to stockholders that includes discontinued operations was $318,000 or $0.02 per basic and fully diluted share. This compares to net income of $286,000 or $0.02 per basic and fully diluted share for the third quarter of 2021. Now turning to our financial condition and our balance sheet. Our cash equivalents totaled $51.1 million as of September 30, 2022. This reflects an increase of $2 million from the $49.1 million as of June 30 of this year, and a $10.4 million increase in cash and cash equivalents year-to-date.
This increase was due to cash generated from operating activities, which were almost $16 million for the first nine months of this year. As of September 30, our working capital totaled $71.1 million, and we still only have debt at $200,000, our stockholders' equity totaled $158.8 million. As of September 30, our projected liquidity requirements for the balance of the year include capital expenditures for existing operations and plant construction of approximately $6 million. This construction amount includes the $800,000 for the replacement of our West Bay seawater desalination plant on Grand Cayman and approximately $2.4 million for the construction of the water authority's new desalination plant under our recently awarded contract. As I mentioned earlier, in October, we exercised our option to purchase the remaining 39% minority interest in PERC.
So our liquidity requirements will also include the funds necessary to complete this purchase. For purchase price for PERC, the minority interest will be based upon a third-party valuation, which is presently underway. We paid approximately $1.4 million in dividends in October this year. Our future liquidity requirements will also include any future dividends declared by our Board. And during the quarter, we obtained a $10 million revolving credit line with Scotiabank in the Cayman Islands. This line was obtained to assist us with some of our short-term financing and working capital needs. However, to date, we have not utilized any of the borrowings under this line. So this completes our financial summary for the quarter. And with that, I'd like to turn things back over to Rick.
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Rick McTaggart : Thanks, David. I'd like to talk a bit more about our business segments and major projects. Looking at our retail water operations in Grand Cayman, we are -- we were pleasantly surprised by the rapid return of tourism to the island. In March of this year, several major airlines resume their flights to the island and cruise ships and thousands of passengers will welcome back to port. In August, all COVID-19-related restrictions for entry to the Cayman Islands were lifted by the government. And this easing of restrictions has positively impacted tourism here in Grand Cayman. David and I are here this week in Grand Cayman and its sure looks like a lot of tourist activity around the hotels are full. So we're very pleased to see what's happening here.
We are encouraged by recent indications that the 2023 tour season will return to more historical levels on Grand Cayman. At the beginning of this month, we saw the commencement of nonstop flights from Los Angeles to the Cayman Islands by Cayman Airways. So more airlift, more tourists would be the expectation. Given these factors, we expect continued improvement for our retail water operations in the fourth quarter and the first quarter of next year. Our bulk operations remain consistent with our expectations and this segment was not materially affected by COVID or the downturn in the economy. Effective September this year, another milestone, all COVID-related travel restrictions to the Bahamas were eliminated by the Bahamian government. As I mentioned earlier, we broke ground in the fourth quarter on the Red Gate seawater reverse osmosis plant in Grand Cayman.
And this plant has been designed to produce up to 2.64 million gallons of portable water per day for the water authority. We expect revenue generated over the approximately 11.5 year term of this contract to total about $20 million based on January 2022 values. And I'll just note again, the contract actually allows for capital cost adjustment for inflation at the end of this year and also inflation adjustments for the operating costs in our bid at the end of this year and at the end of next year. The majority of the revenue is expected to be generated by the construction and sale of the plant during the first 18 months of the project with the remaining revenue to be earned by bulk water sales to the water authority over 10 years. Now looking at the desal outlook beyond Grand Cayman, we're finally seeing some activity in the Caribbean market, and we're following a couple of opportunities in that region.
We're also awaiting the resolution of the design, build, operate bidding process for 1.7 million gallon per day seawater plant in Honolulu, Hawaii which has been extended to the end of this year. So we would expect the successful bidder in that to be announced sometime in January if they proceed with the project. This project in Hawaii is very comparable to the types of projects that we've successfully completed in the Caribbean over many years. And we believe our extensive experience in designing, building and operating these seawater plants enabled us to be shortlisted for this project and for similar projects in the future. Now looking at PERC, the U.S. operations of our California-based subsidiary, PERC Water had been working on some exciting wastewater recycling projects in the Southwest United States.
As we mentioned earlier, in May, PERC was contracted to design, construct and commission a 4 million-gallon per day wastewater treatment facility for Liberty Utilities in Arizona. We believe that we were able to obtain this project from Liberty because of our unique project delivery model. Under this project delivery model, our clients only have to deal with PERC for all aspects of the project, including design, the cost, schedule and plant performance, which enabled us to design, construct and ultimately commission an advanced water treatment plant on an accelerated schedule, which was important to Liberty and at a lower overall cost versus some antiquated project delivery models such as design, bid, build. Delivery project is proceeding on schedule, and we expect to begin generating increased revenue from this project in the fourth quarter and in 2023.
The project is scheduled to be fully completed by June of 2024. Also in October, we announced that PERC was awarded an expanded 10-year $49.2 million contract to operate and maintain two advanced water treatment facilities in Southern California. This was a milestone win for PERC. Its longest -- PERC's longest-term operations and maintenance contract. And it represents, we think, an affirmation of PERC's world-class operations and asset management services. We anticipate this win will support our plans to continue growing this segment of our business in the Western U.S., a region that is currently experiencing unprecedented drought conditions. And I'll just note that there's a lot of discussion about desal in California. It's a very difficult market to do those projects.
We think that PERC's product offerings, recycled wastewater, which could be used beneficially for irrigation, golf course maintenance and even for drinking water and groundwater replenishment as they do with these two plants that they're currently operating is a much more robust market in those areas of the world. So now looking at manufacturing. In the third quarter, we continued to be held back by supply chain constraints and challenging economic conditions that have increased our costs. However, we saw some improvement in October, and this has allowed us to start moving more of our significant order backlog through the manufacturing process. Our manufacturing contracted order backlog increased over the past three months to a record $20 million.
We anticipate most of this backlog will be booked as revenue over the next 18 months. However, we caution that timing can change depending on the availability of materials and equipment. Our backlog growth is due in no small part to the success of our integrated sales team who develop new clients and enter new markets, such as the industrial and mining sectors. Now I'd like to give you a real quick update on the Rosarito matter. The project, as you know, was canceled in 2020. We continue to be in active discussions with the Baja California government to resolve our claim relating to their cancellation of the project as well as potentially addressing the state's acute water shortages. I'd like to reiterate that we've agreed to delay the appointment of the arbitrators during the course of these discussions, but the arbitration has not been suspended.
We hope that our ongoing discussions with Mexico will result in a positive solution for both parties. In addition to our organic growth, we continue to pursue potential acquisition and partnership opportunities that would be complementary to our existing businesses, product offerings and customer base. David mentioned earlier that some of our G&A expenses are related to business development activities this past quarter. We are actively pursuing two opportunities, one that could bring our wastewater operating services into another rapidly growing area of the United States; and the second, they could further grow our manufacturing business by providing equipment to the mining sector. We see many positive factors driving continued revenue growth and more importantly, earnings growth in future quarters.
These include the continued recovery of tourism in Grand Cayman our record high manufacturing backlog and increased project bidding activity in the United States and the Caribbean. The more than $150 million in major multiyear projects that we obtained already this year will have a much bigger positive impact on our earnings in the coming quarters and support our outlook for continued growth in our Services segment. All of these activities and trends represent catalysts for greater growth ahead. Now, Joe, I'd like to open up the call for questions.
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